Successful entrepreneurs present an intriguing conundrum for wealth managers who will need to balance their risk-taking zeal with a need to preserve capital.
“Entrepreneurs have a schizophrenic attitude to investment,” says Iain Tait, head of London & Capital’s private client office. “They are ultra conservative on the bit of money they do not want to put to work, but they want to deploy [some money] in things they relate to which are typically risky – they are at two ends of the risk spectrum.”
The UK has a large number of high-net-worth (HNW) and ultra-high-net-worth (UHNW) entrepreneurs, the latter numbering more than 10,000 with a combined wealth of over US$1 trillion.
Those who require the services of a wealth manager will most likely have sold a business and in turn sold their income source which means the structure of any investment is particularly important, as well as the level of risk.
Jonathan Gold, director of RBC Wealth Management, says selling a business means selling an income source, so he asks clients to split their capital into two pots – core capital and excess capital.
“Core capital is the money you live on and you can give to your children, and that is the money you do not want to take much risk on,” he says. “Excess capital they can take risk on – it is working out how much to take a risk on and what risk they want to take.”
He says entrepreneurs will look for preservation of capital, but also require high returns. “They want to preserve the capital value of the money. When we talk to them about returns it is different to business returns which are much higher; they say they are cautious and would only like a 10 per cent return,” says Mr Gold. “You have to [tell them] that, when interest rates are at 0.5 per cent, that is your risk-free rate of return and anything above that requires you to take risk.”
Preservation of capital only becomes interesting after the sale of the second business and then they become cautious
The investment strategies preferred by entrepreneurs tend to depend on the stage they are at in the entrepreneurial journey.
Heinrich Adami, group managing director at Pictet, says new, young entrepreneurs are still in the wealth accumulation phase.
“These entrepreneurs have a liquid event because they are selling all or part of a business, but they are not interested in investing for preservation – they are putting 100 per cent of the proceeds back into starting the next venture,” says Mr Adami.
Preservation of capital only becomes interesting after the sale of the second business and then they become cautious.
“We build a portfolio that has the usual asset classes and then part of that portfolio is invested in private equity where they take some risk because they know the sector, and it is interesting to them. The capital-preservation side is usually bonds, equities and hedge funds,” he says.
Capital preservation is not just for the entrepreneur’s benefit, but also for their family. Mr Tait is now beginning to see second and third generations in his office, and is setting up more family offices.
“Family office is playing a bigger part. You need to understand the family mind-set and the family business as we are seeing the next generation coming through, and it gets very complicated dealing with the third generation as well,” he says. “We have upwardly mobile, portable families and we have to be flexible.”
While preservation of capital is important, entrepreneurs can be tempted by an exciting new venture and crowdfunding is helping to facilitate that.
“We have clients who have made money through hedge funds and private equity, and several times we have been asked to do due diligence on crowdfunding platforms,” says Mr Tait.
If self-made, they have entrepreneurial flair and ambition, and also empathise with others trying to do the same thing.
Entrepreneurs are interested in things they understand, says Mr Tait, and wealth managers often fail them by presenting high-level instruments, for example hedge funds, with which they don’t feel closely connected.
The idea of keeping a hand in the world of business appeals to most entrepreneurs, even those who are planning to retire.
“I do not think entrepreneurs ever really retire,” says Mr Gold. “They may relinquish their principle business, but they will end up doing social investing through philanthropy or other types of investing. They either give time or money, or both, as they like to keep their hand in.”
He adds that a wealth manager’s role is “not to make entrepreneurs wealthy, but to keep them wealthy” and ensure the money lasts for as long as the time horizon the client sets.
Mr Adami says the prudent entrepreneur is consistently putting away money towards retirement, but they are not always interested in the process.
“Some entrepreneurs like and understand the financial markets, and how they are invested, but others do not,” he says. “They just say to us: ‘Do conservative management and we want capital preservation’.”
However, he has noticed an increased tendency for clients to engage in the investment process. “It creates a better relationship because you can discuss investments and agree on what to do, and there are no surprises for the client,” says Mr Adami.
Duncan Glassey, founder of Wealthflow, says entrepreneurs are a diverse group and difficult to pigeon hole, which makes building a relationship even more important.
“Focusing on personality ensures we listen to our clients’ needs without making unhealthy assumptions, ensuring that we follow the client’s agenda and not some pre-defined adviser-driven process,” he says.
