Legacy: For the Effective Family Office Fall 2018

GACY

For the Effective Family Office

The “G” Word: Governance Freedom From Wealth

by Charles A. Lowenhaupt Investing in Wine Futures

Fall 2018

FAMILY OFFICE SOLUTIONS treasury & lending partnership accounting & administration

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The “G” Word

Aligning Your Investments With Your Values

An excerpt from Angelo Robles’ latest book Effective Family Office: Best Practices and Beyond focused on governance.

22 Wine Futures: A Guide To Buying

33 From The Wise Inheritor’s Guide to Freedom from Wealth:

54 Make an Impact With Your Investing

60 The Case for Token Equity in Your Portfolio

Making Family Wealth Work for You

66

An excerpt from Charles A. Lowenhaupt’s forthcoming book The Wise Inheritor’s Guide to Freedom from Wealth: Making Family Wealth Work for You

Are Great 401(k) Advisors Born or Made?

38

73

Putting the Mission First:

Securing Your Family:

Every Family Office Needs A North Star

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10 Steps You Can Take Today

We believe in the commitments that empower results Aon is proud to support the Family Office Association and their members.

As a Resource Council member we provide a variety of insurance, health and benefits, due diligence, and retirement services to the Family Office community Contact Scott Kegler at scott.kegler@aon.com

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ALTS Capital Media, 30 Old Kings Highway South, Darien, CT 06820 - +1 203.202.2067 - www.LEGACY-mag.com LEGACY is the flagship publication of the ultraprivate Family Office Association, an invitation-only community whose elite membership consists exclusively of ultra-high net-worth families and the executives who run their family offices. Read by family members and family office executives themselves, this singular publication was established to meet the high level of engagement of Family Office Association members. There is no other venue like LEGACY because there is no other readership equal to the one created by the members of the Family Office Association.

Family Office Association is a global community of ultrahigh net worth families and their single family offices. We are committed to creating value for each family that we serve; value that grows wealth, strengthens legacy, and unites multiple generations by speaking to shared interests and passions. Family Office Association delivers private education and networking opportunities, proprietary research, and access to salient thought leadership that will interest all generations of your family.

ALTS Capital is the definitive resource guide for VC, PE and Hedge Funds looking to maximize the efficiency and efficacy of their LP capital raising efforts.

Whether you are looking to raise capital from Family Offices, High Net Worth Individuals, Advisors. Endowments, Public Pensions, Private Pensions, Pension Consultants, or other Institutional Investors, we have everything you need to know. We host Master Class events with LPs to help share best practices. We also publish the ALTS Capital magazine which shares insight and best practices both in print format and on the web.

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GEOFF MARCUS President, Publisher & Editor-In-Chief gm@altscapital.com ANGELO ROBLES Publisher Angelo@familyofficeassociation.com BOBBY KEOUGH Vice President, Art Director bk@altscapital.com SHARON KRESS Director, Sales & Marketing sk@altscapital.com

CONTRIBUTING WRITERS Angelo Robles Sotheby’s Wine Charles A. Lowenhaupt Jim CoutrÊ Trevor Neilson David Scalzo Terry Berland

Mike Cagney Steve Branham Dr. Sean Hannah Dr. John Sumanth Done Trone Mary Lou Wattman Scott Kegler

ADVERTISING SHARON KRESS +1 203.639.2542 sk@altscapital.com LEGACY Magazine is a trademark of ALTS Capital Media.

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LEGACY Magazine is published six times a year - January, March, May, July, September, November by ALTS Capital Media. The known office of publication is 30 Old Kings Highway South, Darien, CT 06820.

September/October 2018 issue POSTMASTER: Send address changes to ALTS Capital Media, 30 Old Kings Highway South, Darien, CT 06820 Printed in the USA Visit us on the web: LEGACY-mag.com

50 FO R

YEARS

E M M W E A LT H HAS HELPED

A F F LU E N T FA M I L I E S

PRESERVE

PROTECT

AND GROW THEIR

WEALTH AND WELL-BEING

220 East 42nd Street 32nd Floor New York, NY 10017 www.EmmWealth.com

Randy Kaufman Office: (212) 476-5354 Cell: (617) 460-0322 Rkaufman@emmny.com

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THE

“G” WORD

CREATING AND MANAGING GOVERNANCE AN EXCERPT FROM THE BOOK “EFFECTIVE FAMILY OFFICE: BEST PRACTICES AND BEYOND”

BY ANGELO ROBLES LEGACY PAGE:

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S

ome families shy away from the term “governance.” It can bring to mind long lists of onerous rules, regulations and policies.

But at its core, governance is nothing to be scared of—it’s really nothing more than a set of rules that define how an organization will make decisions, large or small. For governance to be effective, owners, overseers (the board of directors or advisors) and management must be informed; understand their respective roles, rights and responsibilities; and operate the organization accordingly.

Once your SFO is established and your leadership team and people are in place, you’ll need to turn your attention to either creating or rethinking your governance.

Families of wealth need governance structures—such as a family council, family meetings and boards of directors—that determine who will be included in which decisions. Governance structures may also determine who will work with or at the family office, factoring in how the family wealth is owned (in varying trusts, operational companies and philanthropic foundations).

One of the most common reasons that SFOs fail is that they lack a defined family hierarchy for making decisions and don’t have direction and leadership within the SFO. A family with significant first-generation wealth has the clearest path to decision-making. The patriarch and/or matriarch call all the shots.

Legendary investor and founder of Berkshire Hathaway, Warren Buffett, explains his approach to effective decision-making: “I believe that [the decision-making committee] should be an odd number and less than three.” That means one decision-maker: him. While the wealth creator is active, it may make sense for the founder to serve as chairman of the SFO and for the founder and his or her spouse to make the decisions.

As the family expands and rising generations come of age, the founding generation

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may lose interest, control or, eventually, become disabled and die. This complicates and often compromises decision-making.

When the family encompasses many adult beneficiaries, benefactors and rising decision-makers, it’s time to establish a three-person family board and choose one of those board members to be the chairman and final decision-maker. It’s best to agree to a term limit for the board members and the chairman and to specify those limits in governance documents.

Each person in a large multigeneration family likely brings his or her own desires and conflicts. In-laws can

further complicate family decision-making, as they can bring in potentially conflicting family cultures, values and beliefs.

A simple and clear path to decisionmaking about the direction of the SFO requires creating governance documents that outline guidelines, due process and a means to resolve conflicts. Governance and constitution systems vary from family to family. Some allow family members to elect the board members and the chairman.

More consensus-centric families create an odd-numbered board with three or five, allowing majority votes to determine key directional decisions.

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Governance has long been a focus of corporate investors, but until recently less attention has been paid to how SFOs are governed. An SFO that intends to serve a family for generations would be wise to encourage the family to develop and implement effective and appropriate family governance structures. Doing so can significantly improve the longevity and success of the office and the family it serves.

The SFO needs to clearly delineate how communication will flow amongst all interested parties.

This should be a collective effort marked by complete transparency and should focus on delivering excellence on the core goals of the SFO. BUILDING IN FLEXIBILITY

One of the challenges of SFO governance is that the needs of the organization may change radically over

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time—sometimes very suddenly. Governance structures must be robust yet flexible enough to withstand family conflict, generational transitions and cataclysmic changes in the investment environment, whether anticipated or unanticipated.

Commonly, a successful individual will create an SFO following a liquidity event of some sort. The founder will build the SFO structure to suit his own needs and interests. As with any business run by a controlling owner, there isn’t a great need for formal governance. At this stage, the owner is fully informed, understands the goals and objectives of the SFO, and handles the critical roles—ownership, stewardship, oversight and management—by themselves. Unless the controlling owner has a formal governance mindset, they generally will prefer to run the SFO “lean and mean,” without a lot of staff or formal structure, making decisions on the fly in accordance with their intuitive assessment of what’s needed at the moment.

The controlling owner will often rely on a key advisor or staff member who knows how to implement the controlling owner’s plans, who understands what is needed and does whatever is necessary to make that happen. This sort of organic, firstgeneration governance generally works quite effectively, at least in the early years. The office runs, makes investments and provides other financial and non-financial services.

However, when the SFO comes to be managed for a wider group—typically, upon the controlling owner’s death, when the assets pass to descendants or trusts for their benefit—the absence of established, articulated policies creates a power vacuum.

Without the founder around, suddenly no one really knows who’s in charge, what needs to be done, who’s responsible for doing it, or how that performance will be measured or compensated. If the members of the next generation haven’t been prepared for their new roles, there may be a struggle for dominance, or the opposite: fearing conflict, family members may simply abdicate. The SFO may slowly collapse, or a non-family member may come to fill the vacuum, for good or for ill.

