Working in “Private Wealth” means being an advisor to multi-millionaires and billionaires. Here’s what I learned from 6 months of working in that industry.
If you’re expecting a tell-all expose, sorry to disappoint you. There are no specific details in this post that could tie in to any particular client.
The scale of Private Wealth
Our firm targeted private individuals and families with a net worth larger than some countries. No exaggeration.
The thing is, there were a lot of them.
For perspective, millionaires would be considered minnows. It put my boat plan into context: the kind of capital I’m trying to raise is, in the grand scheme, really nothing.
Don’t let that thought intimidate you! On the contrary, I thought it was empowering. Money must really be everywhere if there is enough spare capital to support this many billionaires.
Before any reader decides to follow Lenin and start up a Bolshevik uprising, you might want to consider this next bit as consolation.
My 3 generation rule
The thing that surprised me is that “generational wealth” is often short-lived.
Don’t get me wrong: the landed aristocracy definitely still exist. It’s a real thing. The difference is that they’re not the biggest players in the game any more, they’re just the longest-lasting. We’ll come to assets shortly, don’t worry.
I’ve pretty much spotted a pattern amongst the ultra-wealthy. “Generational Wealth” seems to usually be limited to three generations:
First generation
Starts a business. Under their management and skill, it grows to a regional or national scale. It’s pretty awesome, they become self-made millionaires.
Second generation
Grew up learning from their parents. They expand the business into a global empire, improving upon the model and refining the plan. That’s still pretty impressive, but they’re replicating and adapting rather than innovating.
Third generation
Spoiled by wealthy grandparents and billionaire parents. They know about money and want to help, but they didn’t see the struggles of setting up the business and haven’t had the harsh lessons that come with it. This is where the money tends to bleed out.
I can only evidence this from casual observation. I didn’t collect statistics and I’m not about to breach client privilege, so I can only speak in generalisms. However, it seems to ring true.
Why the third generation destroys generational wealth
There are a number of things that I saw.
Being born into private wealth doesn’t give you business acumen
Generally, the third generation knows nothing about business, but believes they were born to greatness. They tend to set up businesses that don’t make economic sense, but they have the large start-up capital to invest at the beginning. There’s no need for them to float a business case past anyone for a sanity check and I suspect many don’t.
Think “media empires” that only have one blog and produce low-quality content, or fashion designers for babies and dogs. When you can burn millions per year without consequence, you can take a punt on some of these businesses.
This reminds me of something I read in The Millionaire Next Door: most millionaires in that book were entrepreneurs but wanted their kids to be professionals, like accountants and lawyers.
I can see why.
Lifestyle creep eats private wealth
Everyone has a degree of lifestyle creep. Even me!
I’m currently getting a bus to the station in the morning instead of cycling like I did last year. It’s cold and wet, and for a tenner a month it can be made slightly better.
The third generation starts with a millionaire lifestyle, though.
They hand around with millionaire and billionaire kids. Every party they go to, school they board at, first home they get bought… It’s a high starting level.
Generation one worked 20-hour days and ate a bowl of plain rice for three meals. Generation three has opinions about organic food, and doesn’t need to go to work this morning.
Heirship issues
Generation three has a sense of entitlement. In many ways, I can’t blame them. This comes out when generation one dies and leaves a will.
You might think that your last will and testament is a perfectly binding document.
In many ways, it is. Unfortunately, it’s entirely possible to challenge the validity of a will on several grounds, such as:
- Undue influence of someone close to you changed what you left to whom.
- You should have provided for a dependent in your will, but you didn’t.
- You weren’t of sound mind and aware of what you were doing at the time.
- You’ve given away something in your will but someone else thinks they own it.
For most of us, these risks aren’t big at all.
We don’t have that much to give away in our Estate when we finally kick the bucket and the cost of skilled lawyers to challenge our will is going to be prohibitively expensive.
However, if you’re the adult baby of a billionaire who’s now left with only a couple of million when you expected a lot more, you might have the incentive and the initial cash to challenge grandaddy’s will.
Great for lawyers. less good for the deceased.
What I learned from this is that the kindest thing you can do as a super-wealthy person to stop your descendants quibbling over your Estate after you’ve gone is to spend it all, aggressively, as you get close to your death bed.
There’s an entire e-book on this called Die With Zero that pretty much advocates for this approach. I’m still reading it but I might review it later.
On to happier things…
Where private wealth is made
From what I could see, the stock market doesn’t really feature in the global empires of the ultra-wealthy.
I actually raised this point with a superior. I mentioned risk allocation, equity portfolios, stocks:bonds, index funds…
….and was told: “you obviously see much more exciting portfolios than I do. They tend to all be government bonds.”
No joke.
