Family Capital. Curtis Gregory

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      But a family that hopes to do well in the investment of its capital should never, ever be sold anything. The family should, instead, be an active, knowledgeable and proactive buyer of investment services and products.

      The way the process should work is that a family looks at the risk and return profile of its portfolio and decides that (let's say) it needs to reduce its risk but, hopefully, without reducing its returns by a similar amount. The family will then look around for ways to accomplish this and might (for example) decide to replace some of its long equity managers with long/short hedge fund managers. The family will look for the best long/short managers in the business and engage one or two of them.

      But that's not how it worked with George Titan III. Instead, George would show up at a meeting with his advisors and find that they had a new idea for him. The bank had recently purchased a hedge fund, and the advisors thought the find would be a useful addition to the family's portfolio. The advisors would walk George through reams of data showing how terrific the hedge fund's returns had been, and eventually, with George lost in the details, he would tell the advisors, sure, let's give it a try.

      Maybe the family's portfolio needed a hedge fund and maybe it didn't. George would never know. Maybe this was the best hedge fund for the family and maybe it wasn't (in fact, the odds were huge that it wasn't), but, again, George would never know.

      The biggest error George Titan III made was his decision to abandon the equity markets. A wealthy family, like it or not, is in the business of managing capital, and it's a tough business to be in. Families pay taxes, they pay investment management fees, they spend money from the portfolio, and, of course, inflation constantly eats away at the value of the capital. And as if all that weren't enough, families tend to compound faster than capital does, so that even successful families will likely see their per capita wealth drop across the generations.

      Given all these headwinds, it's essential that family portfolios be growth-oriented, and that means owning stocks. George's rationale for selling equities may have resonated at the time, but longer term it was a calamitous, utterly destructive act. When George sold out, the family's portfolio had already declined by about 40 %. Selling immortalized those losses. Then, with no growth assets in the portfolio, it was impossible for the family to recoup.

      As noted previously, if George had simply held on for a few more months, the stock markets would have resumed their upward trend. The strong markets of 1975 and 1976 wouldn't have restored the family to its former wealth, but it would have been a nice start. Then, when the big bull market started in 1982, the family would have enjoyed 17 long years of mainly very strong markets. They would have been much wealthier in 1999 than they'd been in 1972, before the 1973–1974 bear markets.

      But it wasn't to be. George Titan III's investment mistakes, and especially the devastating decision to abandon equities, destroyed his family's wealth.

      What a Good Advisor Could Have Done for the Titans

      For advisors to wealthy families, there are many lessons here, but perhaps the main one is this: a successful wealth advisor must grapple with much more than capital markets. Let's examine some of the ways George Titan III's advisors might have helped prevent the very unfortunate outcome described earlier.

      Advisors shouldn't even think about working with wealthy families unless they are willing to place the clients' interests above their own. This should be true of any financial advisor, but unfortunately the Securities and Exchange Commission (SEC) has seen fit to allow most advisors to put their own interests first.