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Types of family governance Here are some of the more common types of governance structures that can help involve, educate and improve communications within wealthy families:

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Family Board of directors

Family constitution

Family participation on the board and in the chairman’s role can add value. These individuals should evaluate and vote on the SFO’s major strategic direction and policies.

This is a document that expresses the family’s shared legal, financial, emotional and spiritual ideals, values and responsibilities: everything the family deems necessary to create and preserve harmony and health. This document can be drafted by the Family Council members, and then ratified by all adult family members.

non-Family family advisory board

Family meetings

This entity should be filled with non-family members—often CEOs of more significant businesses in a variety of industries. While advisory board members lack voting rights, they must aim very high and be paid to ensure that the SFO receives the widest possible range of perspectives.

These events provide a time and place for the extended family to share information about the SFO’s progress, to educate younger family members about family wealth and values, to discuss family philanthropic direction, and to strengthen family bonds through fun activities.

Family council

Family committees

Often, a group of family members, representing different branches and generations of the family, meet to discuss issues and concerns that impact the entire family, such as employment of family members, involvement of in-laws, educating the rising generation about family wealth, financial values, and shared vision and mission.

These involve engaged family members who embrace a deeper purpose than simply being a beneficiary-benefactor. Committees can be formed to focus on human, cultural and social capital.

They should be inclusive and transparent. A tax committee, directed by the Chairman and/or CEO, can be comprised of family members as well as external (to the SFO) tax and legal professionals, who can offer shared ideas and resources to help the SFO achieve the best tax outcome for the family.

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Pathstone is a registered investment adviser; information about Pathstone is available via its Form ADV, Part 2A, which is available upon request or at www.adviserinfo.sec.gov. This page should not be considered a solicitation or offer to buy or sell any security, future,option or other financial instrument or offer to provide any investment advice or service to any person in any jurisdiction. Past performance is not a guarantee of future results.

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key

elements

of family governance Strong governance structures ensure that the SFO operates in accordance with the family’s mission and values over multiple generations.

The following are key types of governance activities that families can undertake, as needed:

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mission, values, and vision

focused mission statement

The family has articulated its mission, values and vision for the future, and the strategic plan of the SFO is built around that core. What will be the purpose of this family office? To manage liquidity generated by the sale of a business? To oversee a portfolio of direct investments? To preserve a family legacy? And why does the family want to manage assets collectively? Families planning an SFO should take time at the outset to consider the purpose of the SFO and its role within the family.

Developing a short, focused mission statement to guide the work of the SFO will help to avoid “mission creep” in future years. The founders should resist drafting a mission statement that is high-minded but vague and short on specifics. A family office consultant can help a family mold its vision and values into a practical and useful tool to guide the work of the SFO.

regular meetings

board of directors

There are regular owners’ and board meetings, with written agendas and complete minutes.

Information necessary for effective decisionmaking is distributed well in advance of voting, and there is adequate time for discussion.

The owners have appointed a board of directors and/or advisors to provide perspective, access to specialized experience/skills, and to discuss strategy and provide guidance. The board includes the family member chairperson, the CEO of the SFO and frequently three others non-conflicted in this capacity (five is commonly an optimum number, three tends to be too clubby).

management freedom

plan beyond investing

Management is free to implement the SFO’s strategy, without interference or meddling from the family or the owners; although they do need monitoring as to how well they are meeting goals.

The SFO’s strategic plan goes beyond investing and includes education of family members, for example, to promote effective stewardship over the long-term.

clear performance reports

rights and responsibilities

SFO performance reports are clear, comprehensive and timely, so that decision-making can be based on accurate and complete information.

The powers, rights, and responsibilities of owners, board and management are clearly spelled out and followed.

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LINES OF AUTHORITY AND ACCOUNTABILITY

The CEO reports to the chairman. Simple. As with a public company, the chairman and the family board are responsible to the family for making sure that the SFO is serving its mission as best as possible.

Aside from accepting direction, guidance and support from the chairman and the board, the CEO should limit distractions. Even from within the family there should be a protocol, in which the CEO submits monthly reports on progress toward goals and an overview of the finances of the SFO, ensuring complete transparency to all family members. There should be at minimum an annual meeting with all family members at which the CEO addresses the family, delivers his or her “state of the union” report, listens to all family members and answers all questions.

While the chairman must be accountable, accountability can have consequences: rifts can occur within the family; disgruntled family members can file lawsuits. It is often a thankless job for the family members in these roles. The more clearly the family can provide the CEO with a clear vision and the governance to achieve it, the better the chance the CEO and the SFO will successfully meet family goals at the highest of standards. Anything else is failure.

The family should create a streamlined process for family members to ask questions of the SFO leader outside of monthly updates and the annual state of the union addresses. A defined process can head off a constant barrage of questions and interruptions that distract the CEO from executing the family’s vision and goals. If family members disagree with direction or specific solutions and services, they can reach out to the chairman via a formal process for submitting a grievance, with a timeline for response.

Many successful generational families and their SFO CEOs appoint an SFO contact, such as a chief of staff, to field questions and concerns.

Smaller families have a far easier time avoiding divisiveness. In larger families, it sometimes makes sense for dissenting family members to take control over their respective portions of the capital/resources to prevent their conflicting needs from damaging the SFO and allowing it to serve the rest of the family well. Dissenters may find that they can maintain healthy family relationships by breaking off from the SFO.

Whatever governance decisions your SFO makes, making it clear what those decisions are is the key to success. Without clear structure and rules, even the best CEO and staff can be gripped by indecision and become ineffective.

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Continue to read in :

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Wine Futures:

A Guide to Buying by Sotheby’s Wine

What are Futures?

Buying Futures – also known as en primeur – means purchasing wine that is still maturing in the barrel and has not yet been bottled.j Why buy Futures?

The advantages of buying Futures are: To purchase wine at the first release price, when the margins made by wine merchants are the smallest. In most vintages, although not always the case, the price of the wine increases and the margins made by wine merchants also increase once the wine is offered for sale in bottle.

To secure allocations of hard to find wines and varying formats (half bottles, magnums, double magnums, imperials and even larger) as soon as they are available for purchase.

To ensure perfect provenance by owning the wine from its first release.

To secure wine for a special birth year – as a gift for children, grandchildren, godchildren or for weddings and anniversaries.

To purchase the latest vintage of wines that you like to buy every year and where there is generally strong demand, such as Lafite, Mouton Rothschild, Margaux, Haut Brion, La Mission Haut Brion, Cheval Blanc, Pétrus, Lynch Bages, Montrose, Pichon Lalande, Pontet Canet and Haut Bailly.

When selling wines, ownership since intial release can bring higher prices.

Who buys Futures?

Price, provenance and access are the biggest benefits in buying Futures and this attracts all wine enthusiasts, from private collectors who intend to drink their wines to collectors who invest in wine, as well as wine funds.

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EMBRACE THE POWER OF COMMUNITY GROWING WEALTH, STRENGTHENING LEGACY, AND UNITING GENERATIONS

The Premier Global Membership Organization for Ultra-High Net-Worth Families

Family Office Association is an exclusive membership organization for the wealthiest families in the world. In our private community, members share with and learn from peers with the utmost regard for privacy.

Our thought leadership, resources and exclusive events provide an opportunity for growth and enlightenment so that your family continues to perform at its highest potential.

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www.FamilyOfficeAssociation.com 500 West Putnam Avenue, Suite 400 Greenwich, CT 06830

Futures Timeline YEAR OF THE VINTAGE

28 pt

Vines Pruned: The canes from last year’s vines are removed by hand in mid-winter. The vines are dormant over the winter, preserving their energy for the growing season to come.

Vines Flowering: In May or June, the vines flower. In an ideal growing season, the sugars and flavor compounds in the grapes develop gradually over the course of a warm, dry summer.

Harvest: Starting at the beginning of September, and often running through mid-October, the harvest takes place. Fine weather is crucial at this point, since any rain can dilute the vintage.

Even after indifferent summer weather, vintages have been saved by a dry September and October.

YEAR AFTER THE VINTAGE Wine Tasted: After the wine has been in barrel for about 3 or 4 months, an army of wine professionals arrive from around the world to taste the new vintage. Sotheby’s Serena Sutcliffe and Jamie Ritchie are among them, and they taste hundreds of wines, noting their opinions and scores on the young wines.

Aging Barrels: Once fermentation is over, the young wine is carefully transferred to small, new oak barrels, which will be its home for the next two years. Here the wine gradually softens and all of its components – acidity, tannins and flavor compounds – become a seamless whole.

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SECOND YEAR AFTER THE VINTAGE Futures Offered for Sale: Shortly after the wines have been tasted, the chateau owners release the prices of the new vintage, which can happen from April through June.

THIRD YEAR AFTER THE VINTAGE Wines Shipped and Delivered.

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When can I drink my Futures?