The ultra wealthy don’t seem to like public equities. Instead, they tend to own family businesses, usually interconnected family businesses, and generally across multiple countries.
This supports the view taken in The Millionaire Fastlane (which I reviewed). Simply put, that first generation builds the first assets which the second grows. That’s where the money generally comes into it.
The lesson for financial independence is that if you’re going for the big FIRE numbers, at some point you might want to consider setting up your own business. The fact is that if you need more than a £million, you’re probably not going to be able to do that without building some kind of business that leverages other people’s time (i.e. workers) or money.
I dimly recall that 90% of businesses tend to fail soon after starting. Don’t quote me on the exact figure, but if it’s anywhere close to this then most billionaires are taking lots of risks early on and probably have more failed businesses than they want to admit to!
Other portfolio assets
The three biggest assets beyond the wholly-owned businesses seemed to be real estate, private equities and, bizarrely, art.
Real Estate
Real estate seems to feature heavily in a private wealth portfolio.
I could see a few reasons for this:
- Billionaires tend to be globally mobile. Owning real estate around the world allows them to relocate and change citizenship fairly easily.
- Rental income is usually pretty good, especially at the scale that they buy in. A £20,000-per-year ISA allowance barely factors in, so they don’t worry about this minutiae of tax efficiency.
- You can borrow against it cheaply if you suddenly need money (more on this later).
I have seen quite a few real estate assets owned in trust or through companies. This seemed to be less of a tax consideration (although that would influence which version of the holding entity was chosen) and more about insurance in case the owner died, keeping the property in the family.
There’s a great quote about this in The Sovereign Individual.
Only the poor sell land
From The Sovereign Individual by Davidson and Rees-Mogg
In the private wealth sector, real estate seems to be tightly held onto by the more established families, especially the ones that beat my 3-generation rule. I guess there’s always some value to be had or created from a real estate asset, which isn’t true of companies (which may fail).
I think there’s a lesson in this for financial independence: an argument that real estate ought to form a decent chunk of a portfolio. This surprised me because apart from REITs and my home (not an asset…) I don’t really own real estate, mostly because of the deposits involved. Perhaps I will weight more of my wealth into REITs and indirectly gain this greater real estate exposure. I’m undecided on this point.
Private Equities
Private wealth doesn’t often flow into the stock market.
Obviously, yes, there’s a lot of capital there by volume because a small investment by a billionaire might be in excess of £1million. However, as a proportion, it seemed to me to be quite small.
Where investments are made, they tend to be as angel investors in start-ups, as venture capital investments, or as private equity investments in growth companies.
All of these offer (generally) better returns than the stock market. However, they’re also high-risk and pretty hard to sell if you suddenly need cash.
I once had a briefing from a venture capitalist who targets 4x returns over 10 years but presumed that most investments failed or returned very little, with only one or two successes which boosted the average return.
My assessment is that a family with immense private wealth often has some knowledge of assessing businesses and what to look for. This probably boosts their average return.
Billionaires can also afford to lose £200,000 in a failed start-up, which most of us won’t want to do.
I don’t actually have £200,000, so I can’t do it even if I want to!
Art?!
A lot of wealthy people own art, alternative assets (like cultural artefacts) and similar things that we wouldn’t expect to be in a portfolio.
For example: did you know that Hermes birkin handbags are made by hand, in limited runs, and appreciate in value? Neither did I.
I’m not sure how many pieces get bought for pleasure and how many as investments, but it’s quite clear that there are investors out there who buy lots of art in the hopes that at least one painting becomes a ludicrously valuable masterpiece.
I guess the (poorer) equivalent would be buying NFTs and hoping that in the future one or two become rare collectors’ items.
I don’t really know what lesson to draw from this for financial independence! I guess it reinforces my idea that anything can be an asset in the right circumstances, if you know what you’re doing.
Illiquidity
The problem is that although these assets tend to have market-beating returns, they’re illiquid: it’s hard to shift a £10m property, the number of potential buyers is small.
People get around this by taking out a loan secured against an asset.
In theory, the asset appreciates in price at a higher rate than the interest on the loan. This allows the asset to be refinanced, and effectively turns it into an income-producing asset but without an income tax implication.
Pretty nifty, eh?
Yes, you can get loans secured against private equities (although you’d expect decent dividends, so it’s less common) and against cultural artefacts. It’s not easy, but at a certain price tag it becomes possible.
Again, not much for the rest of us to learn. I guess the closest most of us can get (unless we create that unicorn business!) is to refinance our personal property or a buy-to-let property.
I have seen this backfire, too.
The great advantage of retail shares and ETFs is that they’re liquid. If you need that £10,000, you can sell £10,000 of shares during the opening times of the stock exchange, and get the money a few working days later. This is why the FIRE movement is so keen on ETFs and index fund investing, and why I’ve been a fan for a while.
