Rich Rojeck has cultivated a high-net-worth-and highly illiquid-clientele.

    Business owners and real estate developers whose wealth is tied up in illiquid or hard assets do not make ideal clients for advisors driven primarily by investment planning. Yet Rich Rojeck, co-managing director of the Southern California Regional Planning Group of Sagemark Consulting, a division of Lincoln Financial Advisors, has built an enviable practice around these hard-to-manage clients. In the process, he has become one of the most highly respected business and estate planners in the profession.
    Born in Phoenix in 1952, Rojeck attended college on a Navy scholarship and served six years of active duty based in San Diego as a surface warfare officer. His experience in the navy taught him a quiet kind of leadership, responsibility and discipline. Rojeck's colleagues respect his professionalism, even temper, work ethic and, above all, his vast knowledge. "Clients trust him and know he has their best interests at heart," says Brian McKechnie, managing principal for Sagemark's Irvine office. "He comes across as frank, honest, friendly, focused, and very consultative in nature."
    McKechnie considers Rojeck a mentor. "I usually turn to him before meeting with a high-net-worth prospect who has complex business or estate planning issues. He'll help design the case from start to finish. Often we'll role-play the situation. I'll do a mock presentation in my office and he'll play devil's advocate." 
    As managing director, Rojeck spends more time on colleagues' cases than his own, and visits each of the three Southern California offices at least once a week. He adds only three to four new clients a year to his roster, which reads like a who's-who of San Diego's entrepreneurial elite. His average client is worth $25 million.
    Teamwork, according to Rojeck, distinguishes his company and adds value for his clients. He can tap into specialized expertise at any one of Sagemark's 37 offices nationwide. "With one phone call, I can bring in top legal experts from New York, or leading authorities on sophisticated stock options or premium financing," he says. The company adheres strictly to the CFP Board's six-step planning process. About half of the company's revenues come from planning fees, the rest from assets under management.
    Working with business owners and real estate developers presents its set of challenges, Rojeck admits. Southern California probably is home to more of these clients than any other region of the nation. So, for the patient advisor, the payoff can be huge. "At some point they are going to need to diversify or extract equity for retirement," he says. "Once that kind of liquidity event occurs, the trusted advisor who has been there for ten years will likely be assigned a sizeable investment portfolio to manage." In the meantime, Rojeck charges planning fees that start at ten to 15 basis points of a client's net worth.
    The major challenge Rojeck faces in working with business owners is their lack of liquidity. "Business owners tend to have the majority of their wealth tied up in their business," Rojeck says. "They see that as the thing they know best and the thing that gives them the highest potential return. So they tend to reinvest, even if it means keeping their salary below market value."
    At some point, Rojeck pushes his client to consider diversifying. "In working with a closely held company, the question is how do you extract equity at the appropriate time?" Rojeck describes one real estate client with whom he worked for eight years before any kind of liquidity event occurred. "I had done his estate plan, his mother's estate plan, his business succession plan. Four years into the relationship, I convinced him to set up a 401(k) plan for his employees. Finally, after eight years, interest rates were so low that he agreed to refinance one of his properties, which resulted in a $25 million windfall."
    The client reinvested $10 million in his business, put aside $5 million in short-term working capital, and earmarked $10 million for a diversified portfolio that Rojeck would create and manage. "We're happy to collect planning fees, but we do want to be around when these liquidity events occur," he says.
    In this situation, Rojeck turned to the Sagemark team and brought in resident portfolio design guru Brock Houston, a member of Lincoln Financial Advisors' national investment policy committee. "Once we understood what role he needed this money to play in his life, we put together a proposal with four different portfolio options," Houston says. "The first was a relatively simple, well-balanced portfolio of fixed income, bonds and equities. The second allocated a portion of the money to alternative investments such as real estate hedge funds. The third and fourth allocated even greater percentages to alternative investments, managed futures and unique managers."
    After discussing the risks, benefits and costs associated with each portfolio, the client opted for the second, which provided the growth he needed but would still allow him to sleep at night. "It was important for us to understand that for this client, his business-feeding it, watching it grow-was his life," Houston says. "It was difficult for him to part with that cash. Yet his lack of liquidity, if not addressed, could wipe out the fortune he had spent his entire life building."
    Real estate developers represent a subset of business owners who, while more transactional in mindset and more short-term in their dealings than widget-makers, cannot sit on idle cash without being tempted to invest in more property. "It's very important for these clients to own tangible assets that they can look at and touch, rather than intangibles that may be confusing and that others could manipulate," Houston says.
    Getting real estate entrepreneurs to invest in the stock market is practically a lost cause, Houston says. "We need to understand how they think and try and help them accomplish their goals," he says. "We also have a responsibility to tell them the truth. But it's not our job to blindly change them to our way of thinking."
    Rojeck describes one encounter that perfectly sums up the real estate entrepreneur's mentality. "This particular client was worth about $100 million. At our second meeting, his CFO mentioned that they had considered entering the stock market in 2000 and thank God they hadn't, because they had really dodged a bullet. It turns out the sum in question was $100,000. I had to restrain myself from laughing, but it just goes to show how cautious these guys are about cash. In a classic sense, it does bother me that they don't want to diversify, but if you understand the person, it's like shoveling sand against the tide."