Here is a general guide, although each wine from each vintage may vary.

Petits Chateaux: 3–10 years Crus Bourgeois: 5–15 years Second Wines from top chateaux: 5–15 years Second to Fifth Growths: 10–30 years Super Seconds and First Growths: 15–50 years If I want to invest in wine, what are the drivers of the market?

In the last fifteen years, there has been a significant change in the price of wine and the underlying factors affecting the market, represented by two main points: Demographic change: As significant wealth has been created by a much younger generation (e.g., technology and finance), the average age of the wine auction buyer has fallen from being approximately 60 years old to roughly 40 years old.

Geographic change: Demand for fine wine continues to grow in North America and the traditional wine buying countries in Europe, but now there is also significant demand throughout Asia, South America and Russia.

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If you believe that more people from more countries and from a wider age group will want to buy great wines, then the price of fine wine will have to rise, as production of top class “collectible� wine is limited to only one new vintage every year, and most wineries are focused on increasing quality, thereby potentially reducing quantity.

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www.lowenhauptglobaladvisors.com | 314.345.8181 St. Louis | New York | Chicago | Sydney

Excerpt From the Latest Book by Charles A. Lowenhaupt, CEO and Founder of Lowenhaupt Global Advisors

The Wise Inheritor’s Guide to Freedom from Wealth: Making Family Wealth Work for You Available Now

forthcoming September 2018 from Praeger. Excerpted with permission.” https://www.abc-clio.com/ABC-CLIOCorporate/product.aspx?pc=A5832C LEGACY PAGE:

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S

ome 20 years ago, I moderated one of the first sessions for wealth inheritors offered by a preeminent global membership network for families of substantial wealth.

The group offers programs, advice, and educational services in a private, collaborative setting, to help people of all ages understand, wisely invest, and build a healthy relationship with their wealth.

Fifteen people between the ages of 21 and 30 attended the event. They were given the task of choosing a topic of conversation related to wealth inheritance, and then I was to lead and guide the discussion.

Although I’d given many talks and led countless discussions in my then 25 years as a wealth advisor to ultrahigh net worth families around the globe, what happened in that room gave me new insights into the challenges faced by wealth inheritors.

The experiences of these 15 people taught me that growing up with wealth is not easy.

I looked to one young man to get the ball rolling, and, without hesitation, he said, “It is much harder to grow up rich than poor.”

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I bit my tongue and decided to let that comment roll for a while. The theme went around the room. One person after the other talked about the difficulties he had had growing up with wealth. Here are a few of the comments I heard that day: “I had a friend from school to my house to spend the night. He arrived and saw the size of my house, all the rooms we had, and our maids, and his eyes widened.

From that day on, I knew that the only reason he wanted to be my friend was that he thought it was neat our family had so much money.”

“My grandfather lived with us and had a chauffeur and a Rolls-Royce. Whenever my friends came over, I was embarrassed because we had so much money. So I really never invited anyone to my house. That made it easier.”

“I wanted to sign up for a soccer team with some of my friends from school. The club met on Saturday morning and my father told me that our bank was going to have classes for me and others in how to manage money. I was only 14 and didn’t really care

about managing money, but my father told me learning how to manage my money was more important than playing soccer.”

“My parents put me through this charade of pretending we were poor. When I was 10 or 11, I had to get a $10 weekly allowance and had to budget how to spend it and how much to give to charity. My parents told me I had to be frugal and try to save for college.

Meanwhile, they had their own private plane and we had a household staff of five or six. My father had a chauffeur take him to Wall Street every day. It all seemed like nonsense to me as I knew we were what the world called ‘rich.’”

“My parents had so much money that they travelled all the time and never stayed home with my sister and me. Flying here and there and the next place on their own plane, we were cared for by nannies and others.

What kind of home life was that?” “‘You will always have whatever you need or want,’ said my grandfather to me when I was 15. ‘Someday, all of the money I have earned will be yours and all

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you have to do is keep it well invested and not lose it to the crooks out there always looking for rich people to bilk.’ When I told him I wanted to go to engineering school and become a computer engineer, he told me: ‘No need! You will go to Princeton as I did and you can hire other people to fix your computer.’ He never understood.”

After a half hour of hearing their complaints and their unhappiness, I asked whether a person from a lowerincome background would understand that growing up “rich” is more difficult than growing up “poor.” “Maybe not,” said one, “but they would never understand.” We discussed the idea without conclusion, but I saw an obvious pattern emerging.

Those 15 confirmed everything most adults suspect about young people; adolescents can be tremendously unhappy, and, when they are, they look to someone to blame. Who else LEGACY PAGE:

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to denounce besides their parents?

More importantly, they confirmed a fundamental truth I had not completely understood before that session. Although most every young person, regardless of their socioeconomic background, has experienced similar feelings toward their parents or upbringing, the difference for those who have grown up in a seeming “lap of luxury” is that they face a serious issue that many people aren’t willing to talk about: they are trapped by the burdens of wealth.

Growing up in families of $100 million or $250 million or $500 million or more presents for many this fundamental issue: How can a wealth inheritor lead a life unencumbered by the burdens of family wealth? How can individuals achieve self-actualization and a feeling of fulfillment? In other words, how can they grow up to become fully realized individuals, seeing their wealth not as an impediment, nor a

crutch, but as something that might help them succeed?

It was clear that the young people in that room were raised by parents and grandparents whose wealth was the defining character of their personal identities. As they grew up, those young people lived in the shadow of their parents and their parents’ wealth. When looking for the reason for adolescent unhappiness, they pointed to their wealth. They lacked the perspective that can come with independence over time. They needed experience they could only gain as productive people making their own way through the world with direction and freedom.

When we’re young, perspective is often absent. When I was teaching English at an elite Eastern boarding school, many years ago, I tutored the teenaged son of a wealthy and prominent name in all the social circles. He was a likeable boy, but very lazy. I spent hours

trying to teach him how to write with proper punctuation and grammar. One day, in frustration, I said: “You just have to learn how to write; you cannot grow up without that ability!”

“Mr. Lowenhaupt,” he replied, “You and I both know that all I have to know how to write is my name on a check.”

That stopped me in my tracks. A successful life is much more than simply signing checks, a fact that young man learned over time as he became a Phi Beta graduate of a good college and went on to a successful career, entirely on his own.

As stated in a March 6, 2015, article for Reuters, “Baby boomers will leave more than an estimated $30 trillion to younger generations over the next 30 years.” With such a large amount of money comes an even larger amount of responsibility, but “wealth alone” should not define a person’s life (even if it defines the life of one’s parent). If you grow up with wealth, if you are a wealth inheritor, if you are one of those inheriting a piece of that $30 trillion, how do you get on with life?

So how do you chase the American Dream or the Chinese, Indian, or Australian Dream, the dream of the human soul to become all you can be? You start by figuring out what that wealth is for; you consider that you want to live in a world of peace, beauty, and health; you consider community. To succeed and become one’s true self, it’s imperative to create a healthy relationship with wealth at a young age and continue that relationship until it’s time to pass that wealth, and knowledge, onto the next generation.

At the heart of the many challenges wealth inheritors face is the ability to take control of their own lives. Control

always requires two sides: the person exercising control and the person being controlled. Many times, this struggle exists between parents and their children. In this book, you will find many stories of people who break that dynamic in one way or another, but one that I want to share with you at the outset is that of an only child who was born into the wealthiest family in Malaysia. His father used family wealth to try to control his son’s actions and decisions, leaving the son miserable and unfulfilled. When he was in his early twenties, however, the son found a higher calling, joined a Buddhist monastery, and took a vow of poverty. This, of course, infuriated the father, but gave the son independence that led to happiness and contentment.

Unless you can develop such independence, you will never experience true freedom.

In the chapters that follow, I identify 10 specific challenges facing young, wealthy people today. I draw on the experience and wisdom of the more than a century that my family has been working for wealth creators and inheritors, explore some of the solutions to the issues wealth inheritors face, and discover the many opportunities they have to lead inspired lives of self-actualization and freedom. When you finish this book, I hope you will be motivated to pursue a life of self-actualization with freedom from wealth, and you will be committed to helping your children and grandchildren chase their dreams. Whether you are an inheritor of wealth or the parent of an inheritor, I hope you will have the wisdom and capabilities to have a healthy relationship with your wealth and your family. I am here to help you.

Now, let’s begin!

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Putting the Mission

First: Every Family Office Needs a “North Star” TRÉ

BY JIM COUNT,

E VICE PRESID INSIGHTS & NS, FIDELITY CONNECTIO S ICE SERVICE FAMILY OFF

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F

idelity Family Office Services’ 2018 Evolving the Family Office e-book, released as monthly installments, will explore what we believe are the most significant challenges and opportunities that could disrupt family offices today—and how executives can prepare themselves to stay relevant in future. The following is Chapter 2 of the e-book, “Putting the Mission First: Every Family Office Needs a ‘North Star’.”

