Secret Financial Weapons of the Super-Rich

  1. Alternative Investments

    Alternative Investments

    Under U.S. law, certain investment products are only available to accredited investors, who must have a household net worth of $1 million or more. A key advantage of many of these so-called "alternative investments" is that, at least in theory, they help diversify a portfolio because they don't move in lockstep with traditional stock and bond investments, and so help balance out returns.

    Alternative investments include venture capital funds, private equity funds, direct investments in commodities such as timber, and stakes in private companies.
  2. Hedge Funds

    Hedge Funds

    Hedge funds, which are also restricted to accredited investors, use a variety of often complex strategies, such as high-tech, proprietary trading platforms that buy and sell stocks in milliseconds. There were more than 8,000 hedge funds at the end of 2009, according to Hedge Fund Research. John Merrill, chief investment officer of Tanglewood Wealth Management in Houston, says less than 25 hedge fund managers have stellar long-term records that make them worth often hefty fees, which can be 2 percent of the portfolio every year plus 20 percent of any profits. For regular investors it can be a challenge to even identify the most successful funds, which can be secretive about their track records, he adds. Well-regarded hedge fund managers with long track records include Paul Tudor Jones at Tudor Investment Corp., launched in 1983; Louis Moore Bacon of Moore Capital Management, founded in 1989; and Andreas Halvorsen (above) at Viking Global Investors, which dates from 1999.
  3. Executive Perks

    Executive Perks

    Senior executives at large companies typically receive not just a salary but bonuses, grants of stock, and stock options. They may have the ability to defer some of their compensation until future years, which can help with tax planning.

    Corporate leaders may also get help with tax preparation, along with free medical care and valuable insurance benefits. For example, General Electric (GE) paid $105,202 to cover life insurance premiums for Chief Executive Officer Jeffrey Immelt (above) in 2009. According to research firm Equilar, the median perks for Fortune 100 CEOs totaled $249,632 in 2009, down 28.3 percent from 2008.
  4. Networking


    The topic for discussion at the World Economic Forum in Davos, Switzerland, in January is "shared norms for the new reality." Sound sleepy? For most of the rich and powerful in attendance, the real payoff is an opportunity to network with other rich and powerful individuals. The Davos forum is restricted to CEOs and invited guests, and more than 2,500 political and business leaders attended in 2010, including former U.S. President Bill Clinton, South African President Jacob Zuma, and French President Nicolas Sarkozy.

    Another popular schmoozefest is Allen & Co.'s exclusive, annual one-week conference in Sun Valley, Idaho, where every July, the likes of Warren Buffett (pictured), Bill Gates, Tony Blair, and many other moguls and politicians rub elbows. Other fairly exclusive gatherings are hosted by the Aspen Institute and TED, which stands for "Technology, Entertainment, and Design."
  5. Board Membership

    Board Membership

    The wealthy can serve on corporate boards to both supplement their incomes and make important business connections. According to Equilar, companies in the Standard & Poor's 500 stock index paid their median board member $190,000 last year—not bad for what's usually a part-time job.

    Board memberships can also be a way for prominent business leaders to extend their influence. Microsoft's (MSFT) Bill Gates serves on the board of Berkshire Hathaway (BRK/A), a company built by his friend Warren Buffett. Google (GOOG) Chief Executive Officer Eric Schmidt served on Apple's (AAPL) board from 2007 to 2009, while Apple CEO Steve Jobs has served on the board of Walt Disney (DIS) since 2006.
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  6. Customized Investments

    Customized Investments

    Because of their wealth, the rich can get portfolio managers to create investment products customized to their own particular needs. One option is structured notes, which are complex securities that use derivatives to give investors exposure to particular investment strategies. Also, rather than invest in a mutual fund like everyone else, the wealthy can ask prominent mutual fund managers to create separately managed accounts designed to reduce their tax bill and fees.
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  7. Diversification and Hedging

    Diversification and Hedging

    One way to protect a portfolio from big losses is to spread investments across a range of different asset types that won't fall or rise together. Investors can also hedge their exposure, through derivatives such as put options and other strategies, so losses in certain investments are limited or made up for by gains in other products.

