Here are some key quotes from the second Spear’s/Speechly Bircham seminar, ‘The crisis in the family office’, held on 20 October 2010
Click here to download the full transcript
Josh Spero – Editor, Spear’s (introduction)
Charles Gothard – Speechly Bircham (moderator)
Liz Henson – PwC
Charlie Hoffman – HSBC Private Bank
Sandy Loder – A.H. Loder Advisers
Julien Sevaux – Stanhope Capital
Josh introduces the event
Welcome to the second Spear’s/Speechly Bircham debate. Part of Spear’s core mission is to navigate, explicate and elucidate the major trends and ideas which affect the wealth management industries. A key one in recent years is in the rise of family offices. When so many people are clamouring for family offices we want to know the truth, where have they come from, what do they do and most importantly do they mean what they say about what they are going to do.
Charles introduces the panellists
I would like first of all to introduce you to a very learned panel this evening, first of all on my left, far left, here is Liz Henson, a partner at PwC who I think heads the entrepreneurs unit at PwC and has talked extensively on family offices. On my left here is Julien Sevaux who is the managing partner of Stanhope, which I am sure is well known to quite a lot of you, some people would describe it as a multi-family office, others might not.
On my right, on the far right, we have Sandy Loder who has got his own consultancy company and used to be at Fleming Family & Partners and I think I am right in saying you are a 5th generation member of the Fleming family so there is a good connection there. And on my right here is Charlie Hoffman who is a managing director at HSBC and I think that you will agree should provide a good basis for quite an interesting discussion this evening.
Sandy on what a family office is
There seem to be quite a lot of people calling themselves family office but when you sort of look a bit deeper they seem to be just running a lot of funds but call themselves ‘family office’, not quite sure whether that’s just a catch for Google effect and hopefully get people to put money with their funds.
Julien on what a family office is
I am not sure that I know what a family office and that is why we don’t put ourselves in that category and it means as the previous speaker was saying it means many different things to many different people because families are faced with different situations and therefore with different needs and therefore they respond to those needs differently by either having an administrative service which is a PA as you were mentioning or having an accounting service or having a kind of supervision service of you know, investment managers for instance.
Charlie on alignment of interests
Well it should both MFOs and private banks, should be solely aligned to their client’s interests and so the best interest to their clients. And unfortunately I have seen instances where both MFOs and private banks do not serve the best interests to their clients.
We, as HSBC, have taken a number of refugees from other private banks where they feel they have been oversold to, product pushed, had activity days, sales managed and not felt that their interests had been best served. And the same goes I suppose for multi family offices and that is why the large multi family offices who really are truly multi family offices should also be concerned.
Many of them, as Julien says are just really independent asset managers and moreover some of the family offices that we have seen, or multi family offices that we have seen, spring up recently arguably because of the disaffection through the banking crisis, have really been one or two bankers dragging a client out of a private bank and tacking on a few others with a view to selling that business in five to ten years and that must surely run counter to the interests of those families who normally mind longevity and to be active for in their very best needs.
Julien on dominance within MFOs
I think multi family entities where they are maybe one or two partners that dominate and again the capital is not readily available to incentivise and therefore attract a team, then that is an issue.
Charlie on pay
It’s interesting what Alex from Sandaire said, echoing Julien’s points, it is really important to attract and retain staff and it is difficult sometimes in a closed family office to actually, even if you deliver equity, how do you then cash out of that equity if you want to leave, so in terms of the banks, banks should always have discretionary bonuses and anyone who has a direct drive model which some of the American organisations do, you know, will fall foul I think of not acting in the best client interest and so in terms of remuneration of family offices again, I concur with Julien in the terms of one hands to pay market if we are going to attract staff.
Julien on alignment of interests
I don’t know, I think as an independent asset manager, I think the alignment of interest is in the issue and I think there is a bias in large institutions and banks towards risk and the reason there is a bias towards risk is that riskier product is more remunerative and therefore it finds itself happily in portfolios at any point in time in the cycle so I think there is a problem there and I think alignment of interest with one product is great but it has to be alignment of interest with everything it has to be alignment with the whole portfolio with every asset class because as we know asset allocation is very key so if you are adding to risky asset class you have to be aligned mentally to be able to do that and so I think it is unfortunately with the best intention this is something that the banks will never be able to do.