Families and executives often come to us seeking help when they embark on creating or restructuring their family office. They inquire about the appropriate way to structure different functions, they ask us what services they should offer, how they should be delivered and who should be their next hire.

While we are eager to help, we can’t provide truly helpful answers until we know why they want a family office or why they are restructuring their current office—and, surprisingly, this is a question many have a hard time answering.

We’ve seen that the family office foundations that have stood the test of time tend to start from a clearly defined mission—created from the family’s vision of success. In short, every family office needs a “North Star.”

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GETTING LOST AT SEA

Family offices are often elusive, private and complex, so it is understandable that family members don’t always have clarity on what might be involved in building an office—or even what questions to ask first. When an executive is charged with execution, it’s expected that they will forge ahead with whatever guidance—great or small —they have received from the family. In these situations, a family office will be created and it may be successful, but the likelihood of headaches, stumbles or suboptimal outcomes increases.

What have we seen go wrong when the office is launched before its mission is properly defined and understood?

DISJOINTED DECISION-MAKING

In the absence of a statement of purpose, decisionmaking criteria are unclear, leading to confusion, inefficient processes or decisions that ultimately are not aligned with the family’s philosophies or needs.

SERVICES MISMATCH

If created without a deep understanding of the family’s needs and wants, the office structure and services may fall short of its potential today—and this will be exacerbated as the rising generation comes of age. Similarly, the office is more likely to be over-built and require right sizing further down the line. Lastly, decisions made in the beginning might have to be undone, which may cost dollars to correct. Without clearly articulated goals, offices can bias their service offerings toward the professional expertise of the founding executive.

SKEWED HIRING

It is hard to hire the appropriate talent if you haven’t yet defined the strengths, skills and culture that will align with the family and seeks to deliver a vibrant office.

NARROW PERSPECTIVE

In most cases, families want their offices to support multiple generations or promote cohesion across different branches. Failing to involve a broad set of stakeholders is a potential lost opportunity. Without an inclusive approach, the final product is less likely to truly reflect the broader family and family members may lack a strong sense of ownership as a consequence.

DISAPPOINTMENT

If no metric is created to measure success, any claim that value was created can be made—or dismissed— arbitrarily, putting the efforts of the executive at risk of being under appreciated.

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The third and final company that Chris used as an example was NextSeed. NextSeed is a platform that allows for local business to get funding from members within their own community through flexible debt financing. Similar to Kickstarter or GoFundMe, members of the community can choose to invest money into the company through a simple online platform with investments of as low as a $100 minimum. What sets this apart from the other crowdfunding platforms out there however is the fact this is truly an investment, not a fund raising donation, meaning one receives a revenue share in return.

UNDERSTANDING THE PURPOSE OF WEALTH MEANS BEING INTENTIONAL IN DEFINING WHAT WILL FULFILL FAMILY MEMBERS TODAY AND EVEN FOR GENERATIONS TO COME. THESE CONVERSATIONS SHOULD BE PERSONAL, EMOTIONAL AND REFLECTIVE OF THE FAMILY’S TRUE HOPES AND DREAMS. -JIM COUTRÉ, VICE PRESIDENT, INSIGHTS AND CONNECTIONS, FIDELITY FAMILY OFFICE SERVICES. SETTING A “NORTH STAR”

It can be challenging or even uncomfortable for executives to have a conversation with the principal or family about defining the mission of the office. The family may have no idea of what the answers are, or may simply not realize how important it is to articulate a mission and the criteria for decision-making. To help secure the long-term success of the office, we believe it is critical that executives have this conversation. Armed with the lessons learned above, and factoring in the following considerations, success may be more likely.

Defining the purpose of the family’s wealth: a family vision With so many financial, legal and tax advisors surrounding wealthy families, it’s not surprising that many offices default to targeting the protection and growth of financial assets. But the starting point should actually be to define: What does success look like for the family (not the office)?

And what is the role of wealth in that vision of success?

What is the purpose of the family’s wealth?

Is it solely to beget more wealth?

Is it to create cohesion across generations?

Is it to use philanthropy to help shape a world the family wants?

Is it to help individual family members find personal fulfillment?

Is it to drive entrepreneurship or innovation?

Is it some combination of these purposes?

There are no right or wrong answers; every family is different, but if you don’t know where you want to go, you are unlikely to reach your destination.

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DRAWING UP A MISSION STATEMENT

Once a vision for the family has been established, creating a clear mission statement for the office should help to align family members around shared goals, enabling the family and its advisors to create an office around what has been identified to matter most.

There is no single approach to crafting a mission statement, nor are there requirements for what should be included. But a well-crafted mission statement should capture what is most important to the family—a bit like a scorecard that ensures long-term goals are not sidetracked by urgent or tangential concerns.

With that in mind, here are some examples of simplified, illustrative mission statements that families might put in place:

SUPPORT PHILANTHROPIC ENDEAVOURS Support philanthropy and other charitable giving by providing operational services, fostering governance, and cultivating family leaders.

a resource to the local community. The family members pledge to each other mutual support in achieving property stewardship, contribution to society, and personal growth.

EDUCATE FUTURE GENERATIONS Ensure future generations understand the responsibility of their inheritance and how they can benefit from it.

If the mission represents the navigational beacon of the office, organizing the appropriate team and provisions are likely the keys to staying on course.

The office mission can be used as a basis to understand what the organization of the office needs to look like:

Family A:

Family C:

SUSTAINABLE ASSET MANAGEMENT To protect and enhance the family’s wealth.

STEWARDSHIP OF THE COMMUNITY As longstanding land-owners, the family vows to undertake responsible use and stewardship of its property as

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Family B: SELF-ACTUALIZATION To ensure that individuals can fulfil their potential and ambitions, whatever those may be. Providing tailored financial and advisory support to individual family members to support them in achieving their aspirations.

ORGANIZING THE OFFICE

What services will it offer?

What roles need to be staffed?

What culture needs to be created?

How will it be governed?

What legal structures should be used?

It is important to understand that answers to any of these questions may change over time as the family’s needs and vision evolve. Even an office that has been running successfully for many decades may need to revise its mission, and therefore the way it is organized, as the priorities of new generations change.

One large and growing family started to feel less cohesive because of their global dispersion, so they decided to refocus on their vision for unity and identity. As a result, the office was retooled to put more emphasis on creating and maintaining communication channels, defining and executing educational programs, and convening an annual retreat intended to build stronger emotional bonds between branches and individuals.

One family office, founded due to a liquidity event, had to evolve as new generations arose. As the family grew, it became clear that the long-held vision for success was unattainable if new wealth was not created. To align with a newly established vision for the next era, the office’s primary role shifted from wealth preservation to wealth creation. This included changed investment policies, new programs to promote entrepreneurship, life coaches for family members, and assets liquidated to create a new fund to invest in family-led start-ups.

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In our opinion, families and executives that manage to articulate a clear purpose and mission, which can feed into decision-making frameworks for the office, have a far greater chance of creating an office that will stand the test of time.

Through our experience in helping families and offices achieve these goals, we found it can take upwards of five years to get the vision and mission correct. Based on our experience, it is our opinion you will need to test initial assumptions and theories before you can agree that you have it right. After the vision and mission are understood, it can take another five years to get the office staffed and working effectively. Building this foundation is a marathon and not a sprint, so taking the time to set things up correctly will likely pay dividends down the road.

The onus is now on family members and hired executives alike to help steer that process— enabling every family to find its “North Star.”

QUESTIONS TO CONSIDER For families: Can you articulate the purpose of your wealth?

Is your vision for the family your own or is it a shared vision, inclusive of multiple members and generations?

Have you communicated this purpose and vision with those you have charged to run your family office?

For family office executives: How do you know that the office and the family are aligned on what success looks like?

How might the family’s needs and wants change over time?

As the family does evolve, how will you react to address these changes?

Explore other chapters of the e-book at go.fidelity.com/evolvefamilyoffice.

About the Author Jim Coutré is Vice President, Insights & Connections. He is responsible for the oversight of Fidelity Family Office Services’ Insights & Connections program, which provides family offices and wealthy families with thought leadership, referrals to industry experts and consultants and access to a peer networking program. Prior to joining Fidelity, Jim was a vice president at The Philanthropic Initiative where he helped ultra-high net worth families and multi-generational foundations increase the social impact of their giving and he trained professional advisors and family office staff to help their own clients set and achieve their philanthropic goals.