Trusts and offshore companies
Before I took up the job, I was convinced that the wealthy were all about tax-dodging.
Obviously, yes, there’s some tax mitigation. You’d be a fool not to mitigate your tax bill. Most of us should use an ISA or pension for this.
However, to my surprise, the main reasons that most of the private wealth in the world tends to go through offshore trusts and companies seemed to be:
- You can have a professional manage the property for you, so your Idiot Grandson doesn’t spend it all on Lamborghinis and cocktails.
- You can be globally mobile but the assets can be held by a known “person”, as companies and trusts have legal personality.
- If a company or trust fails, but you have a few trusts, they don’t bring the other companies or trusts down with them. It’s about diversification and risk reduction.
- Anonymity. If you use a trust, you don’t have to be declared to the world. Keeping up appearances is often a big deal in private wealth, especially if you’re an entrepreneur from a country that tends to execute its billionaires and take their possessions for the state.
Contrary to popular belief, trusts do pay tax on income remitted into the UK. In most jurisdictions, there is a corporation tax to pay. Most professional trustees and directors of companies also want their pay, and there’s a lot of legal fees involved.
The tax savings definitely exist, but they’re not as good as I was expecting. The only particularly good one was that you can avoid inheritance tax if you die but all your assets are in a trust or company, as the trust or company won’t die with you.
How this experience changed my perceptions
I went into the private wealth sector hoping for juicy gossip and hot tips on how to make money. I’ll admit that I thought it was mostly going to be about tax dodging and that there was some secret shady empire we weren’t able to access as commoners.
Imagine my surprise when I learned that the biggest thing that separates the ultra-wealthy from us is that they own a lot of big – but generally quite boring – businesses.
Although tax planning was a big part of the work, the tax savings weren’t anything like as good as advertised. They also tended to be a secondary consideration. Risk mitigation, looking after the family after death and getting liquidity from illiquid assets seemed to be more pressing issues.
Private equity and personal businesses
Ironically, the biggest takeaway to be learned is the one that I’m least applying in my own financial independence campaign: big wealth is built through building private businesses and investing in other private businesses.
I’m not doing this in any particular scale.
Mindset of the top 0.01%
I’ve seen a lot of Twitter posts with titles like “millionaire mindset” and so on.
I haven’t seen nearly as many Lamborghinis as you’d think. Some big houses, sure, but not nearly as many toys as you’d expect. There are definitely superyachts, which might be the exception to the rule here.
Still, very few of these toys compared to the scale of the global business network that supports their running and upkeep. The first and second generations of wealth are remarkably good at living below their means. Less so the third generation…
There is however one thing that I think is really important.
Private wealth tends to be global
Most privately wealthy families and individuals tend to be globally mobile.
Yes, part of this is because of the “non-UK resident” tax thing. However, that’s not what I mean.
Almost all of the big money tends to be geographically diversified.
If you’re a millionaire in the UK but you know a bit about the US or have business friends there, you might set up an US business too.
Have Indian family connections? Perhaps a factory in India would go nicely with your money-making empire.
Eastern European wife? Perhaps her friends can help you sell to customers in Prague.
The point is that they tend to think of business opportunities around the world.
I suspect that the reason why there are so many investments in private companies is that wealthy international businesspeople tend to know other wealthy international businesspeople. This gives them a network of valuable contacts across the globe, a broader understanding of global opportunities, and therefore the ability to act on the more tempting ones.
For comparison: I know a few people outside the UK, but most of them aren’t in business. I could probably get a beer in Germany, but I couldn’t set up a brewery there.
I’m not sure how to interpret this information, either. However, it’s probably time to reflect on what I’ve learned.
How this influences my financial independence campaign
My logic when I started my financial independence campaign last year was that I didn’t need much money to achieve my objective.
The boat plan only requires £200,000-300,000.
I have deliberately manoeuvred into a high-paying career to be able to raise this kind of money, and I can achieve it through owning mainly ETFs, index funds, and REITs.
However, I don’t want to be closed-minded. If this isn’t the way that the ultra-wealthy build private wealth, I should at least consider the alternatives. It’s obviously working well for them. I value adaptability, so I should try to adapt to new evidence.
I should consider the upside.
I’m going to consider building a business on the side, possibly with my partner (who is insanely qualified!) [She also wants me to add “talented” and “beautiful”.]
I don’t know what this will look like yet, but if I try with a small amount of start-up money and fail it won’t have cost us much and it might be fun.
If it succeeds, we might accelerate our financial independence campaign. I guess if we try it and it fails, we’ve just had a weird hobby for a few months.
I’ll keep musing on this. We’re still planning to relocate this year (see the 2022 campaign plan) so this might not get actioned this year, but you never know.
