Performance management is risk management

Where TSC has become involved in the detailed analysis of investment portfolios, we’ve chosen to focus on the massive amount of data that is in fact sitting on the books of financial advisors, rather than on broad market segments standing alone. In working with a high-net-worth family, we sought to track not just overall performance of their entire investment portfolio, but the effects of each major component: stocks, bonds, real estate, operating businesses, private investments, and major non-operating assets (such as art). This sort of portfolio analysis isn’t particularly brilliant until you realize that no one we ever talk to thinks about tracking the rest of the family’s non-investment assets as part of the portfolio. Why not? They’re certainly part of the wealth, capital, available to the family.

No family wants to end up like stock option millionaires in Los Altos in 2002, with 8-digit tax bills on 7-digit wealth. No family wants to end up like poor nobles, with a castle too big to be furnished, where they are selling off the family silver to support the assets. No family wants to look like Toys ‘R Us, selling off the most profitable part of its business, Babies ‘R Us, to support the failing operations of the parent.

Managing the performance of all these types of assets, and understanding their effects on family cash flow, not just investment performance, is important to creating an appropriate risk management profile for the family as a whole. Managing family dynastic wealth is about growing the assets so that they can accommodate the growing size of the family over time while they are shielded against the “slings and arrows of outrageous fortune,” taxes, and growing charitable investments in society.

Risk management is about preserving freedom of action, options and choices, in the face of an uncertain world. Risk management isn’t about being the safest today or the safest for 50 years; it’s about understanding where variance comes from, and how much, and how to array the forces at the family’s disposal, its capital, to manage those risks and minimize them efficiently in light of the family’s goals.

Can we do this for your family or family office? Yes. Can we do this for your company? Yes. We can.