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The content provided herein is general in nature and is for informational purposes only. Unless otherwise noted, the views expressed are those of the speaker and not necessarily those of Fidelity Investments. Views and opinions are subject to change at any time based on market and other conditions. Fidelity Family Office Services is a division of Fidelity Brokerage Services LLC. Fidelity Clearing & Custody SolutionsŽ provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC. 200 Seaport Boulevard, Boston, MA 02210. Š 2018 FMR LLC. All rights reserved. 853126.1.0

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ALIGNING W YOUR INVESTMENTS WITH YOUR VALUES

BY TREVOR NEILSON Co-Founder Investments

and

CEO i(x)

hat are your values?

Having met with hundreds of family offices in every corner of the world I have found that often that is a question that most family office advisors have never asked the families they represent.

Most families have values they hold dear, yet when it comes to family offices there seems to be a divide between conversations around profit and conversations around purpose. While some family office’s may have crafted mission statements and their advisors help to facilitate philanthropic investments, a small percentage have advised their clients about how to make for-profit investments that also address the issues their families care most about.

Until recently most family offices have ignored the ability to invest with an eye on impact. This may be a function of our tax code and the tax exemption granted for charitable contributions. For the last hundred years, high-net-worth families have primarily focused on using philanthropy to create social impact-but that is changing and it’s changing fast. We are all shaped by our personal experiences. My experience working in the Clinton administration and at the Bill and Melinda Gates Foundation has led me to conclude that neither government nor philanthropy alone can solve our world’s greatest challenges.

Purposeful capital combined with innovative entrepreneurship and advances in technology can.

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Data from a recent Global Impact Investing Network survey, shows that investors moved $35 billion into impact investment deals in 2017, a 58% increase from the prior year; while total impact assets of those surveyed were $228 billion, double the 2016 total.

This change is largely being driven by younger investors’ commitment to social impact. Another recent study by U.S. Trust showed that 40% of high-net-worth investors either own or invest in companies with a strong environmental, social, and governance (ESG) track record, compared to 38% two years ago.

The same study showed that 77% of millennials own ESG stocks or include impact investments in their portfolio.

“The millennials want to do well, they also want to do good,” said Joe Quinlan, head of market strategy at U.S. Trust. “Now that they are one of the largest investing cohorts, the trend is more pronounced.”

The biggest firms in the world are paying close attention. A recent survey by BlackRock found that 67% of millennials want investments to reflect their social and environmental values—and when the data focused on women the number jumped up to 76%.

We are in the early days of this new era in investing, UBS has projected that that $7 trillion globally will pass into the hands of millennials between 2017 and 2020. These investors reject the irrelevant notion that it is not possible to generate strong returns while creating positive social impact.

In fact, the data shows that investments which take into consideration social and environmental impact outperform their peers.

A 2015 report by the Morgan Stanley Institute for Sustainable Investing, found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. Wall Street is creating product with presentation materials that will find their way

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“You never change things by fighting the existing reality.

To change something, build a new model that makes the existing model obsolete. ” -R. Buckminster Fuller

onto the radar of family offices. The time is at hand for investors and investment committees to move their values to the core of their portfolio decisions. These opportunities must stand up to rigorous due diligence processes and risk return parameters of any allocation. The key will be to have the ability to gauge opportunity alongside measurable impact.

These dual mandates are achievable and will provide families with the long-term wealth creation embedded in successful family offices as they deploy multigenerational capital.

The growing trend of families collaborating on direct investments will be a definitive catalyst for these strides forward. The thoughtful process of choosing our partners and focus of our capital is a statement of our inherent choices. Given the long-term nature of family capital, even at the most opportunistic level we can express a vision of how we are shaping the future.

New investment structures that align the interests of capital providers and asset managers are evolving to facilitate this secular trend.

Family offices are asset owners of what is designed to be permanent capital when their mission is successful. We are moving from philanthropy as the expression of our legacies to the active creation of new industries and economies. At i(x) we call this “Profit With Purpose” and our focus is investing in companies that address the most pressing areas of global need. To date, we’ve launched platforms in the following issue areas: Renewable Energy, Green Commercial Real Estate, Gender Equality, Media, Education, Fair Insurance and Workforce Housing.

Over $100 trillion is currently invested in private wealth accounts around the world—and the vast majority of it has been invested without any consideration of social impact. This presents an exciting opportunity for high-net-worth families, and those who advise them, to align their investments with their values and to profit with purpose.

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VENTURE INVESTING FOR GROWTH An afternoon of conversations about what makes great venture investing

FRIDAY, NOVEMBER 2, 2018

HILTON ORRINGTON HOTEL, EVANSTON, IL

FEATURED SPEAKERS

Matt Barnard Founder & CEO Plenty

Jay Jordan Founder & CEO The Jordan Company

Larry Levy Founder & CEO Levy Restaurant Group

Alicia Loffler Assoc. Provost Innovation & New Ventures Northwestern University

Will McLean Vice President & Chief Investment Officer Northwestern University

Bryan Ritchie Vice President & Assoc.

Provost for Innovation Notre Dame

Thad Seymour Vice Pres. for Partnerships & Chief Innovation Officer UCF

Mark Yusko Founder & CEO Morgan Creek Capital Management

FIND OUT MORE:

edgesummit@kirenaga.com

Summit Partner:

Join us for this special opportunity to hear from industry thought leaders who bring strategic insight into what it takes to find, invest, and allocate capital to early-stage growth companies. The Kirenaga EDGE Summit is focused on venture investing and is an invitation-only event.

Attendance is free of charge.

RSVP NOW!

Kirenaga.com/edge-summit Use Invitation Code: Summit2018

Your legacy begins today You have high expectations for your family, your business and the legacy you’ll leave.

To turn that vision into reality, you need legal advisors who understand your priorities and complement your skills.

Day Pitney is a full-service law firm with a deep commitment to its clients–individuals, families, family offices and businesses across the U.S. and globally.

We’ll help you understand your options at every turn, and transform your vision into reliable steps toward your goals.

TRUSTS & ESTATES | BUSINESS & TAX PLANNING PRIVATE FUNDS | DIRECT INVESTMENTS VENTURE CAPITAL | REAL ESTATE | LITIGATION 7 Times Square | New York, NY 10036 | 212.297.5800 R. Scott Beach CT Darren M. Wallace CT, NY, DC James A. Ballerano, Jr. FL (Palm Beach County), NY

Admissions: Connecticut CT Washington, DC DC Florida FL New York NY

Prior results do not guarantee a similar outcom

BOSTON CONNECTICUT FLORIDA NEW JERSEY NEW YORK WASHINGTON, DC

www.daypitney.com

MAKE AN IMPACT WITH YOUR INVESTING ALZO &

BY DAVID SC AND TERRY BERL ERS OF N T R A P G IN MANAG RTNERS A P A G A N E KIR

M

any investors, especially family offices and foundations, want to “Do Well by Doing Good,” which implies two simultaneous goals: (1) making a meaningful impact, and (2) generating an appropriate financial return. The Global Impact Investment Network (GIIN) formally defines impact investing as “investments into companies, organizations and funds with the intention to generate social and environment impact alongside a financial return.”

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While many investors believe that one needs to sacrifice financial return to make a larger impact, we don’t believe that has to be the case. With smart investing, true societal impact can be accomplished while concurrently generating great financial returns, if an investor is willing to keep an open-mind.

IMPACT & RETURN IN THE EYE OF THE BEHOLDER

It may be obvious, but let us first acknowledge that what defines “impact” is quite personal and there is no single answer that fits every investor equally.

Many individuals support charitable causes and make legacy donations to hospitals and universities while expecting no financial return. Others may focus on specific, mission-based investing and are willing to significantly sacrifice returns to promote that cause. If your mission is affordable housing in New York, then the allocation of your investments will be much different than another investor who wants to promote women-owned businesses in Africa.

Therefore, it should also be acknowledged, that the more narrowly-tailored the mission, the more difficult it may be to find reasonable

financial returns. First, the range of investment options will be much more limited, and second, those investment options will likely be more about expanding access, rather than developing fundamentally better ways of doing things.

Each investor will need to decide how narrow or open their investment criteria will be to fairly judge whether their personal Impact Investing program will be able to achieve their on-going objectives.

A BETTER WAY TO DO THINGS

In Peter Thiel’s book “Zero to One”, he defines technology as “new and better ways of doing things.” Luckily, the world is filled with scientists, engineers, and entrepreneurs with great ideas for solving some of the world’s biggest problems.

Too often, though, these individuals lack access to professional networks and capital sources to properly develop their ideas into viable business models.

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At Kirenaga, it is our passion and mission to bring these ideas and these new technologies to the world by helping these untapped entrepreneurs build sustainable businesses. To evaluate the potential, we focus on four key characteristics of every new technology: Meaningful: We start by asking whether the problem being solved is meaningful to society. How many people will be impacted? Is the market size large enough? Peter Diamandis suggests that one should look to make a Ten-to-the-Nine (“109”) impact, that is, that one-billion or more people should be positively affected. An important mentality is to be both humble and open-minded when considering new technologies.

