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Portfolio management for heirs


ericd1
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I've thinking about how to help my heirs prudently manage their inheritance. I would like them to have a trustworthy point of contact that can help them with their financial questions and portfolio management. We're not talking mega bucks here, but an amount that if managed properly could help them throughout their lifetime. Because I've been a self-directed investor for 40 years I'm probably not aware of many possible options.

 

Appreciate your comments...

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1. Educate them yourself, show them where the inheritance came from and how long it took to amass

2. Interview lots of CFPs, CFAs, ChFCs types in the "retail" financial services industry

3. Find the firm or individual that you would want to work with

4. Introduce your heirs to the professional that you have chosen

5. Set up your heirs with some money now and help them integrate with the advisor

6. Structure your estate plan with incentives/hurtles to limit waste and sloth

7. Sleep well at night

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I've been wondering about that for some time. Not have any good recipe yet, but you may want to study the Shelby C. Davis family story.

 

Also, I wonder if it would be possible to create a trust with some rules in it:

 

- Invest in low cost indexes related funds only.

- Give money to the adult heirs only if they work. If they don't, give some money to be able for them do choose any kind of daily work they love, but not enough to do nothing.

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Guest HarryLong

I wouldn't touch most of the retail financial services industry. A good plan might be to place half the money with some excellent managers (a good litmus test is whether they had a CAGR of > 10% from 2000-the present.

 

The other half, you might let let your heirs manage.

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I've thinking about how to help my heirs prudently manage their inheritance. I would like them to have a trustworthy point of contact that can help them with their financial questions and portfolio management. We're not talking mega bucks here, but an amount that if managed properly could help them throughout their lifetime. Because I've been a self-directed investor for 40 years I'm probably not aware of many possible options.

 

Appreciate your comments...

 

Teach your heirs to read these message board discussions every day. :)

 

The ideal solution would be to teach them what you know and then give them some money to manage while you are still around to monitor and guide them. The problem is that this easier said than done. The reason value investing still works is because not many people can do it well. So, if you have heirs who neither have the interest or the emotional aptitude for it, then you are forced to look to third parties for help.

 

One way would be to work with financial adviser types. Unfortunately, good ones are hard to find. I would not, as someone else recommended here, look for them based on the letters (CFA, CFP, etc) that come after their names. It is more important to listen to what they say, understand how they think and see what they actually do over an extended period of time in order to judge their suitability. More than 90% of the advisers you interview will not be suitable and you can normally tell after just one or two meetings.

 

The third option is to identify fund managers/asset allocators to place the funds with - e.g. FFH, BRK, FPA Capital, etc. - and then encourage your heirs to learn from these managers by reading and listening to them. This is a good way to go if you can trust your heirs to take a long term view and stick to the program instead of doing other things with the funds. If you are worried about the self-discipline of your heirs, then it might be worthwhile to go the trust route even though that means more cost and red tape. You can write rules into the trust to limit the investment of the trust funds but the danger of rules is that they may become outdated and cause unforeseen problems for your heirs.

 

There are no simple solutions but you can console yourself with the fact that your heirs will have a headstart over most others and it's up to them to make the best use of it. You can only help them up to a point.

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Thanks for the ideas. The idea of reading this board daily was outstanding, but my heirs have not expressed any interest in investing, or learning about it.  Maybe some discussion about learning and using this board would be appropriate.

 

I agree with not using a retail adviser because good ones are so difficult to find. My family left me with a trust managed by a reputable bank. They pretty much insisted on investing in their trust funds, which was ok, but very conservative. I believe their strategy was more to conserve and protect than grow assets. I a teenager at the time and it was probably the right approach. Because of the situation I made the effort to learn about investing and glad I did.

 

I like the trust idea, but have not done any research on trustees and investment flexibility. I was not aware of Vanguard's Services, perhaps Fidelity and others may offer something similar. I'll check into what they offer.

 

For now I've prepared a short letter outlining an overall strategy with ~10 funds/stocks (the jockey approach), rebalancing and withdrawal suggestions.

 

Thanks again for the ideas...

 

 

 

 

 

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Thanks for the ideas. The idea of reading this board daily was outstanding, but my heirs have not expressed any interest in investing, or learning about it.  Maybe some discussion about learning and using this board would be appropriate.

 

I agree with not using a retail adviser because good ones are so difficult to find. My family left me with a trust managed by a reputable bank. They pretty much insisted on investing in their trust funds, which was ok, but very conservative. I believe their strategy was more to conserve and protect than grow assets. I a teenager at the time and it was probably the right approach. Because of the situation I made the effort to learn about investing and glad I did.

 

I like the trust idea, but have not done any research on trustees and investment flexibility. I was not aware of Vanguard's Services, perhaps Fidelity and others may offer something similar. I'll check into what they offer.

 

For now I've prepared a short letter outlining an overall strategy with ~10 funds/stocks (the jockey approach), rebalancing and withdrawal suggestions.

 

Thanks again for the ideas...

 

 

Just thinking, doesn't the jockey approach suffer from the same problem of succession that you are trying to solve? Wouldn't you be better off identifying companies that don't need exceptional jockeys (e.g. KO, PG, PM, etc)?

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I think if your heirs dont learn anything about money. The money you give them will soon be taken away.

 

It doesnt take much to read a Fairfax or Fairholme letter and know that the guys are doing a good job. I recommend setting them down and showing them a few things. Nothing crazy but basic money management skills. If not they will do something dumb with the money at some point.

