Friday, February 11, 2011

The Financial Advisors Of The Children Of the Super Rich, Systemic Risks, Conflicts Of Interest And Precious Metals

<--- John Exter's Inverted Golden Pyramid: visualise the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets. While Exter's original pyramid placed Third World debt at the top, today derivatives hold this dubious honor. Read about it here and here.

What the Financial advisor will tell the children of the super rich is to understand where the power is: the politicians, bankers as they will protect you no matter what.

They will also advise the children to invest in the system rather than outside of the system with a preference for "risk free" (!) stocks, bonds, etc.

Financial Advisors cannot and will not see the systemic risk, the moral hazard and the boom & bust theories of their Masters, after all, we're experiencing a "return to normal"?

Unfortunately also, what the financial advisor will not tell these children that there is one asset class which will preserve their wealth, in fact, has been used for at least 3000 years by smart people to avoid the follies of out-of-control politicians and bankers, but also:

§  Doesn’t engage in accounting fraud.
§  Doesn’t miss quarterly earnings.
§  Isn’t affected by Obama’s health care.
§  Doesn’t lie about its real balance sheet problems.
§  Doesn’t lose market share due to stupid management practices.
§  Doesn’t perform stupid mergers or acquisitions.
§  Doesn’t waste money on buybacks.
§  Doesn’t lose profit margins to rising commodity costs.
§  Doesn’t go out of business.
§  Doesn’t have custodial risk (if you keep your bullion yourself).
§  Doesn’t pay itself ridiculous salaries and bonuses rather than increasing shareholder returns.
§  Doesn’t require a bailout or stimulus to stay in business.
§  Doesn’t commit insider trading or use Government policies to keep itself a billionaire.
§  Isn’t impacted by a slow down in the economy or consumer spending.

The regular reader knows the answer: physical gold and silver. Look at these words carefully and note that ETF's are paper promises and therefore not gold.

Makes one wonder about the competence of financial advisors!

The Rich Want Children Schooled In Crisis 

Private Wealth Magazine

February 10, 2011 (Dow Jones) Advisors to the very wealthy are adding a new chapter to the primer they use to teach the next generation how to handle the family's fortune. Its title: Avoiding the mistakes of 2008.

Stung by the downturn's impact on their fortunes, ultra-wealthy families—think $50 million and up—want their future leaders to have a firm grasp of governance and to fully understand investment risk.

"For the first time in my experience, prospects are coming to us and asking, unsolicited, about family governance," says asset manager Glenmede's wealth-service chief Susan Mucciarone. A family wealth manager for 30 years, she says that was a concern "we used to have bring to our clients over time."

Mucciarone sees education as core to family governance, along with other aspects of family management like mission statements, councils and regular, business-oriented get-togethers.

U.S. millionaires shed 30% of their financial wealth in 2008, according to an early-2009 study by Spectrem Group. Though the S&P 500 has nearly doubled since those dark days, advisors say families remain eager to equip younger members to withstand future downturns.

Lessons from the downturn now underpin next-generation education on wealth, and give senior family members "an easier way to talk about the future" with those younger family members, says Daisy Medici, head of family governance for GenSpring Family Offices.

Before the recession, family elders often avoided talking money to their children—even grown-up offspring—for fear of dulling their ambition. "But now they're able to say, 'We're worried the wealth may not be there,'" says Medici. This approach can draw next-generation family members into governance structures and promote thinking aimed at preserving wealth.

One important element of education for scions of the wealthy is something Medici calls "the impact of generational mathematics"—that is, the erosion of wealth as a family grows larger but no more productive over the years. "Given time, there is no amount of wealth that can't be spent through," says Medici.

Some families are looking to mold entrepreneurs--even if it calls for instilling skills quite different from those that make for good investors. "Building a business is about taking control, being in charge; investing in financial markets is really about letting others take control," says Jennifer Pendergast, a senior consultant with the Family Business Consulting Group.

Still, Medici says family members should be encouraged to follow, and educated to make the most of, their go-it-alone instincts, both for the sake of their personal fulfillment and because it can help keep the family coffers filled.

The financial crisis was a shock not just to family's portfolios but also to the psyches of both adults and children.

Jill Shipley, head of next-generation education at GenSpring, tells of the teenage son of super-rich parents who, unnerved by media coverage of the crisis, had a full-on anxiety attack over the expense of a vacation the family had planned for late 2008.

So some of GenSpring's next-generation education focuses on market cycles—including basics like the fact that battered markets can engender bargains—and the danger of letting emotions sway investment decisions.
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H/T Phoenix

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