    As a result, Rojeck must find other ways to help these asset-rich, cash-poor customers protect their wealth. The first order of business usually involves purchasing adequate life insurance to cover estate taxes and avoid a fire sale or forced liquidation of their holdings at death. Rojeck's typical real estate client has less than 10% of his estate in cash but will owe 40% in estate taxes. As an alternative to investing, he convinced his stock-skittish client to purchase $35 million in life insurance to fund three irrevocable trusts. The first contains life insurance on him that will pass to his wife, and ultimately his son, who will take over the business. The second trust owns insurance on both himself and his wife, and the third satisfies the daughter, who will not maintain an interest in the business.
    "Our primary goal was to preserve the business and still pay the estate tax. Otherwise the children would have had to borrow heavily against the properties or liquidate," Rojeck explains. "The second goal was to remove as much equity as possible from his taxable estate by transferring stock to his son under the annual gift exclusion, since he would take over the business anyway. And the third goal was to provide an equitable arrangement for the daughter."
    Business owners, whether in real estate or other industries, generally fall into one of three categories, which will help determine their exit strategies, business succession and estate plans. In the first group are those with a partner or co-shareholder, who ideally functions as a built-in buyer, Rojeck says. The second group consists of those who wish to keep the business in the family. The challenge here is to keep inheritances equitable and address the inevitable family tensions that arise. In the third group are individuals who own at least 90% of their business. "In that case, we would have to identify a buyer," Rojeck says.
    A big challenge in working with business owners is that the wealthier the client, the less their perceived need for a financial planner, Rojeck says. Many already have longstanding relationships with estate planning attorneys, CPAs, and their own company lawyers and CFO. Most already have a buy-sell agreement and will have done some planning. Yet in Rojeck's experience, much of the planning has been done piecemeal and the buy-sell agreement may be outdated or inadequate. "It's the difference between merely having had some planning done versus having the best possible planning," he says. "We always start by reevaluating the buy-sell agreement, and have literally saved clients millions of dollars in the process." 
    In addition to provisions for the death or disability of a shareholder or partner, Rojeck says, the buy-sell agreement should include provisions for personal bankruptcy; voluntary termination, whether through retirement or unloading of stock; and inter-family transfers of stock. In community property states like California where the spouse automatically holds an interest, divorce should be included as an item as well. Other provisions might include the loss of a professional license in the case of a dental or medical practice, and expulsion of a partner for bad conduct or drug involvement.
    The buy-sell agreement should clearly state what is permitted, be as specific as possible, and not necessarily contain the same provisions for each partner. "We would be more kind to the loyal guy retiring after 25 years than someone who just walked out without an orderly transfer," he explains. Not only do buy-sell agreements provide a blueprint for an uncertain future, he says, but they also spell out the eight or nine "triggering events" that could result in a liquidity event and, ultimately, diversification.
    Getting entrepreneurial clients to discuss business succession is an obstacle in itself, because most of them don't want to retire. "These are generally people who have started out modestly and realized the American dream," Rojeck says. "They love what they do." A further obstacle, he says, is that they are constantly working, which means jetting off to Wyoming or the Far East or wherever they have business.
    The key to financial planning for business owners is to weave together business succession and estate planning as part of a complete plan. A representative case involved a property owner worth about $100 million, who had been referred by his lawyer. "He had in place six trusts of various and sundry types, and a hodgepodge of insurance. Some of his trusts were out of date, some didn't meet his family's objectives, and some were underperforming. He had actually retained an estate attorney to fix this mess, but they got so bogged down in complexity that they simply disengaged. The client, whose children didn't plan to take over the business, also wanted to leave 30% to charity, but his current trusts didn't do that." 
    Ultimately Rojeck recommended that the client and his spouse amend their current living trust arrangements, which were out of date, and add a Q-tip, or marital, trust to their existing survivor's and bypass trusts. "The Q-tip trust defers the estate tax until the second death, and enables the estate to take additional valuation discounts upon the death of the first spouse by splitting assets between the first and second death of the husband and wife," Rojeck says. 
    The next step was to set up two trusts with identical beneficiaries (the two children), as well as a gift trust for the grandchildren. "The typical estate plan moves assets down one generation to the grandchildren, but we want clients to move assets out of the transfer tax system altogether whenever possible. If they're out of the transfer system they're not repeatedly taxed, for example when the children and grandchildren die. We share with clients that there are several states with no rule against perpetuities, and I suggested they create their trusts-at least for the two children-in Alaska."
    Despite their enormous wealth, most of Rojeck's clients want simple, elegant solutions to complex problems, and it takes a special kind of advisor to work with them. "Ultimately, working with illiquid clients requires that you structure your fees so that you are adequately compensated for your time without reliance on investment planning," he says.
    Of course, you also must have expertise in complex business and estate planning. Rojeck is characteristically blunt on the subject. "If you aren't competent, your practice won't be ethical, nor will it be profitable because you won't be time-efficient, nor even viable, because you won't attract the clients." For Rojeck, it's not assets under management, but clients under management, that count. These headstrong entrepreneurs, so willing to take risks in business yet so risk-averse when it comes to their own portfolios, provide him with a lifetime of challenges and rewards.

Eva Marer is a freelance writer based in New York City.