Claiming Independence from Potential Risk: A Review of “Filing Cabinet” Assets

Leveraging the expertise of a Family Office, families can conduct the due diligence necessary to identify all sleeping filing cabinet assets and in essence, wake them up. Through this strategy, there may be opportunities for reevaluation of investment position, reinvestment opportunities, and more important, held-asset risk analysis.
Kevin Heaton featured in Insurance Research Letter July 2019

This article originally appeared in the July 2019 issue of The Insurance Research Letter.

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There is a popular bank commercial floating around highlighting the advantages of a white label banking app; the app reminds the user of automatic deductions from recurring payments and subscription services to better evaluate the continued need for – and cost of  – the subscription services. 

We can call these recurring services “filing cabinet” services; services we file away and forget about.

Many high wealth families have a number of private assets we can deem as “filing cabinet” as well. The comparison of random app charges and high-dollar filing cabinet assets may be an oversimplification, but both require oversight and due diligence.

Filing cabinet assets sit on a high wealth family’s balance sheet without attention. They may include operating companies, income-producing real estate, vacant land, marinas, art work, private loans, timberland, franchise rights, and other assets that a family either wholly owns or is invested in as a limited partner. They may be assets in different forms (indirect, in trust, via investment funds, in nominee through banks, in common ownership with other family members or third parties), and across diverse geographic, global locations.

Using excess cash flow from a core business, families accumulate private assets over years or even through generations and decades. Through a family office or active in-house management team, some families manage their portfolio of private assets while others – and this is more often the norm – allow these assets to under-perform resulting in at best, a missed opportunity or at worst, significant liability for damage, injury or loss to an other’s property or health. 

Different than wealth accumulated in a portfolio of stocks, bonds or other financial market instruments that can easily be held and managed at a financial institution, private assets have characteristics such as illiquidity, lack of marketability, and lack of required industry knowledge or experience that makes managing them a challenge for beneficiaries and financial institutions alike. 

Leveraging the expertise of a Family Office, families can conduct the due diligence necessary to identify all sleeping filing cabinet assets and in essence, wake them up. Through this strategy, there may be opportunities for reevaluation of investment position, reinvestment opportunities, and more important, held-asset risk analysis.

i3 focuses on information – in this scenario, creating the Family Global Balance Sheet including investigation and an inventory of all assets, infrastructure – analyzing the data gathered to weigh opportunity costs, create best-use recommendations, and present overall re-balancing strategies, and investment – to divest, reinvest or re-position in a new investment for the greatest return.

This takes into consideration that many high wealth families find comfort in knowing today’s financial needs are well-met; as a result, they may focus less on future, generational wealth growth. Additionally, the risk management analysis of filing cabinet assets may be overlooked completely, creating a potentially litigious environment. Uninsured or under-insured assets can jeopardize an entire private asset portfolio.

Challenges for families can range from deferring maintenance on commercial real estate to failing to remediate environmental hazards. Often, out of sight is out of mind; a major tsunami event across the globe may be overlooked until a family realizes it holds hotel assets in an effected region. The economic impact of floods, earthquakes, large-scale brush-fires, tornadoes and hurricanes cannot be overstated.

One natural disaster or environmental crisis can create significant long-term liabilities. As cited in a peer-reviewed article published in The Geneva Papers on Risk and Insurance – Issues and Practice, January 2018, Volume 43, Issue 1, pp 37–71 titled The Natural Catastrophe Protection Gap: Measurement, root causes and ways of addressing underinsurance for extreme events by Thomas Holzheu and Ginger Turner:

“Globally, an estimated USD 4 trillion has been lost over the past 40 years to extreme natural disaster events, of which USD 2.9 trillion were caused by climate-related events such as windstorm, flood, drought, hail and brush-fire, and USD 1.1 trillion by other natural catastrophes such as earthquake and tsunami. Some USD 1.1 trillion were recovered through insurance, and about 2.9 trillion remained uninsured.”

On a more micro-level, the economic cost of natural disasters has an immense impact on the U.S. economy. In a March 2019 article from the Center for Insurance Policy and Research, the article noted natural catastrophes reached $91 billion in total costs 2018, the 4th highest total costs only behind the years 2017, 2005 and 2012. In 2017, economic losses reached a record $307 billion, largely due to wildfire and hurricane losses. In terms of insured losses, ten of the nation’s costliest catastrophes have occurred in the past two decades. Eight of these were hurricanes. Insurance plays a large part in helping with the economic recovery following catastrophic events. However, according to a recent Aon report, the portion of economic losses not covered by insurance (insurance gap) was 60 percent in 2018.

While challenging to manage, private assets often present the greatest opportunity for a family to grow and protect their balance sheet and increase their cash flow with – in some cases – limited risks. Working with trusted advisors –  such as a through a Family Office – high wealth families have the opportunity to review filing cabinet assets, create a strategy to preserve and grow wealth, and reduce risk while creating multi-generational family governance and education—in a way that is meaningful to the family.

To learn more about creating a sound Private Asset Management strategy and blueprint for your family, visit us at i3resources.com and ask us how.

About Kevin Heaton

Kevin Heaton is a CFO who understands the cycles of wealth, the dynamics of family change and resultant behaviors. His expertise is in developing and implementing focused tactics to protect and manage private assets through the objective application of information tools, infrastructure support and investment strategies.

Mr. Heaton is the founder and principal of i3, LLC, a Family Office Private Asset Management firm, and has grown the organization into a team of professionals who provide clients with access to relevant information to make informed decisions, the infrastructure (team and tools), to actively manage their assets and investment opportunities (directly or through managed funds) to (re)invest their capital.

As an accomplished speaker and presenter, Kevin’s talks give in-depth analyses of his own experiences in family office asset management and makes even the most complex asset strategies clear with concrete action plans.

About i3

i3 is a Boutique Private Asset Management Family Office with a passion for helping families manage the complexities of family wealth and behavioral dynamics.

i3 Private Asset Management’s value proposition is in our breadth of market knowledge, transaction and due diligence experience. We combine this experience with senior-level, on-going management and comprehensive reporting necessary to insure our clients have the information to make informed decisions about their private assets.

We offer a proprietary, open-architecture platform that allows high-wealth families, closely-held companies and private institutions to access relevant information allowing key decision-makers to make informed decisions, the infrastructure to acquire and manage assets, preserve and grow a portfolio of private holdings (e.g. partnership interest, operating companies, direct investments and real estate), and investment options that allow the preservation and continued reinvestment of capital.

i3 does not replace current professional service advisors; rather, we augment and enhance existing services and relationships.

Most important, i3 brings a unique passion, perspective and real-world, family dynamics management skill-set to every engagement.

To learn more, visit us on the web at i3resources.com.

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