 

I dont doubt that the Buffett kids are not too great on the investment side, but am quite sure they know how to pick a good money manager and how to monitor there progress over a decade or 2.

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That isn't the problem, our heirs (kids) do a good job of managing their money.  They just aren't interested in reading 10-K's etc.  They have other interests and do well in their chosen fields.

I had hoped Fairholme was the one and purchased some in October 2007 and even with reinvested dividends it is down about 7%.

Any suggestions.

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Sea - The problem with finding the good adviser is compounded with making sure there is a viable succession plan in case something happens to the adviser. That suggests to me a larger organization, etc. which might be terrific, but I haven't heard anyone make any suggestions who I might contact!

 

OEC - Even exceptional companies rise, fall and disappear over time - Although I included a few on my short list.

 

Myth - I see the situation as a challenge with two parts - #1 discipline to not over spend (a trust could enforce this) and #2 growing the assets. #1 is easier to plan  and setup, while #2 is much more difficult.

 

Bookie - Fairholme is on my short list - Remember patience is a virtue

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Why not set them up with a simple 50/50 Stock/Bond?

 

Something like 25% Russell 3000, 25% S&P 500, 25% Investment Grade, 25% Treasury

 

I would give them simple guidelines like to reinvest 50% of the dividends and keep the other half for their spending.

 

They won't get awesome results but they will get the broadest portfolio available for a cost under 0.5%.

 

BeerBaron

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Guest HarryLong

Interesting point HarryLong, especially with what has gone on for the last few years. Which portion of the retail world would you touch?

 

Forget brokers/"financial advisors". Find some amazing fund managers who have done 10% plus compounded over the last 10 years. Find 10-12 of them, interview them to make sure their approach makes sense, speak to former investors to make sure the performance that is reported is real, check with the SEC for violations, etc....you get the picture.

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That isn't the problem, our heirs (kids) do a good job of managing their money.  They just aren't interested in reading 10-K's etc.  They have other interests and do well in their chosen fields.

I had hoped Fairholme was the one and purchased some in October 2007 and even with reinvested dividends it is down about 7%.

Any suggestions.

 

Fairholme, as good as Bruce is, has gotten way to big to assure extraordinary returns, especially with the fees and the constraints that mutual funds have.  BRK has a great culture and so does FFH.  Both organizations are obsessively focused on Rule # 1. Plus, there's almost no rakeoff that will be a big drag on compounding.  :). The "founder's effect" says that if heirs inherit assets invested in aparticular way, they are likely not to make a change.  You could keep most of your investable assets in BRK & FFH ( subject to change if there should be a drastic change in the culture of either, And ask your heirs to do the same, subject to the same condition. :)

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Fairholme, as good as Bruce is, has gotten way to big to assure extraordinary returns, especially with the fees and the constraints that mutual funds have.  BRK has a great culture and so does FFH.  Both organizations are obsessively focused on Rule # 1. Plus, there's almost no rakeoff that will be a big drag on compounding.  . The "founder's effect" says that if heirs inherit assets invested in aparticular way, they are likely not to make a change.  You could keep most of your investable assets in BRK & FFH ( subject to change if there should be a drastic change in the culture of either, And ask your heirs to do the same, subject to the same condition

.

.

So far that is what I have done.

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Bookie,

 

maybe you could make the inheritance conditional on them understanding and taking a more active interest in investing?

Or if not, you could go for the mass diversification approach.  Choose a number of jockey plays, and outstanding companies, and good mutual funds and spread it all out.  I think if you had put 10K in BRK 30 years ago, that investment alone would have given you a reasonably good chunk of change.  If you can find several like minded companies and spread it out then maybe you can just let them work their magic.  So spread it out between BRK, FFH, LUK, MKL, BAM, L, (maybe SHLD, maybe BH, Y, PICO, BIDVEST), then some mutual funds like FAIRX, the Primecap funds, dodge and cox, Sequoia, TILDX.  Some in PG, JNJ, KO, WMT etc.

 

Just thinking out loud! :-)

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ericd1- You may have to make a trade off for continuity vs. investment performance. Glenmede(Pew family SunOil), Wilmington Trust(DuPont), Arvest(Wal-Mart Waltons) exist to serve multi-generational wealth. Their investment performance may not be as good as some of the other names metnioned but it may be good enough to ensure that the money does what you want it to do for you heirs.

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OEC - Even exceptional companies rise, fall and disappear over time - Although I included a few on my short list.

 

I agree - I was just responding to your post in which you mentioned only jockey stocks. In any case, I suspect "non-jockey" companies have better longevity records than jockey stocks (because jockeys tend to be already quite old by the time we identify them). I am curious - can anyone name some jockey stocks that have made a successful succession transition? (I have not followed jockey stocks in NA for that long so my knowledge base is limited.)

 

Digressing slightly, I am curious to hear your views on the pros and cons of passing down what Asians might term "an iron rice bowl" to your heirs. Are you worried about how that might affect their motivation to strive? It sounds like you had that benefit handed down to you as well - I am curious to know how it affected your thinking.

 

(I ask because I am grappling with this issue myself of how best to provide for my kids - give them fish or focus on teaching them to fish. From a societal viewpoint, I'm thinking that after I have provided my kids the best educational opportunities and some basic safety net each marginal dollar I give away will have a much greater beneficial multiplier effect on society if it is given to someone smart, driven but financially disadvantaged rather than to my kids.)

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