    The wealthier you are, the easier it is to diversify and hedge—both because you can hire skilled money managers to construct those strategies and because you have the resources to spread among many different assets and products.
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  8. Lower Fees

    Lower Fees

    The wealthy have the clout to ask for and receive the very lowest fees. Fees can have a big impact on returns. For example, according to a 2006 study by the U.S. Government Accountability Office, by locking in a 0.5 percent annual fee rather than 1.5 percent, an investor with $20,000 and a hypothetical 7 percent annual return could save $12,100 over the next 20 years.

    Rich investors "should be able to get the absolute maximum discount," says Paul Sutherland, president of Financial and Investment Management Group, a wealth manager. They can wind up paying only 15 percent of a mutual fund's maximum fees, he says.
  9. Financial Advice

    Financial Advice

    The super-rich can afford the best advice. They can hire lawyers and accountants to lower their tax bills, insurance experts to get them the best deals and protection from losses, and personal financial advisers to scrutinize each investment. For many, these functions are conducted by their own "family office," a private company an individual family establishes to manage its investments, property, philanthropic activities, or other personal affairs.

    According to the Securities and Exchange Commission, citing industry data, there are 2,500 to 3,000 single-family offices in the U.S. that manage more than $1.2 trillion in assets. The Wall Street Journal reported May 18 that Oprah Winfrey has hired an investment manager, Peter Adamson, to set up her own family office.
  10. Going Offshore

    Going Offshore

    If the wealthy don't like paying U.S. taxes or meeting local regulations, they often have the ability to get citizenship in another country without upending their careers or business activities. For example, billionaire and mutual fund pioneer John Templeton, who died in 2008, renounced his U.S. citizenship in 1968 and moved to the Bahamas.

    British rocker Keith Richards (pictured) and other members of the Rolling Stones have spent decades avoiding the reach of their home country's tax collectors. "A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it," Richards told Fortune magazine in 2002. "Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar." Richards currently lives in Connecticut and the band rehearses in Canada for tax reasons, he said.
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  11. Financial Perks

    Financial Perks

    Banks, credit-card companies, wealth managers, airlines, and hotels all fiercely compete for the business of the super-rich, and the result is perks and deep discounts their other customers never know about.

    American Express' Centurion Card, available by invitation only and with no credit limit, is one of several exclusive credit cards. It provides 24-hour access to a personal concierge service, personal shoppers at luxury stores, free financial advice, access to airport lounges, and entry to golf tournaments and other events.
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  12. Priority Status

    Priority Status

    Investment banks and money managers know who their most valuable clients are, and typically offer them special treatment. For example, the extremely wealthy are often the only individual investors who can get their hands on shares of hot initial public offerings before they start trading. That's because the investment banks underwriting the shares may earmark shares for their top customers.

    Only the super-wealthy—who sometimes must be willing to commit hundreds of millions of dollars—are sometimes permitted to invest in top-performing mutual funds and hedge funds that have become so popular that they are officially closed to new investors.
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  13. Staying Power

    Staying Power

    As most investors age, they reduce the amount of risk they're taking with their portfolios, a process that can hurt their returns over the long term. The extremely wealthy often don't need to do this. "Their time horizon—even later in life—does not really shorten," says James King, president and chief investment officer at National Penn Investors Trust. Their assets are being managed not for short-term retirement needs but for heirs or philanthropies that won't need the money for decades.

