Advisory helps families stay liquid enough to keep what they worked to get. The economic crisis triggered by the decline of the U.S. residential-mortgage market in 2007 has made itself felt to different groups of people in different ways and to different degrees.

For some members of the middle class it has meant a year of dismaying 401(k) and 529 reports and little more; it could be argued that recent high oil prices were a source of more distress than the effect of deflated property and capital markets. For others in the middle class, however, the downturn has meant postponed retirements, increased indebtedness, lost jobs, lost homes and the stark prospect of starting over in the face of a sharp and persistent recession.

Similarly, the recent reversals have cost some wealthy Americans money -- as much as 30% of the value of their assets evaporated last year, according to recent one survey of U.S. millionaires -- without placing them under more serious constraint. But other high-net-worth and ultra-high-net-worth individuals and families are in serious trouble with de-valued assets and falling incomes threatening their lifestyles and long-term aspirations.

Great expectations

Think of the Wall Street executive who spent the years between 9/11 and 2008 bringing in $10 million, $15 million, $20 million a year in cash and investment-asset compensation. Now suppose her 2008 take-home fell -- no stretch this -- to $1 million. For some, such an abrupt drop would be vexing, certainly, but not ruinous. But our executive -- like many wealthy individuals and families -- is in a truly frightening position for having in previous years leveraged investment assets and future cash-flow assumptions in exchange for immediate consumption. Now she finds that her cash flow has been curtailed and her assets have plummeted in value but that her liabilities are -- of course -- constant and as much in need of service as ever.

The result is what investment bankers call a "structural debt squeeze." As a private-client phenomenon it arose from the Federal Reserve 's efforts to keep the U.S. economy from tipping back into recession after 9/11 by lowering the cost of funds to banks. In turn the banks were happy to slash the cost of credit to their big private clients -- who quickly cottoned on to the arbitrage between, on one hand, raising money by selling securities (taking a capital-gains hit in the process) and, on the other hand, raising money by using their securities as collateral to borrow at something like LIBOR plus 50 basis points.

These high-wealth consumers "could get the money they needed without selling their still-appreciating liquid position and make the purchase they desired," Alec Haverstick, a managing partner of Boxwood Strategic Advisors, writes in an article called "Solutions to a Structural Debt Squeeze." Meanwhile current yield on the portfolio might well cover debt-servicing charges "with any distributions partially sheltered by available interest rate deductions," he adds. "This would also allow them to spend future cash flow, which was also increasing exponentially, on consumption rather than on debt service."

And it wasn't just Wall Street types who began acting this way. "This was happening all over the country: in the oil patch, in the real-estate kingdoms of Phoenix and Newport Beach and even in Silicon Valley," says Haverstick "In all these places and more, individuals were converting unrealized paper wealth into hard assets that could add to their quality of life."

Even where tax considerations weren't paramount, it seemed a fair bet to fund the purchase of one appreciating asset with another appreciating asset that the owner gets to retain. Rules against borrowing against marketable securities to buy more marketable securities made improved land the likeliest target of these transactions.

As a result, "individuals wealthy on paper backed up the trucks and filled them with cash," Haverstick writes. "They then carted that money to the Hamptons, to Nantucket, to Vail or to wherever like-minded socio-economic peers were gathering and [buying] their second, third and fourth homes."

Naturally enough, this pushed property prices in swanky areas up into the stratosphere. It also had the effect of converting two initially non-correlated assets -- securities and real estate -- into "almost perfectly correlated consumption assets" as "the aggregate behavior of similarly situated individuals amounted to a giant concentration of wealth in effectively the same assets: their jobs, their stocks and their real estate," according to Haverstick. These people "had made money from the appreciation of liquid assets, whether purchased, inherited or awarded as compensation; they had borrowed on those assets from a select group of private banks and they had all bought in the same places, thereby creating a price structure that was supportable only if the liquid securities markets continued to go up, and they continued to be compensated as they had been and now expected to be. Instead of achieving diversification, they had, in fact, doubled down."

Just the facts

That's the problem. The solution, according to Haverstick, comes down to helping ultra-high-net-worth families make the most of the wealth on both sides of their balance sheets, which is what Boxwood is in business to do. Wealth-industry participants say this unique offering puts the 18-month-old consultancy in a position to thrive as high-wealth families scramble to realign their assets and liabilities in ways best suited to keep them going in challenging times.

"It's a new approach to wealth management," says Haverstick.

Henry Johnson, president and co-CEO of New York-based Fiduciary Trust, agrees. "They've got this great focus on liabilities and hard assets," he says. "It's an important part of what the wealth-management model is really supposed to be."

Maarten Van Hengel, a principal of New York-based multifamily office Highmount Capital recently got a presentation on Boxwood's capabilities from Haverstick and his business partner Arthur Bingham. "We take the approach of being family CFO, which of course includes balance-sheet management, but we focus much more on the liquidity side," he says. "Boxwood takes it to another level; they're balance-sheet doctors; investment-banking types who understand [wealthy] families and their borrowing needs."

Clinton Kendrick, chairman of Nashville, Tenn.-based RIA holding company WealthTrust and a former executive director of the law firm Shearman & Sterling, says Boxwood's expertise with the liability side of the balance sheet is "particularly germane now with the lack of visibility on the outcome of the financial crisis -- is this going to last six more months for four more years? I think that justifies [Boxwood's] positioning of [its] services as a new offering" to the wealth-management arena.

One thing Boxwood doesn't claim to be is a lifestyle consultancy. It doesn't advise families on ways to manage spending or reduce consumption. In fact, it views lifestyle expenditures as concrete liabilities, "as real as any mortgage," says Bingham.

Adds Haverstick: "We don't judge. So it isn't a fault that people didn't make the assumption that their assets would decline by 30% or 40%, let alone 90% -- it's just a fact. And if this is where you are, we might be able to help."

Bingham, formerly a managing director with the boutique investment bank Kaufman Bros., and Haverstick, a trust and estates attorney with senior-executive experience at several big financial firms including Lehman Brothers and Deutsche Bank, founded New York-based Boxwood Wealth Management in mid 2007 as an investment advisory to ultra-high-net-worth families. A year later, however, they changed the name to Boxwood Strategic Advisors to reflect its new and exclusive focus on providing balance-sheet and cash-flow advisory services.

"We climb through your balance sheet, looking at the family as an enterprise," says Haverstick. "We look at everything in detail, and we search for new pools of collateral. We could, for example, see a way to take what was largely [a loan based on] an equity structure and shift [it] away from those securities and use another home or the family business as a collateral pool, and then we'll say, 'Now let's go to the bank with a plan that makes sense' -- because, believe me, you don't want to be sitting with the bank without a plan. The point is to help our clients avoid a liquidity squeeze and so live to fight another day." -FWR

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