Liz on who needs a family office
Yes, if I can just take a step back I think really your initial starting question was what is the family office and I think that the whole point about that this is it’s become a very generic very watered down very washed down term and if you think I think it was a couple of months ago Oprah Winfrey started a family office. Now I don’t know Oprah Winfrey very well but I know for sure that she’s not married and she doesn’t have kids so where’s the family in all that situation.
I mean if you look at the emerging markets for an idea they are very very wealthy and in that market nowhere on this planet are they going to have a multiple family office or multi family office. They are all going to want you know what they are paying for is confidentiality. They want to be able to control what they are doing. They are actually moving away from having in some instances that I’ve seen where you’ve got a number of well-known Middle East families of at least families who have set up a multiple family office actually moving away from that because the confusion about direction, confusion about generational planning, the confusion about what you invest in, what you don’t invest in.
Charlie on scale and reporting
There are two bits, I think reporting is a huge issue as well and again it goes back to scale for family offices and multi family offices. we have a family office team in Geneva with a Chinese wall separating all other parts of the Private Bank so if you can’t talk to the rest of the private bank or the relationship managers there is a two person team.
It’s a laborious job but they basically unpick all the reporting decisions for multi bank clients where they often have four or five relationships you know and many billion dollars under management, they unpick every advice slip, contract note, process it, put it into a programme which has been specially devised and then produce a 90 page report which shows your asset class, your position, performance of each manager, can benchmark it against anything, you can you’re your currency exposure, you can tailor make this nine page report.
I’m saying that a lot of family offices will not be able to do that although they will have to spend an enormous amount of money to do it or they will have to outsource it which is fine but costly and then in terms of actual managing due diligence and again we go back to a comment on scale and in some of the larger multi family offices they do have that scale… To really give whole of market you need an enormous amount of people to do that…
Just taking one asset class hedge fund for example HSBC has a hundred and thirty people working in hedge funds and it’s a 20 year business in which they look at about 10,000 funds, track 1,000 managers, do 1,000 or so due diligence visits a year and that takes an enormous amount of time and an enormous amount of people and an enormous amount of money so again what do you do if you’re a family office.
Now a single family will either say that’s an element of their expertise and they will concentrate on that but it’s where often multi family offices do not have that capability so they are either going to have to outsource that or they are going to actually have to disadvantage their clients. The same goes for long-only managers, 20,000 of them think of the economy as only a scale of the market.
Liz on what one should expect from a family office
I think the basic answer to your question is that life moves on and that life is never, you know, the minute you have got somewhere you think you can sort of trust and use, you are behind the times already. Let me give two other examples, you know a Russian oligarch, well he wants probably above all other things is confidentiality and control, he’s not going to share that with anybody.
And let’s skip to another part of the world, the Middle East, where there you are talking about a whole different range of issues where you have got Sharia application law, you’ve got multiple families and multiple wives, cousins and so forth and actually one of the biggest issues facing that family office is generation transfer of wealth and resolution of family disputes so what’s important for that family office is to have a family counsel who would actually more control the way the family is run or make sure that the family’s vision, assuming that it’s established, and often that’s a bit fuzzy, gets down to the next generation or gets applied to the correct way of asset allocation and the division of wealth.
Charlie on family offices getting out of their depth
I just think the thing about family offices is I think they normally know whether expertise begins and ends and some are extremely adept in the property market and would never go anywhere else in terms of property because they know they are not necessarily best at some parts of investment and I think it is slightly harder for some of the multi family offices in terms of trying to deal with these sort of people and it goes back to what I was saying about research capability, it’s very difficult unless you are very big to cover 10,000 alternative managers, 27,000 long only managers, have the excess and reach to do some of the deals whether it’s joint ventures with sovereign wealth funds or buying direct real estate in flood deals which some larger organisations have.
Liz on security
On the secrecy point also what we are seeing is an increased need for IT security these days, actually started to realise that their 16 year old daughter can’t go and have a Facebook page and put whatever she likes on it and so you know, I was talking to one of my colleagues earlier and they were talking about a client who is extremely wealthy, kept below the radar he is doing a big deal and it’s over the front page of the FT and they have turned around and gone how secure are our IT systems and we are seeing an increasing demand for that in terms of you know, they can be hacked into.
