Big wealth often is associated with people who built large public companies, like Warren Buffett and Bill Gates, but one giant advisor to the rich says it may be a mistake for advisors to think that way.
At Northern Trust, a lot of effort has been placed on serving the needs of family-owned-and-operated, closely held businesses—entities that often fly under the radar, yet comprise a larger component of the U.S. wealth engine than many people realize.
“Still, to this day, 75 percent of ultra-high-net-worth wealth in this country has been generated from self-made, private businesses,” said David Blowers, Northern Trust’s president of wealth management national services. “We work with many of those businesses and consider them a huge, huge growth opportunity.”
In recognition of how important that market is, Chicago-based Northern Trust says it has continually placed a great focus on its business consulting practice, going against a trend that has seen many wealth management firms farm out this type of advice to outside consulting entities.
The trust company has done the opposite, Blowers said, by stocking the business unit with professionals of multiple specialties, such as expertise in agriculture and the oil, gas and mineral industries.
In related news, the trust company announced that Robert Ashcroft has been named Northern Trust’s senior vice president and director of business owner consulting. Ashcroft comes from PricewaterhouseCoopers, where he spent 12 years consulting with executives, often on private mergers and acquisitions and other business issues.
Business consulting is naturally a key area for Northern Trust because the company is a trustee for family wealth, and families often view their businesses as their most prized possessions, according to Blowers.
As a trustee, Northern Trust manages more than 1,200 business interests comprising $8 billion of assets. Moreover, it holds the controlling interest in 160 of these businesses. The trust has a team of 18 professionals responsible for overseeing these interests, Blowers said.
In the oil, gas and mineral sector alone, Northern Trust manages 15,000 properties with the help of an in-house staff that includes former industry professionals.
In agriculture, another sector with the involvement of many family-owned businesses, the trust manages nearly 2,000 properties, including 170 farms, 330,000 acres of timberland and over $2 billion worth of commercial and residential real estate.
It amounts to a lot of varied interests, with a lot of specialized issues to deal with. But there are also common issues that run through practically all the privately held businesses, with one issue in particularly standing out: succession planning.
“Everyone agrees that succession planning needs to begin early,” Blowers said. “But in family businesses, owners are so busy and singularly focused on driving their business, they often don’t do that.”
Hence, succession planning is an area where family businesses frequently stumble, often in ways that lead to the dissipation of family wealth and the businesses themselves.
That’s why the loss of family wealth from generation to generation is such a familiar issue in the advisory industry. Northern Trust’s in-house research confirms the trend, showing that 30 percent of family businesses make it to the second generation, 12 percent to the third and only 3 percent to the fourth, according to Blowers.
It’s an important issue, and one that cries out for advisor intervention. Northern Trust, for example, urges its clients to make plans for succession up to 10 years prior to any expected transitions, Blowers says.
The trust company also encourages clients to identify who in the next generation should be prepared to take over businesses. If there is no one in line, which is often the case, planning may involve planning for a sale of the company or the appointment of an outside person to handle business operations until a family member is identified, Blowers says.
Of course, that doesn’t always happen. Indeed, the trust company often sees expert business people who handled transitions by the seat of their pants.
“Former business owners often tell us they didn’t intend to sell the business when they did,” Blowers said. “Rather, they got an unsolicited offer and they decided to sell.”
That can be an unfortunate situation for a business owner because it means he or she can’t do efficient tax and philanthropy planning in conjunction with the sale. Sudden sales also often mean poor valuations and short-changing children in the next generation, Blowers added.
In the current environment, with so much private equity activity, business owners want to avoid such situations because it’s a sellers market, he said. “There’s a lot of money chasing deals right now,” Blowers said. “Right now it is better to be a seller than a buyer.”
