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Wealth Managers Court Silicon Valley’s Newest Millionaires

Silicon Valley encompasses all of the Santa Clara Valley, including the San Jose (pictured).
Jeff Olshan | Flickr | Getty Images
Silicon Valley encompasses all of the Santa Clara Valley, including the San Jose (pictured).

A feeding frenzy is going on in Silicon Valley as financial planners jostle to add the nouveau tech riche to their client rosters. The trend is reminiscent of the late 1990s, when advisors courted scores of young millionaires spinning out of the dot-com boom in this entrepreneurial enclave.

"It's been crazy to see all this activity," said Aaron Rubin, an independent financial planner at Werba Rubin Wealth Management, a San Jose, Calif.-based firm managing about $250 million in assets for 225 clients. "Everyone is trying to move upstream in the market."

That's not surprising, as wealth managers always go where the money is. Silicon Valley is once again ground zero for the über-rich, where scores of newly minted entrepreneurs have reaped the benefits of social media IPOs such as Facebook ($16 billion), LinkedIn ($6.8 billion) and Zynga ($7 billion), as well as the runup in tech stock valuations in recent months.

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The wealth being generated is staggering. One-fifth of ultrawealthy Americans (defined as having a net worth of more than $30 million) live in California, driven by the valley's wealth- creation ecosystem, according to tracking company Wealth-X. That's the nation's highest concentration of millionaires.

The pace is predicted to continue. Other companies, including cloud computing companies Box and Dropbox, are expected to go public, while acquisition activity heats up: Yahoo announced a $1.1 billion acquisition of Tumblr this week, a deal in which Tumblr CEO David Karp is expected to receive $250 million. Facebook is reportedly in the market for more billionaire-dollar app acquisitions, recently eyeing navigation app Waze, according to published reports. At the same time, iconic tech companies such as Apple continue to churn out millionaires from the rank and file. Flush with stock options and restricted stock, employees are reaping the rewards of high market valuations.

In the 21st century's version of the Gilded Age, savvy advisors are using a multimedia tool kit to attract clients—from YouTube videos to tax-planning webinars, to seminars on the economy to e-newsletters on estate planning. Some are writing columns and blogs for local newspapers such as the Los Altos Town Crier and using Twitter to build a following. Their goal: to cast a wide net to boost their roster of ultrahigh-net-worth clients.

Kevin Sayar knows what it's like to be an object of desire. The entrepreneur sold ebrary, a provider of e-books to libraries, to electronic publisher ProQuest in 2011 in a deal analysts valued at more than $50 million—and the calls and emails came pouring in.

"These guys are masters of the soft sell and are really creative," Sayar said.

First were cold calls mentioning far-removed personal contacts, Sayar said. Others sent him books they had written on financial planning, with personal notes about how they had assisted other high-profile clients. There were lots of invitations for seminars and venture capital events sponsored by their firms.

Like most entrepreneurs, though, Sayar used his own contacts—in this case a referral from his wife's law firm—to find an advisor: Robert Cheney, a CFA and CFP who runs Westridge Wealth Strategies, a Palo Alto, Calif.-based firm. It has $45 million in assets under management and specializes in working with doctors, entrepreneurs and start-ups.

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Sayar was keen on Cheney's approach from the outset. The planner helped him develop a wealth management strategy that would minimize the tax bite after the sale of his company. That included tax-loss harvesting, and a broad diversification of assets that included real estate, principal-protected insurance such as annuities, and oil and gas drilling funds (which offer significant tax deductions).

The funds allow full deduction of intangible drilling costs the first year that can be as high as 90 percent of the investment. That was key for Sayar, given that federal and state taxes can approach 54 percent on income, and 37 percent of capital gains for individuals in the top bracket.

"It's daunting if you are an entrepreneur who has put all of his efforts in building a business to start thinking about how you will benefit when you cash out," Sayar said. "In this political climate, the biggest challenge is dealing with taxes and sheltering wealth. You need to take everything into account—including risk management and estate planning—and you need an expert who is open and transparent who can guide you through the process."

The landscape for financial advisory services is likely to become even more competitive as Silicon Valley changes.

Besides independent advisors and the large wire houses, new online investment management services offer an alternative for time-pressed techies who would rather do their investment management themselves. For 0.25 percent, a fraction of the traditional advisory fee, companies such as Wealthfront.com let clients create their own tax-optimized portfolio of index funds. These options are becoming increasingly popular, especially with millionaires in their 20s and 30s who love technology.

Wealthfront.com is growing 20 percent a month, according to Andy Rachleff, one of its founders. Launched in December 2011, the company currently has $250 million in assets under management.

Whatever marketing strategy is used, the truth is that the industry is still "a club," said Steve Lockshin, founder and chairman of Convergent Wealth Advisors, which Barron's ranks No. 1 in California. He is also the author of "Get Wise to Your Advisor," to be published in August.

"Wealthy individuals in Silicon Valley tend to find their advisors by word of mouth, through a venture capitalist, attorney or trusted friend," Lockshin said.

_ By Lori Ioannou, Special to CNBC.com

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