    Also, because they have so much more money, the wealthy have "staying power" during turbulent markets, King says. They can afford to stay in the market at times when losses would force other investors to liquidate.
  14. Multitasking


    For the super-rich, time is money, and many have very sophisticated ways of making the most productive use of each day. Drivers, social and household assistants, and personal secretaries free the wealthy from waiting in line or other tasks that chew up time for the rest of us, and give them more time to do what they do best: make money.
  15. Private Jets

    Private Jets

    Warren Buffett calls his private jet "The Indefensible" and has joked that he wants to be buried with it. For the wealthy, the personal jet isn't just a way to speed up travel and free up time. The jet can also be a convenient way to bestow favors on business partners, clients, and politicians. So much so that a 2007 federal lobbying reform bill specifically restricted discounted congressional use of corporate jets.
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  16. Philanthropy


    Giving away money can be a way for the wealthy to give back to society, improve their reputation—and to network. In capital-rich places like New York, the boards of major cultural organizations are a who's who of the well-connected. The board of the Museum of Modern Art in New York includes as honorary chairmen David Rockefeller, heir to the Standard Oil fortune, and Ronald S. Lauder, son of the founders of Estée Lauder Cos. The current chairman of the board is Jerry I. Speyer, co-CEO of Tishman Speyer Properties.

    An especially exclusive group is those who have taken the "Giving Pledge," a promise to give away most of their wealth to charity. Facebook's Mark Zuckerberg signed on to the project on Dec. 8. (Previously pledging was Michael Bloomberg, mayor of New York and founder and majority owner of Bloomberg LP, the parent of Bloomberg Businessweek.)
  17. Political Connections

    Political Connections

    To the extent that money dominates politics, the very wealthy have outsized influence on the government policies that, for personal or financial reasons, they care about. According to the Center for Responsive Politics, in 2010 candidates for the U.S. Senate and House of Representative raised $1.8 billion from donors. Outside groups spent another $294 million to influence congressional elections.

    In addition to giving donors access to politicians and the chance for prized government jobs like ambassadorships, campaigns connect donors. Former President George W. Bush's 2004 reelection campaign relied on prominent donors, designated as "Bush Rangers," who each raised $200,000 or more from other donors. Among the Rangers: former Merrill Lynch CEO Stanley O'Neal and Aon Corp. founder Patrick G. Ryan.
  18. Vacation Spots

    Vacation Spots

    The wealthy are attracted to certain vacation spots both for their beautiful settings and for their exclusivity. But these favorite spots—a villa in Aspen, Colo.; a house in the Hamptons at the far eastern end of New York's Long Island; a beachfront home on the Caribbean island of St. Barts—also offer the wealthy some equally wealthy and well-connected neighbors.

    Country clubs can also be exclusive getaways for the rich and famous. Members of the Augusta National Golf Club in Augusta, Ga., include Bill Gates, Warren Buffett, former General Electric CEO Jack Welch, and energy industry billionaire T. Boone Pickens Jr.
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  19. School Networks

    School Networks

    One of the chief benefits of an Ivy League education is the connections one makes in college or graduate school. For example, alumni of Harvard Business School include former President George W. Bush, General Electric CEO Jeffrey Immelt, former Merrill Lynch CEO John Thain, former eBay (EBAY) CEO Meg Whitman, Blackstone Group founder Stephen Schwarzman, Boeing (BA) CEO W. James McNerney Jr., and many more prominent business leaders. Ivy League secret societies can forge lifelong friendships with the powerful: While an undergraduate, Bush was a member of Yale University's Skull and Bones society, which also reportedly had as members FedEx (FDX) founder Frederick Smith and Blackstone's Schwarzman.

    The super-rich also connect through their children's schools, such as exclusive private academies like the Dalton School on Manhattan's Upper East Side. According to education directory Peterson's, Dalton accepts just 15 percent of students who apply.
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  20. Estate Planning

    Estate Planning

    Since 1916 the U.S. has levied an estate tax that limits the ability of the wealthy to transmit their riches from generation to generation. The wealthy use a variety of increasingly complex techniques to avoid estate taxes, including specially constructed trusts, gifts, and loans.

    In 2010, as a result of Republican efforts to eliminate the estate tax—which they call the "death tax"—the tax disappeared. Under a deal reached between President Obama and Republicans, the estate tax would return in 2011 at a rate of 35 percent, which is the second-lowest in 80 years, and with an exemption of $5 million per individual or $10 million per couple.
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