The historical racial wealth disparity in America has gotten more attention in recent years.
For example, a 2018 study from the Federal Reserve Bank of Minneapolis concluded, “The historical data also reveal that no progress has been made in reducing income and wealth inequalities between Black and white households over the past 70 years.”
Causes are manifold, up to and including factors like gaps in income, access to investment opportunities and redlining policies that drove down the values of homes in neighborhoods predominantly occupied by communities of color.
In addition, there has been a disparity in how families and affluent people of color have been advised to manage their wealth.
And that's where one wealth manager, V. David Russell, is aiming to change things by helping families and affluent people of color build wealth rather than letting it slip through their fingers.
Russell recently joined MGO Private Wealth in Dallas as head of Family Office Services. His chief task will be helping the firm expand its Private Client Services practice. Specifically, Russell will concentrate on building out the firm’s multi-family office practice and investment platform and growing the firm’s focus on entertainment, sports and media professionals and increasing the focus on the distinct financial interests of affluent people of color.
WMRE recently talked with Russell to hear about the unique needs in helping communities of color sustain their wealth so it can be passed on to future generations, as well as how his clients view allocations to commercial real estate.
This interview has been edited for style, length and clarity
WMRE: There has been a lot of buzz around capturing family office business, but it’s traditionally been a tough market to tap. What’s your approach?
V. David Russell: One reason it has been hard is that the way in which people make money now is much more complex than it has ever been. You have people who are YouTubers that are making $20 million a year, whereas 20 years ago the people who made $20 million or more per year was a very small, concentrated group of people. In my opinion, the only way that a family office can be truly successful is by having a very specific focus and expertise for the people that you work with. You can’t have a family office that works with executives, business owners, sports and entertainment folks. You have to have a focus, because the needs, not from an investing standpoint, but the needs related to how the way they live their lives and their set of expectations looks different based on how income is derived.
WMRE: One of your tasks is building out the firm’s multi-family office practice and investment platform What does that platform look like?
V. David Russell: Investment allocation theses change every 10 years. A part of that is that things that have worked have created outsized portions on people’s balance sheets. If you invested in Apple or Tesla or Google 10 years ago, that is a pretty big number. So, you have to rebalance. The other side of it is there are new asset classes that weren’t there 10 years ago—things like crypto, digital assets, cannabis, early stage venture capital, etc. Now a lot of people are doing catch up.
Our job is, number one, to make sure our clients have accurately taken the things they have already invested in and done well and rebalance them, so it is not an outsized part of the portfolio. The other part is not only client catch up, but how do we make sure we stay ahead of the curve of what’s happening now and what’s coming next. We have relationships that are keeping us up to date on what that is, so we’re getting better access and better pricing. Because of the clients that we work with, we’re also leveraging their relationships and their brands to be able to get outsized returns.
WMRE: You also plan to focus on growing the firm’s base of clients by targeting HNWIs of color coming from the sports and entertainment industries. What are some of the unique needs associated with working with this group?
V David Russell: Being a member of a diverse community myself, I don’t claim to know everything about every person of color’s wants or needs. Typically, when a person of color has created wealth, they have built it themselves, and specifically through non W2-earned means, which means their balance sheet is complex. They have leverage if they own a business, or a unique skillset that has allowed them to get outsized gains. When you look at diverse wealth, it is typically younger. LeBron James, for example, is a millennial. What that means is that there is a lot of responsibility on that individual as a wealth creator. You are the beacon for others around you.
The other thing that makes it unique is you’re also still earning. LeBron James is still playing basketball. So, in addition to having this responsibility, you are still in the process of building and growing wealth, and that is a very big challenge. When you think about it from a wealth management standpoint, a traditional client is a white male between 40 and 60 years old who is going into peak earning years and has at least 20 years of work and investing experience. They come to you and say, “It’s time to elevate that process”. When you talk about sports, that demographic is 18 to 35. When you talk about Black or brown business owners or other ways of creating wealth, that might be more in the 30 to 45 age range. So, you are dealing with younger folks and the way that they learn and want to receive communication and the investments they make are different than the traditional wealth management client.
The other side of this when is really about the communication of what you have to those you care about. There is no shortage of stories of people dying without a will, or a person who dies and now siblings or children are disputing who has access to what. The communication piece of—here’s what we have; here’s where it sits; here’s who you should call; here’s who is in charge of this or that—is not a conversation that is common in most communities of color.
