Mr. Bluebird (not his actual name) sold his successful operating business some years ago. He owns estates in three different locations. Upon arriving at his Colorado ranch for a much-needed vacation, he confronted three unpleasant surprises. First, he discovered that the dishwasher, motorized shades, and heating system were broken. He texted his estate manager, but she was on vacation (not visible on his calendar). Second, the pool and landscape vendors called Mr. Bluebird on his cell phone (how did they get his number?), stating that their unpaid invoices were more than 90 days past due. Third, he received an urgent e-mail (fourth request) from a private equity fund manager stating that 24 hours remained to wire substantial funds (which exceeded his cash on hand) for a capital call.

Mr. Bluebird serves as his own chief investment officer, selecting investment managers as well as making direct investments in private companies. He is planning to create a consolidated investment statement where he can view the cost basis and current valuation of his investments, but he hasn't gotten around to it just yet. In addition, he hasn't created an investment policy statement (IPS) and spends considerable time evaluating myriad opportunities that range from commodities, to tech start-ups, real estate, and cybercurrency. Tax season brings a flurry of K-1s and other documentation, which sometimes arrive at the wrong physical or e-mail address and have to be traced.

It's clear that Mr. Bluebird faces multiple risks. Certainly his time and quality of life are negatively impacted. But his lack of personal and administrative infrastructure threatens to reduce the value of his home, makes it impossible to determine his asset allocation much less rebalance if needed, and may reduce his net worth, perhaps drastically.

Like Mr. Bluebird, a surprising number of the wealthy lack infrastructure. Not bridges, roads and harbors, but rather personal and administrative infrastructure—the processes, systems, and resources that enable consistent service levels, improve quality of life, reduce risk, and avoid surprises. Consolidated investment reporting, up-to-date cybersecurity measures, and residential preventative maintenance checklists are all examples of essential infrastructure.

Some point to their personal assistant or chief of staff or their attorney and insist that “all is under control” due to that person's excellent work. But resilient infrastructure is not dependent on any one specific person; rather, it consists of processes and systems that operate in the absence of any specific person.

Why does infrastructure matter? Infrastructure prevents disasters, such as careless spenders depleting their inheritance, residential maintenance breakdowns causing leaks or fire, cybersecurity breaches, compliance issues, and lawsuits. Without infrastructure, wealth preservation becomes a game of chance. What may be less obvious are the positive impacts. Infrastructure enables opportunities, including participation in sophisticated investment and estate planning strategies. Further, it enables peace of mind and sleeping well at night, providing time for strategic and creative thinking.

While it is certainly true that every wealthy individual, and their single-family office (SFO), is unique, it is also true that fundamental infrastructure components must be present in order to maintain a high quality of life, reduce risk, and to preserve wealth.

For these reasons, whether you are an advisor or principal, you need to know: Is the infrastructure robust and state-of-the-art? Or crumbling. Decayed. Nonexistent.

What follows is the Infrastructure Self-Assessment Tool, which enables wealthy individuals and their advisors to quantitatively assess the status of their infrastructure, and to prioritize improvements.

Infrastructure Assessment Instrument

Scoring

• Add up the entries in the “Status” column. A score greater than 32 indicates serious risks to wealth preservation and a critical need for improvement. Keep in mind, however, that a score lower than 32 may still reveal individual weaknesses that could cause serious damage if not corrected.
• Add up the rows: Status plus Priority. Any scores greater than 7 per area indicate a critical need to improve that specific area.

There are at least five negative consequences of deficient infrastructure.

• Inconsistency and workarounds. The Merriam-Webster dictionary defines a “workaround”' as “a plan or method to circumvent a problem without eliminating it.” A common workaround is to hire more people, but this does not address the root cause. Staff may be working hard, but the client's requirements are still not being met. Service levels may be excellent one day and terrible the next because the processes are not systematic.
• Distraction. Infrastructure issues described above are unpleasant distractions that impair quality of life, but they also prevent clients from focusing on their most important priorities, including wealth preservation and strategic thinking.
• “Communications blizzard.” Inadequate infrastructure prompts a flurry of urgent e-mails, texts, and calls to resolve issues, preventing clients from focusing on their priorities. What's more, these communications are unstructured, so it is not possible to track, analyze, and systematically address the underlying issues.
• Noncompliance. Lack of infrastructure can lead to missing deadlines, errors on tax returns and other filings, labor law violations, followed by penalties, sanctions, and lawsuits.
• Collapse. The client's existing infrastructure may collapse entirely. Excessive spending, deferred maintenance, lack of controls, and lack of disaster planning can have profound negative consequences.