We continually learn about new opportunities and are amazed by the industries and business opportunities that exist that can actually change the world.

Impactful: Our second consideration is whether the technology is really distinctive and disruptive. We consider who will be willing to use the product or service, and whether it is a genuine improvement over existing solutions. We try to avoid ‘me-too’ products, and shake our head at business models like bike-sharing programs that seem exceptionally wasteful when their goal is just the opposite (just google: “bikes in china” to see pictures of acres of bikes in garbage heaps).

Sustainable: We look for business models that are sustainable, with gross margins that are high enough to pay good wages and support re-investment in the business. The technology needs to be defensible through patents or trade secrets, or else the business is at risk of being commoditized which may shorten the life of the business opportunity.

Finally, one may want to avoid businesses that rely on special government grants or regulation, as these programs can change at the whim of the newest administration.

Attractive: Lastly, the valuation must be attractive enough to generate an acceptable financial return. Each of our venture investments must have the potential to generate a 10x or more return in five-years or less, which we call our ten by five (10x5) threshold. This discipline

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may be our most important as it helps to ensure: (a) the market size is meaningful, (b) the technology is impactful, and truly represents a better way to do things, and (c) the business is sustainable. While not every individual investment will ultimately deliver this impact, the potential has to be there for us to add it to our portfolio. Finally, since our passion is to unleash the great ideas of untapped entrepreneurs, we need sizable financial returns today to be able to invest in tomorrow’s new ideas.

PERSISTENCE TO BE SUCCESSFUL

Impact Investing with the intention of generating an attractive financial return is rarely a ‘set-and-forget’ proposition. Bringing new and better technology to bear on a problem, delivering abundance into markets where there is scarcity, and creating new business models that attack critical flaws in the status quo is rarely a straight-forward, linear process. These businesses will go through peaks and valleys as well as lots of twists and turns before sustainability can be achieved. Investors need to consider whether they have the bandwidth to engage continually with management, or whether they would be better off investing via professional-managed vehicles who can provide that constant oversight and engagement for them.

Family Offices and Foundations can both make a positive societal impact and deliver attractive financial returns with their investing if they keep an open-mind to multiple opportunities, consider the size of the market, the impact of the new technology, and the sustainability of the business.

Note: The issues of Impact and Venture Investing will be discussed at the Kirenaga EDGE Summit on November 2, 2018 at Northwestern University as well as ALTS Capital Miami on December 7th. To participate, please email edgesummit@kirenaga.com.

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Impact Investing Case Study UNLEASHING NASA TECHNOLOGY FOR CLEAN WATER TIMELINE

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2005

Dr. Jacqueline Quinn and Dr. Phillip Maloney at NASA’s Kennedy Space Center invent a groundwater remediation technology which wins NASA’s Government Invention of the Year and Commercial Invention of the Year Award. Later, Dr. Quinn is inducted into the Space Inventor Hall of Fame (2007) and National Inventor’s Hall of Fame (2018), and Dr. Maloney is added to the ecoSPEARS scientific team.

April 2015

NASA, Dr. Quinn, and Dr. Maloney granted patent for SPEARS technology to remove PCB contamination.

2016

NASA contacts Sergie Albino (now CEO of ecoSPEARS) to help them redesign SPEARS to be conducive to mass manufacturing

Dec 2016

Rollins College MBA students present SPEARS technology as part of tech transfer program case competition. By Jan/Feb 2017 Exxon, Golder, and others began reaching out to express interest in the technology.

Spring 2017

ecoSPEARS Incorporated

Nov 2017

Kirenaga becomes 1st institutional investor in Seed Round

Oct 2017

ecoSPEARS signs licensing agreement from NASA for exclusive use of SPEARS technology

2018

ecoSPEARS leading discussions for commercialization with US Navy, EPA, corporations, etc.

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KIRENAGA’S 10x5 INVESTING DISCIPLINE (WHAT WE SAW) MEANINGFUL • Banned in 1979, PCB’s are carcinogenic and environmentally harmful.

• Present throughout US streams, lakes and groundwater (EPA identifies 500+ locations of contamination) • Still being produced and used in Asia and South America

READY

IMPACTFUL • Current remediation attempts – dredging and capping – are costly, ineffective, and environmentally damaging • SPEARS technology actually eliminates PCBs, rather than just moving to different location or hiding under cap

ATTRACTIVE

• Tested at Kennedy Space Center

• Partnership connection with Founder & CEO

• Pilot Program in SF Bay at Hunter’s Point

• Entered at seed round with pre-money valuation of $8 million (only need to hit $80mn for 10x return to Kirenaga)

• EPA mandating PCB remediation and billions of dollars set aside for remediation programs (from Port of Portland to Hudson River)

• Easy to see huge upsize of $1+ billion company

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The Case for Token Equity in Your Portfolio

By Mike Cagney

Co-founder and CEO of Figure

As I’m evangelizing blockchain to the financial services community, I keep running into the same question: why a token?

I understand the skepticism. The boon in initial coin (token) offerings (ICOs) has far outpaced real applications for blockchain. I think there are hundreds of blockchain CEOs out there with the proverbial hammer (their blockchain), looking for the nail (the elusive business problem to solve with their blockchain). Despite this, I am a huge fan of tokens and believe that in many circumstances tokens represent a far better way to invest in and create value from a transformative idea.

To understand my thinking, let’s consider how things worked before tokens. I’ll use Figure – a company I co-founded – as an illustrative example. Figure built a technology solution to improve liquidity and reduce transaction

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costs in financial markets. Using this technology can save asset originators – the buy side and the sell side – billions of dollars each year.

In the days before blockchain, Figure would own the technology and license it to the market. The value of Figure would simply be the risk-weighted present value of the expected net profit, i.e., licensing revenue less costs – basic math every investor understands.

Now consider Figure in the world of blockchain. The first big difference is that Figure no longer owns the technology. Instead, there is no owner; the technology is given to the market.

The blockchain ecosystem is composed of stakeholders who host smart contracts that create distributed, immutable hashes of everything that happens on blockchain; a foundation that administers permissions and economics on the blockchain; and members who use the blockchain to originate, buy, sell and finance assets cheaper and faster than they can today.

When a member uses the blockchain, they pay in token.

What members will pay to use the blockchain is commensurate with the value realized. For example, if a member saves $100 using blockchain for a transaction, they might pay $50 in token to use the platform. A small amount of this payment is distributed to the stakeholders to host the smart contracts and data, a small amount goes to the foundation to pay for

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their services and the rest gets distributed to all the other token holders as a dividend.

The market capitalization of the token is roughly the riskweighted present value of the fees one expects the technology to earn over time. This is similar to the value of Figure in the old way of doing things, but there are some specific advantages to the token versus traditional equity.

1.) Decentralized. There is no “owner,� and therefore, the ecosystem is supported by the collective participants. In assessing the value of the token, the investor does not need to take into consideration the cost structure or the idiosyncratic risks of the firm.

Valuation is simply a pure-play on the revenue from disrupting the market.

2.) Non-dilutive. There is a finite amount of token, and it cannot be created or destroyed. The investor does not have to worry about unknown dilutive capital or option events.

3.) Liquid. The token is traded on the blockchain. There are natural buyers (members) and sellers (stakeholders) to support a liquid secondary market.

4.) Governance. The foundation is

administered by the token holders at inception: one token, one vote.

This supports a virtuous and healthy ecosystem in that all token holders are incented to maximize the value of the token.

So why would Figure release its technology to the market? Economics. For the reasons cited above, tokens on blockchain can have greater value than corresponding equity in an enterprise software company.

Figure exchanges its technology for the majority of the token stock; the rest goes to the initial stakeholders, foundation, and strategic partners.

It then sells a portion of that token stock in an ICO to eliminate control of the foundation. So long as the cash from the token sale and the trajectory of future token appreciation Figure retains is greater than the enterprise value of the firm pursuing the old enterprise software way, this trade makes sense. And it usually does.

If tokens supplant equity, does this spell the end of venture

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capital and private equity firms? Not at all. Rather, these firms will expand their investment mandate to include tokens – as many already have. Given the amount of promising blockchain technology coming to market, expect tokens to capture a healthy share of investment dollars going forward.

One final note. When we started Figure, we raised cash the old-fashioned way – by issuing equity. Why? Again, economics. We felt that to generate the greatest value, we needed to build the blockchain, get the technology in production, and then do the ICO in lieu of any further equity rounds. So, in short, don’t expect equity to completely disappear, even in blockchain companies.

FigureTM creates innovative consumer financial solutions for home improvement, debt consolidation, retirement and more. Figure is harnessing the power of blockchain to reduce costs and increase access to financial products.

