How The Super-Rich Manage Their Money

What’s the best part of being super-rich?

Having all that money.

What’s the worst part about being super-rich?

Dealing with all that money.

A net worth of, say,  $200 million comes with all sorts of obligations, chores, and emotional issues.  First and foremost is the considerable work of protecting and growing that wealth.  Then come the non-stop demands of administering the fortune, and all that goes with it – bills, taxes, houses, cars, planes, charity commitments, family disputes.  It’s like a full-time job!

How do the wealthy handle all of this?  They don’t.  They do what many of us do – they hire people to handle it.  Of course, that arrangement looks just a little, teensy bit different for the wealthy.

The Family Office

Many “high-net-worth” individuals, defined as those with upwards of $2 million in investable assets, have a team of professionals who work together on the full range of money matters, from investment management to taxes avoidance to estate planning and other legal issues.  The squad typically includes an investment advisor, CPA, lawyer and private banker to handle business at their financial institution.  (You won’t find any high-net-worth folks at the bank drive-up window at 5pm on payday.)  With the exception of a private banker, you likely have a similar team of pros in place.   Rich folk just keep their guys a lot busier.

Related: [Podcast] Putting Together Your Financial Dream Team

The super-rich often take the Team Money concept a big step further by establishing a family office, a private firm that manages just about every aspect of life for the family.  In addition to the tasks listed above, the family office often manages home and vacation properties, vehicles, charitable giving, trust-fund disbursements, children’s allowances, and art or wine collections.  Family office staffers can even mediate money-related disputes between family members.

This level of skill and attention doesn’t come cheap.  A family office can cost about $1 million per year, according to The Wall Street Journal.  That kind of expense only makes sense for the 5,000 or so U.S. families with $100 million or more in assets.   In recent years several financial outfits have debuted “multi-family offices” operations that serve anywhere from several dozen to hundred families in the $20 million assets range with a slimmed down version of the family office focused largely on asset management.

High Risk/High Reward

Of course, the money ninjas in a family office aren’t paid to review monthly 401k statements and balance the checking account.   The very wealthy tend to have somewhat more complex portfolios.  Just like you and me, they strive for diversification and a balance between risk and security, growth and preservation.   As part of that strategy, they might be invested in some of the same income or growth stocks, ETFs and mutual funds that we hold.  Often times they are focused not on “hot” stocks but those that have shown stability and increased dividend payouts over many years.

Related: Ashely Asks A Question - Why don't people invest all their money in dividend-paying stocks?

But the super rich also have access to higher risk/reward opportunities that demand careful vetting and oversight -- private equity placements, venture capital opportunities, hedge funds and angel investing.  The only money you put in such investments is money you can afford to lose.

Other complex investments, such as a family business, art or real estate might also be in the portfolio.

Trust in Trusts

Being rich makes you a huge target for everything from taxes to scams to frivolous lawsuits.  That’s why the very wealthy often don’t legally own anything.  Instead, their assets are held by trusts.

A trust is a legal arrangement in which a third party holds the assets of the trust beneficiary.  Trusts can be expensive and require some effort to set up, but they offer many potential benefits, including:

  • Protection from creditors, lawsuits, and other claimants during your lifetime.
  • Avoidance of estate taxes.
  • Avoidance of probate court with its delays and public disclosures.
  • The ability to closely control the when/how of distribution of the estate’s assets to heirs.

There are several types of trusts, each with its own set of benefits and requirements.  While trusts are a favored tool of the wealthy, plenty of regular folk employ them to address specific life issues.  A buddy of mine, for example, used a trust to protect the assets of his new family from a vindictive ex-wife.

Related: Estate Planning Basics

See?  You have more in common with the super-rich than you thought.  Regardless how big or small your net worth, you’ve got to handle your business and plan for the future -- sometimes with the help of a professional or two… or 30.

Reminds me of the supposed exchange between legendary writers F. Scott Fitzgerald and Ernest Hemingway.

“The rich are different from you and me,” wrote Fitzgerald.

“Yes,” replied Hemingway.  “They have more money.”