Inflation and interest rates rising. Markets down. Labor shortages, war, and a lingering pandemic: for investors with their eyes on the headlines, it’s probably easier to keep track of the things that are going right than those going wrong.
“We’re investing on the ‘What If?’ situations. What if the recession lasts a long time?” asked Jim Giordano, who leads the national family office Giordano Wealth Management Group at UBS. “What if the situation in Ukraine should escalate? I think in my 20 years at UBS, this is the most ‘What Ifs’ I’ve ever been able to throw out there.”
But L.A.’s wealthiest investors didn’t make it to the top by flinching. And given they’re not feeling the practical real-world effects of poor economic tidings such as inflation and fuel prices on a personal level, family office advisors – the professionals who tend to the uber wealthy – say their clients are better positioned to keep their eyes on the prize and find silver linings in a cloudy economy.
Adam J. Bass, chairman of the Family Office and Wealth Management practice at the downtown-based law firm Buchalter, said clients are acknowledging the disruptions in the market, but it’s mostly out of interest in opportunities created by the reshuffle.
“Inflation is definitely an issue, but there’s more hitting us than just that. Between the market decline and the general environment, people are trying to rebalance their portfolios to meet the economic realities of the moment,” said Bass, who also serves as chief executive and president of Buchalter. “Still, most of our investors are committed to the longer view, so it’s not about what’s going on in this quarter or this moment. They’re not all suddenly running scared; they want to get opportunistically involved.”
While the wealthiest are often prepared for turbulence, Bass said concerns remain about the length of time it would take to bring inflation down, the rising cost of capital investments, and other economic factors that have made for generally guarded investment strategies in the short term.
“Even the most sophisticated long-term investors can get rattled when there’s a significant market rout. And that’s when you’ll hear from all these various experts about the likelihood that this will happen, or the percentage chance that happens,” said Bass. “But it’s always difficult to be the one that’s going in when everyone else is running for the exits, no matter how much confidence you have.”
Distressed newbies
At Jones Zafari Group at Merrill Private Wealth Management, clients have had a similarly stoic reaction to the disruption, according to managing director and co-founder Richard B. Jones. This is true particularly among established clients; for newer investors, however, Jones said the distressful news has been a little harder to shrug off.
“Clients of ours who have a lot of experience in the markets tend to be pretty good right now about staying in their seats, and we’re reaching out to clients all the time. Where the challenges lie are with the newer clients,” said Jones, noting the sizable impact of recent months’ worth of shake-ups, layoffs and market volatility.
“But we continue to advise them not to throw into the market all at one time, but to dollar-cost average in over a period of time.”
Jones noted the impact of inflation tends to be more psychological for wealthy investors: they aren’t picking up bags of spinach and noticing a 32-cent increase, and few are pumping their own gasoline and feeling the pain of elevated fuel prices personally. They nonetheless learn pretty quickly when an economy lacks confidence.
“(It) might upset them, but it’s not going to impact their day-to-day lives,” said Jones, who oversees a 35-person family office team servicing 170 clients with an estimated collective net worth of $30 billion. “They’re more worried about the impact on their net worth, marketable securities, private investments, real estate, etc…. We’re advising clients to stay in their seats, stay diversified and focused on qualified investments. There’s no need to panic, and if you have any questions, that’s what your financial advisor is there for.”
While a looming recession has been the cause of grief for family office clients, Giordano says most investors moved quickly past the denial and bargaining stages and are on their way to acceptance.
“It’s now a question of how deep and how long that recession is going to hit. I’m not hearing from clients anymore about whether or not there’s going to be one. They’re asking what it’s going to be like,” said Giordano.
Uncertainty hits each client differently and dictates the guidance that family offices offer, Giordano said. But for the most part, he said clients are interested in whatever avenues provide the best protection to their assets over the next year or two.
“For longevity, we need to make sure that there’s money to grow, and that’s where we turn to the more ‘defensive’ stocks,” said Giordano, though he declined to specify which stocks or even industries fit the “defensive” definition, citing potential conflict of interest concerns.
Taking advantage
Hunkering down at the whiff of a recession is a common tactic for any investor, Bass said, tax bracket notwithstanding. But when the smoke clears — or the threat proves less severe than worst-case scenarios indicated, which Bass notes appears likely with recent economic news — it’s the wealthy independent investor who’s best positioned to take advantage.
“When there’s a feeling that it’s not going to be as stinging and sharp as some of the worst estimates had estimated, folks quickly recalibrate,” said Bass.
Despite the doom-and-gloom narrative, corporate and finance attorney Andrew M. Apfelberg says the economic setbacks and uncertainty of recent months provide some benefit to the comparatively nimble wealthy investor.
“In a bizarre way it can actually be helpful when it comes to family office investors bidding against private equity funds,” said Apfelberg, who regularly advises ultra-wealthy clients through mergers and acquisitions as a partner at the Century City-based Greenberg Glusker Fields Claman & Machtinger.
Private equity funds have often held the advantage in previous years, Apfelberg said, given their ability “to call on a whole lot of capital and a whole lot of people to write bigger checks” and outbid on acquisition targets.
“But in inflationary periods, where interest rates are going up, the pendulum swings back in favor of the family office,” said Apfelberg. “Where the family office now has the advantage is they’re less worried about the debt.”
Wealthy investors tend to use less debt in their funds, he said, which means they’re not feeling the sting as badly when interest rates rise.
“The family office doesn’t have a target return – the family office does what suits their needs at the time,” said Apfelberg, stressing that at times of uncertainty it’s important to be flexible.
Private equity funds typically have a turnaround period of three to five years in which they’re working to build that company’s value as much as possible, which becomes an understandably problematic prospect when one is staring down a year or more of economic woes. Family offices aren’t held by those same constraints, Apfelberg said.
“The family office is able to look at their performance on a much broader class of assets than a private equity fund,” he said. “Certainly, higher interest rates will disfavor some asset classes, but that’s less of an issue with more diverse holdings.”
Family office future
Predicting the impact of the recent market and economic tumult on family offices themselves, rather than their clients, will prove a bit harder, according to Tim Lappen, founder and chairman of the Family Office and Luxury Home groups at Jeffer Mangels Butler & Mitchell. He says that’s largely due to the rapid growth in demand in recent years for family office-type services, loosening the definition of a “family office.”
It used to be that someone would need a net worth of perhaps $200 million or more before they felt the need to go to a family office. But in recent years, some folks with considerably less wealth but with intricate or complicated situations might migrate to a family office because they need the intensive, sophisticated attention.
“About 30 years ago, it was a $200 million club,” said Lappen. “In reality, it’s just people who are wealthy and have enough complications in their lives that they need to incorporate people who can deal with it.”
Inflation, rising interest rates, and other factors may cause some individual family offices to suffer, but Lappen said it’s highly unlikely to lead to any significant industry decline. That money will have to go somewhere, after all, and Lappen said that’s true for family offices as well as the industries they’re investing in.
“In a sense, it’s a zero-sum game,” he said.