Figure was co-founded by Mike Cagney, former co-founder and CEO of SoFi, along with Alana Ackerson, Cynthia Chen, Sara Priola and June Ou.

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Specializing in Family Office Retreats Please contact Jacqueline Nelson, Director of Strategic Partnerships, at 310-500-7320 or jacqueline.nelson@fourseasons.com for more information.

Using science to accelerate the development of an exemplary fiduciary

By Steve Branham, Dr. Sean Hannah, Dr. John Sumanth, Don Trone, and Mary Lou Wattman

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ARE GREAT

401(K) ADVISORS BORN

or

MADE?

T

The title is a play on the perennial question: Are great leaders born or made?

The answer is a resounding “Yes!” Research has shown that both play a role, yet genetics explain less than half of leadership behavior and ascendance into leadership positions. Put another way, over half is gained through developmental experiences.

Figure 1: Behavioral Governance — The study of the interrelationships between leadership, stewardship and governance

Becoming a great leader is thus something that can predominantly be learned. To do so, the Center for Creative Leadership has coined a formula, The 70-20-10 Rule: • 70 percent is discovered through onthe-job experiences • 20 percent is acquired from mentors and other people • 10 percent is learned from training programs

Leadership

Stewardship

Behavioral Governance

Governance

However, a preeminent academic team has published a slew of ground-breaking research in prestigious journals on what they have termed neuro-leadership.

Their findings demonstrate that there are certain people whose brains, partially through genetics but more so through development over the individual’s lifespan, are better wired to lead. They found that men and women who have the capacity to serve as effective leaders share similar neurological functioning, as well as psychological factors.

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401(k) FIDUCIARY Our firm, 3ethos is now working with members of this same academic team to develop a new body of research focusing on a concept called behavioral governance.

Together, we’ve studied the interrelationships between three key factors that enable individuals to be exemplary and high-performing fiduciaries: leadership, stewardship and governance.

In many ways, this research is a natural extension of the Nobel Prize-winning work on behavioral finance, except now the focus has shifted to examine the behavior of the fiduciary instead of the individual or participant.

Initial research suggests that certain neurological and psychological factors associated with leadership and stewardship may have a greater impact on the quality of a fiduciary’s decision-making process—such as the quality of retirement outcomes—than mere adherence to a fiduciary standard.

Background For more than 40 years, the retirement industry has made significant investments in developing fiduciary technology, establishing best practices and creating fiduciary training programs, all in an effort to support ERISA’s procedural prudence requirements.

With such vast investments of time, money and people, one would think that the industry would be able to demonstrate that it has finally mastered the ability to develop exemplary fiduciaries.

Not so.

The satisfactory completion of a fiduciary

A procedural prudence standard defines a much higher fiduciary standard than a best interest standard. A procedural prudence standard, like the best interest standard, requires that a fiduciary act in the best interest of others. However, procedural prudence has two additional requirements. The fiduciary must demonstrate the inclusion of fiduciary best practices and generally-accepted investment management principles.

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Figure 2: Behavioral Governance — Third leg of the behavioral sciences stool

Behavioral Governance

Behavioral Finance

Behavior of the fiduciary

Behavior of the investor

Behavioral Economics Behavior of the markets

audit is not always a good predictor of investment outcomes or retirement readiness.

In fact, there is an ever-increasing amount of evidence suggesting that a fiduciary’s decision-making process will be suboptimal if entrusted simply to “good” instead of “great” behavioral governance.

Ten years ago, 3ethos began to search for factors that help to distinguish great retirement advisors from merely good ones. We assumed there has to be more to being an effective decision-maker than mere prudence.

Initially, we wanted to see if exemplary fiduciaries exhibited certain leadership behaviors. Later, we expanded the scope of our study to also include concepts associated with stewardship. To be great, fiduciaries need, for example, to inspire clients, committees and other stakeholders to align them toward mutual goals. They need to demonstrate stewardship to build trust and credibility, and thereby influence.

15 Neurological and Psychological Factors that Underpin Behavioral Governance We started our research by defining a uniform fiduciary framework that could be used to outline a procedurally prudent process—the fiduciary standard of care required

Figure 3 — Uniform Fiduciary Framework Step 1. Analyze Define roles and responsibilities State goals and objectives

Step 2. Strategize (RATE) Identify risks and assets Identify time horizons and expected outcomes

Step 3. Formalize Define the strategy Communicate the strategy

Step 4. Implement Implement the strategy Formalize financial controls and procedures

Step 5. Monitor Monitor the strategy Scrutinize for conflicts and self-dealing

401(k) FIDUCIARY

by ERISA—as defined in the sidebar.

The framework we developed is defined in terms of five steps and 10 dimensions that define the details of each step.

The framework depicted in Figure 3 is truly “uniform:”

Leadership is the ability to inspire and engage others.

Leadership—There are five psychological behaviors associated with leadership, including the fiduciary’s ability to be: Courageous Compassionate Competent Collaborative Character-full

• It is fully substantiated by the 3 Fs– Fiduciary best practices; FINRA rules; and financial planning principles.

• It can be used to define a fiduciary standard for qualified plans, municipal and public pension plans, foundations, endowments, personal trusts and wealth savings.

• It can be used to substantiate multiple professional and regulatory standards, such as: Fiduciary for advisors, trustees, and investment committee members; Governance for directors on boards; and Project management for officers and senior staff.

Working with our academic research team, we began identifying neurological and psychological factors that we believe have the most impact on the quality of a procedurally prudent process and on the development of an exemplary retirement advisor.

Fifteen factors have been identified—five are associated with leadership, five with stewardship and five with neurological capacity.

Of significance are the five neurological factors that work in conjunction with one another and with the noted leadership and stewardship behaviors (see Figure 4) to help define the developmental framework of an exemplary retirement advisor: Procedural justice: The fiduciary’s capacity for moral and ethical leadership. Particularly, the fiduciary’s ability to enact a fair, just and transparent process to resolve moral conflicts or to allocate limited resources.

Self-complexity: The fiduciary’s capacity for inspirational leadership and the ability to define an engaging vision for the future.

This requires: (a) a strong sense of purpose, (b) an understanding of the fiduciary’s own self within changing roles and require-

Stewardship is the passion and discipline to protect the long-term interests of others.

Stewardship—There are five psychological behaviors associated with stewardship, including the fiduciary’s ability to be:

ments and (c) an ability to adjust and adapt thoughts and behaviors to enact more appropriate responses to ill-defined, changing and evolving situations.

Situational awareness: The fiduciary’s capacity to: (a) perceive changes in their environment, (b) interpret these changes to determine whether and how they may impact goals and objectives and (c) make predictions as to how changes may impact future events.

Executive control: The capacity for the fiduciary to resolve conflicts between an impulsive desire and adherence to a higher order goal. This requires inhibition, working memory and cognitive flexibility.

Social astuteness: The fiduciary’s capacity for social intelligence, interpersonal influence, networking ability and sincerity.

L5, Behavioral Governance Society and Neuro-fiduciary The DOL’s Conflict of Interest Rule attempts to make everyone a fiduciary. Our

Aligned Attentive Adaptive Accountable Authentic

research suggests that not everyone has the capacity, willingness or ability for such a role.

In his best-selling leadership book Good to Great, Jim Collins had similar concerns about the proliferation of “leader” and “leadership” titles. His excellent work posed a central question, “How can we distinguish the exemplary leader from the rest?”

His answer was to define the exemplary leader in terms of certain characteristics called “Level 5 Leadership,” or those that display a powerful mixture of personal humility and indomitable will.

We informed Collins of a similar problem in the financial services industry—and attempts by regulators to make everyone a fiduciary. We asked if he’d have any objection if we used an “L5” type of mark to denote the characteristics of an exemplary professional in our identification and definition of them.

To his credit, and an example of his own exemplary leadership, he had no objections. In turn, we formed the Behavioral Governance Society for academic researchers and exem-

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Figure 4: Behavioral Governance Developmental Framework

Step 1. Analyze Define roles and responsibilities State goals and objectives

Step 2. Strategize (RATE) Identify risks and assets Identify time horizons and expected outcomes

Amplify Infuse

Step 3. Formalize Define the strategy Communicate the strategy

Step 4. Implement Implement the strategy Formalize financial controls and procedures

Step 5. Monitor Monitor the strategy Scrutinize for conflicts and self-dealing

plary professionals who are passionate about the study of the interrelationships between leadership, stewardship and governance.

As a next step, and in collaboration with members of the academic team who conducted the neuro-leadership research, we are beginning work to further develop and test the concept of neuro-fiduciary.

Like their earlier work, we will utilize quantitative electroencephalography (qEEG) brain scans coupled with psychological self- and 360-degree assessments to determine the neurological functioning of exemplary fiduciaries.

