As wealth accumulates, many investors find themselves with complex and unconsolidated investment portfolios, which are hard to manage, structurally inefficient, and costly to change. There is much to be said for striving for relative simplicity in wealth management, which generally translates into better overall returns. Consolidated wealth management within a Family Office structure allows for focus, understanding and well-managed risk-return relationships.
What is a messy portfolio?
A messy portfolio is a group of assets with an undefined investment strategy. This includes asset purchases made without consideration of previous acquisitions, which do not have the correct asset allocation or level of risk needed to achieve investment objectives. Investments in messy portfolios are usually haphazardly scattered across various sources, including asset management companies, banks, stockbrokers, legal firms and Linked Investment Service Provider (LISP) platforms.
Messy portfolios are risky
“A significant amount of coordination is involved, and potential capital is lost when investors rely on multiple advisors. The scenario is analogous to a symphony orchestrated by several conductors– the finished product is most certainly affected by inefficiencies. Advisors usually have a sliding fee scale based on the total assets under management or advice. The more capital invested or entrusted, the lower the fee as a percentage of assets under management or advice. If an investor is overpaying on fees, the long-term effect can be severe. Just as compound growth works in an investor’s favour regarding capital growth, it works against them when it comes to fees and lost opportunities – and these costs and losses compound over time,” says Mark MacSymon, a wealth manager at Private Client Holdings which offers a Family Office approach to wealth management.
“There are also real estate planning benefits with a Family Office wealth management structure. Consolidation means that information is shared between wealth management pillars. The value of assets can be determined, and information shared, making decisions regarding the distribution of wealth to heirs a simpler process than with messy portfolios. With a messy portfolio, some assets may be overlooked and this significantly extends the winding-up of an estate, which may pressurise heirs if they are dependent on their inheritance,”- says Elmien Pols, CFP®, FPSA®, TEP, a fiduciary practitioner at Private Client Trust, the fiduciary pillar of Private Client Holdings.
Are there costs to portfolio consolidation?
The barrier to consolidation is usually the cost of embracing change; however, attrition events such as capital gains tax (CGT) must always be considered. In appropriate circumstances, asset restructuring can result in rollover relief where no CGT is incurred. Furthermore, assets that have gained in value but are no longer appropriate to hold may need to be liquidated to broaden exposure to more quality assets. In practice, “it’s not always easy to avoid the tax tail from wagging the investment dog”. Alternatively, delaying the sale of an asset or utilising transactions that defer the triggering of capital gains to benefit from compounding off a higher base, has merit. If structured sensibly, these transactions have the added benefit of introducing diversification benefits and better aligning investors’ intended outcomes with expectations. This is a key component of wealth management success. Another consolidation cost is the emotional pressure of changing familiar structures or inheritance. The fear factor. Investors find it hard to sell assets they are attached to, such as a holiday home, family business or inherited assets. It is hard to sell an asset that has historically performed well but is too risky to hold over the long term. Investors may be put off by the cost of thorough analysis of their messy portfolio and the development of a comprehensive wealth management plan. The positives are often not shared openly, for example that there are no costs when unit trusts are transferred from one LISP platform to another, and the benefits of scale typically result in an overall lower fee experience. There are also no upfront fees on retirement fund transfers.
The benefits of portfolio consolidation
“A significant benefit of a Family Office approach to wealth management is the ability to manage capital actively and effectively as variables change, such as life circumstances, market opportunities and the emergence of new investment vehicles. The characteristics of each investment and the potential impact on the overall portfolio can be considered over time. This almost always enhances investors’ overall return and results in a far greater probability of meeting investment objectives,” – says MacSymon.
The greatest gift is peace of mind and the conviction that hard earned money is invested optimally and is actively managed and reviewed by a wealth management specialist who will ensure that each investment has a place and purpose in your portfolio and adjusts this as investor needs change. Consolidated tax information from various institutions and accounts are streamlined within a Family Office approach, reducing administration. With a consolidated portfolio, there is less paperwork and time is saved. Tax advice is central to the Family Office service ensuring that the most tax-efficient investment strategy is pursued, which could result in significant savings. South Africa’s financial regulatory landscape has been seriously impacted by the country’s greylisting, which has resulted in increased compliance and regulatory requirements. If you hold multiple accounts, you must complete the Customer Due Diligence (CDD) process with all your service providers. With a consolidated portfolio, you only need to do this with one provider, saving time and significantly reducing your administrative burden.
“The benefits of wealth portfolio consolidation within a Family Office structure for investible assets of $2-million plus far outweigh the risks. This service is the ideal vehicle for effectively and efficiently managing investments. An accessible multidisciplinary team of financial experts, be they asset managers, fiduciaries or tax professionals, saves you time and fees. Don’t be held hostage by money and complexity. There is much truth in Martin Fisher’s quote, ‘Knowledge is a process of piling up facts; wisdom lies in their simplification,’” – concludes MacSymon.