With a traditional wealth management client it’s not that complex. You’ve got a 401k, a taxable account and maybe some personal real estate exposure and an insurance policy, and that’s usually it. Whereas it is much more expansive for some of the folks of color that we work with. Organizing that is something that I do, but it’s really the communications side where I provide the most value, because I think that’s the thing that people think about the least.
WMRE: Is there more emphasis from HNWIs of color to build generational wealth?
V David Russell: Traditionally, G1 creates the wealth, G2 spends it and G3 spends whatever is left. When it comes to people of color, it usually doesn’t even make it to G2. So, there are two things that are happening. We talked about the changeover in trends every 10 years from an investment standpoint. We’re seeing that from generations as it relates to wealth. Kids aren’t as interested in running their parents’ businesses. You might have a successful chain of cleaning businesses or a manufacturing company, and for Gen Y or Gen Z that is not cool or exciting or appealing to them. That is creating a generational divide of who does what.
A colleague once said to me that in order for a family to become wealthy, someone at some point had to take a risk or an opportunity to create this. From that point forward, it’s the family’s job of assigning roles of how we as a unit are going to be responsible for pushing this forward. That doesn’t mean that everyone has to work in the family business. The Ford family, for example, some of them still work at the company, while many others do not. That influence spreads past just the family business with roles in the family’s philanthropy and their foundation and different industries that they have chosen to partake in. So, when we talk about how to create generational wealth, I think it starts earlier and it’s making sure the children are aware of what they have, and also their responsibility to it, because wealth is more than just money. It’s reputation and passing along core values that a family has set.
WMRE: What are you seeing from family offices and HNWIs in terms of their allocations to commercial real estate?
V. David Russell: Last year I saw two splits. One was people who were trying to get rid of those illiquid assets with people who were afraid of tenants not paying rent. On the other side, I saw a lot of people opportunistically get into things, because there were assets in geographies that you would never have had access to before that were now on sale. That has started to level out coming out of 2020. I haven’t seen allocation ramp up, but I have seen people be more opportunistic and open to it now versus 12 months ago.
WMRE: What do you typically see from clients in terms of their allocations to real estate?
V. David Russell: It depends on the types of families that you’re dealing with, but allocations are mostly in that 8 percent to 15 percent range.
WMRE: What structures are they looking at—funds, REITs, direct ownership?
V. David Russell: It is across the board, but I have seen it mold itself in one of two ways. One, there will always be metros in the U.S. that will always attract investment—New York, Miami, Los Angeles, Texas. Again, coming out of last year there was more access and more opportunity in those desired areas. People also want to own their geographies, the geography that they live in, because it provides access to other opportunities.
For example, I had one client that is a prominent businessperson that started scaling up his investment in commercial real estate where he lives. Now there is not an event that happens that isn’t housed at one of his properties. So, it provides him more access and exposure, and it creates higher purchasing power. The real estate funds are more attractive to first-time investors in commercial real estate. The level of complexity of a fund-to-fund strategy versus “I directly own something” are two very different approaches.
WMRE: Especially when dealing with athletes and celebrities, do they also see real estate investment as a branding opportunity?
V. David Russell: I would agree with that. On the athlete/entertainer side, a high net worth and highly visible person does think of it that way. However, commercial real estate is a different animal, and a lot of people really don’t understand its nuances. For example, buying and office building and a hotel are both commercial real estate but very different profiles. I do think that you are seeing the success of commercial real estate opportunities in certain geographies, including Miami or more exotic places like Dubai where (HNWIs) spend time as it relates to entertainment and travel, where brands want to attach themselves to them, which also creates commercial real estate investment opportunities.
WMRE: Do your clients favor a particular type of property?
V. David Russell: Definitely housing.
WMRE: Do they have any specific return expectations for their real estate investments?
V. David Russell: That’s a tough question, because I don’t think most people outside of the commercial real estate community is well informed and really understand what those expectations should be. People generally think of real estate as something that you own, people rent from you and pay you. They don’t account for the taxes and all of these other types of things. But I do think that most people view real estate as an income producing play and have mostly approached it from a buy and hold standpoint, which I think now people are starting to think about differently from an exposure standpoint.
One thing that has helped a lot is that you are seeing bigger institutions, such as Blackstone, that have had tremendous success in commercial real estate. They also are able to get in and out of things quicker than most other players in the space. So from a return standpoint, I think most people are thinking about real estate from an income standpoint, but the more sophisticated investors understand the income stream, and also that it’s more about taking advantage of the upside of undervalued or under-appreciated assets.