EEG research is widely used in studies that examine workplace optimization, consumer decision-making, cognitive and attentional states, and social perception—all concepts and skills that impact the quality of a retirement advisor.

In addition, we’re building the first psychometric instruments (a common technique to measure knowledge, abilities, attitudes and personality traits through validated psychological assessments) so that we can better understand what a particular

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retirement advisor “gets” about behavioral governance and can successfully apply. More importantly, we want to discover what they don’t get and why.

We’ll be able to harvest psychological and neurological big data to improve training programs and technology, as well as enhance the tools and methods to develop great fiduciaries.

Through this research, we may also be able to develop validated protocols with which to identify exemplary fiduciaries—which could be a game-changer for our industry.

In the future, we’ll also be working on robo-fiduciary. We’ll be integrating our findings with robo-advisors and artificial intelligence to help improve the management of investment decisions and retirement outcomes.

Most importantly, we are striving to answer the questions “Are great retirement advisors born or made?” and “How can we identify and accelerate the development of exemplary fiduciaries?”

That way, we will no longer have to guess whether a retirement advisor is ready to serve in a fiduciary capacity—we will likely know.

The five co-founders of 3ethos include Steve Branham, Rear Admiral, USCG (Retired); Sean Hannah, Ph.D. Wake Forest University School of Business; John Sumanth, Ph.D. Wake Forest University School of Business; Don Trone, L5; and, Mary Lou Wattman.

1 The academic team included Dr. Sean Hannah (a co-founder of 3ethos) and colleagues. For examples of this work see: Waldman, D. A., Wang, D., Hannah, S. T., Balthazard, P. B., & Owens, B. (in press). Psychological and Neurological Predictors of Abusive Supervision. Personnel Psychology; Waldman, D. A., Wang, D., Hannah, S. T., & Balthazard, P. B. (2017). A neurological and ideological perspective of ethical leadership. Academy of Management Journal, 60(4), 1285-1306; Hannah, S. T., Balthazard, P. A., Waldman, D. A., Jennings, P. L., & Thatcher, R. W. (2013). The psychological and neurological bases of leader self-complexity and effects on adaptive decision-making. Journal of Applied Psychology, 98, 393-411; Balthazard, P. A., Waldman, D. A., Thatcher, R. W., & Hannah, S. (2012). Differentiating transformational and non-transformational leaders on the basis of neurological imaging. Leadership Quarterly, 23, 244-258.

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Neuberger Berman was founded in 1939 to do one thing: deliver compelling investment results for our clients over the long term. This remains our singular purpose today, driven by a culture rooted in deep fundamental research, the pursuit of investment insight and continuous innovation on behalf of clients, and facilitated by the free exchange of ideas across the organization.

Visit us at www.nb.com

Š2018 Neuberger Berman Group LLC. All Rights Reserved.

Securing Your Family 10 Steps You Can Take Today by Scott Kegler Aon Family Office Practice Leader

The world is changing faster than ever, and new threats to our personal safety and security seem to pop up every day. Keeping up with it all can feel overwhelming and exhausting. Here are ten simple steps that you and your family can take today in order to better protect what you hold dear.

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№2 1Be Savvy with Social Media •Make your social media accounts private so that you can approve who follows you and remove or block those you don’t want •Don’t share pictures that include specific location(s) of your home(s) •Don’t “check in” – this lets people know you are away from your home •Wait to post pictures of your travels AFTER you have returned home – never before or during your trip

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№2 2Change Your WiFi Router password Every 3 months, change the password on your WiFi router. This seems more painful than it actually is – it should only take five minutes. This process helps to ensure that only those people you approve can access your internet connection.

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3Use Two Factor Authentication Whenever you have the option to choose two factor authentication, use it! This will require someone accessing your account to not only have the password for your account, but also have access to your cell phone to receive a text message with a one-time access code.

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4Don’t Use Public WiFi Airports, coffee shops, and hotels are rich hunting grounds for hackers. Keep yourself safe and don’t connect to these networks. If you need to access WiFi while traveling, consider a Virtual Private Network (VPN). VPN providers such as Rubica are beginning to partner with insurance companies to offer discounts and higher limits on cyber insurance coverage.

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5Use a Password Management Application According to Verizon’s Data Breach Investigations Report, more than 80 percent of all hacks are via weak or stolen passwords. We know we are supposed to use different passwords for different accounts, make them hard to guess, change them frequently, and not write them down. That’s hard to do, especially when the passwords are shared with family members (anyone remember our NetFlix password?). Consider using a password management application such as Lastpass.

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Trusted Counsel to the Family Office.

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6Tailor Your Automobile Insurance Make the most of your automobile insurance coverage by making the following choices: Include Uninsured / Underinsured Motorist coverage – this coverage (select $250k / $500k limit) reimburses policyholders in the event of an accident with a hit-and-run driver, a driver without insurance, or a driver with limits of insurance that are not high enough to cover the resulting bodily injury or property damage. According to the Insurance Research Council, about one in eight drivers is uninsured.

Insure all family members with the same insurance company – take advantage of potential price savings and claims support by putting coverage for all generations of your family with the same insurance company.

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7Purchase Umbrella Liability insurance with at least a $5 million limit Umbrella liability coverage provides higher limits of insurance, and in some cases broader coverage, in excess of your homeowners policy and automobile policies (and possibly boat / yacht insurance policies). This coverage is relatively inexpensive – choose a limit of at least $5 million.

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8Purchase Flood Coverage Most homeowners’ policies do not cover flooding. Ask your broker for a proposal for flood insurance, even if you aren’t in a flood zone, where coverage will be required by the mortgage company if you have a mortgage. A basic policy can help protect you and your valuables where a normal homeowner’s policy might not respond.

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Customized, objective, best-in-class investment solutions.

Intelligently designed portfolios tailored to your needs combining the best of low-cost traditional investments with high-value alternative investments — providing an opportunity to achieve competitive returns in positive markets, while attempting to protect capital in down markets.

Contact us at 203.428.2600 or visit spruceinvest.com.

ASSET ALLOCATION ANALYSIS PORTFOLIO CONSTRUCTION MANAGER SELECTION CONSOLIDATED REPORTING TAX AND ESTATE PLANNING

The information contained in this transmission may contain privileged and confidential information. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Spruce Investment Advisors, LLC. If you are not the intended recipient, please contact the sender by replying to this e-mail and destroy all copies of this e-mail (and any attachment(s)) from your system. To reply to our e-mail administrator directly, please send an e-mail to compliance@spruceinvest.com.

This presentation does not constitute an offer to sell, or solicitation of an offer to buy, any interest in any investment vehicle, and should not be relied on as such. Nor does this document, email or any attachment hereto disclose the risks or terms of an investment in in investment vehicle managed by Spruce or any of its affiliates.

Solicitations can be made only with the applicable Fund’s offering documents and only to qualified persons. For accredited investors with $10+ million only. Investors in the Partnership must be (1) ‘accredited investors” as defined under the Securities Act of 1933, as amended, and (ii) ‘qualified purchasers” or “knowledgeable employees” as defined under the Investment Company Act of 1940, and the rules promulgated there under.

Spruce may compensate employees for new advisory business. This compensation is based on a percentage of advisory fees paid to Spruce by the client. The client does not incur any additional fees as a result of this arrangement. All fees are subject to negotiation.

One Stamford Plaza | 263 Tresser Boulevard, 15th Floor | Stamford, Connecticut 06901 | spruceinvest.com

9Update Appraisals on your Collections Ask for updated appraisals on your collections at least every two years. Don’t wait. Always select a USPAP certified appraiser. Reputable appraisers never charge a fee that is tied to the appraised value of an item.

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10 Research Third Parties Carefully vet potential investment partners, nannies, gardeners, contractors and others you allow to access your homes, family and business(es). There are many background check options available, including a free National Sex Offender search. More detailed background checks start at roughly $2,000, which include a target search of: •Watch Lists •Connection to Sanctioned Jurisdictions •Political Exposure

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•Derogatory Media •Criminal Records •Litigation

CONCLUSION

Creating a more secure environment for your family and your assets can feel overwhelming at times. There are so many things you could focus on, it’s hard to know where to start. I encourage you to take thirty minutes today and get started on the ten items in this list. You’ll be making significant progress towards substantially improving your family’s personal safety and security.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

About the Author Scott Kegler works with Family Offices that are making direct investments into operating companies (majority or minority) and real estate. His job is to coordinate the delivery of Aon’s services, including insurance, employee benefits, and retirement plans for portfolio companies; due diligence on target acquisitions; Directors & Officers / Errors & Omissions / Crime / Cyber liability coverage for the family office itself; personal insurance for family (all generations) - homeowners, automobile, aviation, fine arts, jewelry, kidnap & ransom, domestic workers, etc; and high limit life / keyman insurance related to tax / estate / succession planning.

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