Why would intelligent, wealthy clients risk these negative consequences? Rarely is this a conscious, deliberate decision. More often, deficient infrastructure is a result of plans not made and actions not taken, of negligent rather than malicious intent. Moreover, there is typically not one reason, but rather a combination.

How to Build Infrastructure: The Seven-Step Plan

• Step 1: Identify the areas that require infrastructure improvement.

  • First, identify what is working well and why. This will provide insights in improving the problem areas and help ensure that changes made to address problems do not inadvertently damage the areas that are high-functioning.

• Step 2: Prioritize on a 5-point scale with the Infrastructure Assessment Instrument (above).

  • Rank each area by its current status (1= Excellent; 5= Terrible). For each area requiring improvement, rank it by impact (1 = Least impact; 5 = Highest impact). Prioritize those with the highest combination score (7–10).

• Step 3: Quantify current resource allocation and document current processes.

  • Who is doing what? Are resources available but not allocated toward the priorities? Are resources insufficient? Are skills missing? Which activities are the most staff-intensive, error-prone, and high impact? Focus on these.

• Step 4: Identify the infrastructure gap and add a third score for ease of implementation.

  • Compare the current status versus the desired outcome. Rank each desired improvement based on ease of implementation, on a 1–5 scale (1 = Easiest to implement; 5 = Very difficult to implement) and reprioritize based on level of impact but incorporating ease of implementation.

    Focus on the quick wins—those that are highest impact in Step 2 and easiest to implement in Step 4.

• Step 5: Create a plan and obtain agreement from stakeholders.

  • Develop a strategic and tactical plan to implement the improvements. Ensure that stakeholders (e.g., family members, SFO and private staff) are in agreement to move forward. Document these agreements in writing.

• Step 6: Implement.
  • Organizational change is challenging, and many forces will try, consciously or otherwise, to stop it. Change management expertise is essential.
  • Identify an implementation “owner” who will lead the process and ensure accountability.
  • Convene an implementation steering committee consisting of principals, staff, and qualified experts to oversee and manage the implementation process, ensuring milestones are set and met.
• Step 7: Maintain ongoing monitoring, measurement, and accountability.

  • Ongoing monitoring is needed to ensure accountability. Specific actionable metrics should be tracked, such as “preventable maintenance issues.” Since an important goal is to prevent distractions, any high-impact issues that arise must be tracked and analyzed to determine root cause, and to be prevented in the future. It is also vital to measure positive financial impacts such as tax reduction, reduced insurance premiums, and staff expense, to help justify the cost of the infrastructure investments. One SFO reported that annual savings from their infrastructure implementation more than paid for the annual cost of the SFO.

In summary, building and maintaining resilient infrastructure is essential for quality of life as well as wealth preservation. While an investment in time and money is required, the payback will be swift, in the form of higher quality of life, reduced risk, and increased likelihood of sustainable wealth preservation.

Source

Natasha Pearl, “The Essential Infrastructure for Wealth Preservation,” a chapter in Advising the Wealthy Client edited by Barbara R. Hauser (United Kingdom: Globe Publishing, 2020).

Additional Resources

1. Atul Gawande, The Checklist Manifesto: How to Get Things Right (New York: Metropolitan Books, 2009).
2. Aston Pearl Tracker, a proprietary, low-tech tool to identify and manage projects.
3. Tracking software such as Zendesk or ServiceNow, which can be customized to enable root cause analysis of “incidents” indicative of infrastructure issues.

Biography

Natasha Pearl founded Aston Pearl in 2003. The firm provides objective and confidential consulting to single-family offices (SFOs), family enterprises, and private clients, with a focus on SFO structure and start-up, and residential operations. Aston Pearl has developed a proprietary approach and significant intellectual capital in the area of Wealth Preservation Infrastructure^®. In 2015, Natasha was named one of the “50 Most Influential Women in Private Wealth.” In 2021, she was named by Business Insider as “one of the 21 people powering the huge growth in family offices.” She received her undergraduate and MBA degrees from Harvard University.