Sandy on next generations
I think there is an increasing demand to educate the next generation and interestingly that led on to and leads on to a increasing demand from divorcees and also the adults that no one has actually sat down and talked to them about some of the basic things in finance whether it be a different asset classes whether it be tax allocation, teaching allocation.
Charlie on the Middle East
We have a team going around the Middle East, I mean they have spent months there with a number of families setting up their single family offices they should be seen setting up single family offices for clients and we find increasingly that the family charter the governance, is so important because you have got the Middle Eastern families they are often very large which does lead to competing interest and with one patriarch and when that patriarch dies there is complete disarray and so it is imperative that they actually put a plan, a document in place and that can take a very very long time.
Julien on ‘large is good’
Yes, I mean in terms of the resources first of all I think the one thing that private client have learnt from the 08 crisis is that large is not synonymous with good investment management or security so I am just kind of surprised that the banks are still using the same argument which is we are big and therefore are great because that is not true and I think the banks will always have far greater resources than a multi family office will ever have.
The problem is those resources are not there to advise the client, they are there to manufacture a product and then sell that product. Now some of that product may be very good, there is no problem with that but I think the problem comes when they are trying to put it all together because there is not the alignment of interest. Now I agree with Charlie obviously you need to have a multi family office which is well resourced but you don’t need 130 people to pick hedge funds and I would suggest that if HSBC has the 130 picking hedge funds either needs to cut heads or it’s because it’s manufacturing many different funds or hedge funds for many different constituencies and that’s all well and good.
But one example that I frequently use is in property, yes we don’t actually have any in-house property expertise to be able to purchase a building in Washington but we probably know a few people that independently can advise clients and are not, they are going to be impartial and are not going to try and flog the next building which comes onto the market.
But in property again HSBC or any bank will have far greater property expertise than we will ever have but most of that team is focused on the in-house property fund when the next vintage comes along they will tell their clients you have got to invest in this fund, it is a great fund, they are not going to look at the timing, they are not going to look at whether the cycle is turning and therefore those property experts are not advising the client well because maybe the client should be investing in a quoted property to be able to have liquidity, to be able to exit, maybe the client should be invested in long short property or maybe the client shouldn’t be investing in property at all, so I think the resources looking at head count and numbers tells you absolutely nothing.
Charlie on the benefits of scale
If you think that you are going to find any sort of big engine in the world economy in the next 20 years you need to partner someone who can get that access, for example recently we were one of the first banks, I think the first foreign bank where you can actually buy Chinese currency for our clients in large quantities so there is degrees of access for clients who want it but I agree with Julien you need to be entirely impartial and that anyone who is trying to flog product will get found at and as he said big is not always great and I think a number of our competitors have been found out.
Sandy on consolidation
I think this could be an argument currently to say that of some of the MFOs there is a consolidation going to be had in them, that depends on how much, whether you are paying 1% of assets or half a percent or where the value is at the moment, I think a lot of the stuffed scared ones are realising that it’s quite expensive to do what they are doing whether they are an investment boutique or are calling themselves family office, multiple family, I think this costs so I think there are potentially there is a consolidation game out there at the moment to gather assets quickly by acquiring other people. I think with multiple family offices if there is a strong founding family I think that will prevent any consolidation of there business because the family may not want to be part of another business so they would ….. because they own the majority shares.
Liz on the globalisation of family offices
I think yes to answer your question yes, I mean places like Hong Kong and Singapore are certainly …….. and able to offer the highest level of governed family offices divide similarly for wealth that’s been created in India and China I think it’s only a sort of 2 hours flight from Dubai to India so the jurisdiction/proximity is very good. I think yes, there is inevitably going to be an increase of family offices being generated in Asia, why, because generally I think people do want to have two things; they want to have their family close to them, so you know if you are a Chinese billionaire why would you want to have a family office in London? You might want to want a branch of a family office if you have got children at school here but that would be a branch of the main family office
Charles on the globalisation of family offices
Having said that though you say well typically the family office would be local because it’s convenient why would you have it in London, what we are seeing is an increasing number of family offices being setup in London or in Switzerland mainly for confidentiality reasons because people don’t want to have the family office on their doorstep locally because they want to keep everything as low profile as possible and they don’t want people to locally to potentially have more access therefore they want their family office far far away, may be picking up on your point Western respectability in part.