American dynasties have traditionally relied on family offices to manage their wealth — and now, says Daisy Prince, they’ve learnt to pool their resources
AS 2009 ROLLS past us, with the hurricane of 2008 behind us (hopefully), the question that burns in everyone’s mind is: where to invest your money now? For the UHNWI that question is trickier than ever. It remains to be seen in ten years’ time which financial institutions will survive in the New World Economic Order and which ones will go the way (metaphorically) of the 1980s shoulder pads, but one area of financial planning that seems to have used the crisis to its advantage is reflected in the rise in power of the multi-family office.
The multi-family office, in its current incarnation, is an industry that is only around twenty years old. They are independent businesses that can provide everything from financial advice to estate planning to managing staff for individuals with at least $1 million in liquid assets.
Most multi-family offices (MFOs) started as single-family offices (SFO) which began to appear on the financial scene after a series of mid-1980s leveraged buy-out deals left a number of families with a large influx of liquidity and no structure in place for managing it. The European tradition of the trusted private banker had never quite taken hold in the US and so, for many, American banks were not the obvious choice for people to park their money.
As a result, a number of rich families started their own firms. These budding businesses tended to be small shops, run by just a few investment advisers, with someone there to answer the phone and pay the bills. As they grew in size and scope, these businesses began to look elsewhere in order to raise capital for their investments. The families who started them began to speak to their friends about their successful new structure and, as other rich families came on board, the businesses began to really take off.
The American multi-family office was able to provide a more holistic approach to the family than the US banks could or would do. They hired consultants to help them decide how to structure their estates, manage their tax burden and even how to set up charitable foundations.
In addition to providing investment advice, MFOs are often now a one stop-shop that will do everything from looking for the best schools for your children to running a household and paying staff. They are very concerned with family governance and the need to avoid and manage all present and future conflict and will even hire a psychologist to come and sit in on family meetings.
ONE ADVANTAGE THE MFO has over a traditional banking model is that many offer the ability to charge a flat rate instead of what the banks often do, which is charge fees for transactions. ‘Unified pricing is one way to make sure that there is no incentive to take unnecessary risk. You never need think that people are moving you from cash into hedge funds,’ says Adam Wethered co-founder of Lord North Street, a London private investment office specialising in investing for very wealthy private individuals.
Additionally, MFOs could boast of their objectivity when it came to selling products. As they didn’t have to make money for any one bank, they could be impartial when it came to investing for their clients. According to Bob Casey, senior managing director from the Family Wealth Alliance, ‘The biggest change over the last two years is that the traditional providers have taken a beating.
The need for open architecture and a greater desire for transparency in investing is one big difference. Clients want objective, integrated advice and they don’t want people to just sell them their product.’ (It should be mentioned that banks have now swiftly followed suit, and while many of them might have started out by only selling their own products to clients, they have deftly moved to embrace open architecture and, in some instances, unified pricing as well.)
Custodianship is another important aspect of the MFO business. It is an obvious point to make, but it is key to have the investment adviser and the custodian as two separate entities. One of the reasons for the enormity of the Madoff disaster was that he was his own global custodian and therefore all the money was collected under one umbrella. ‘It is an extremely important in the investment process; a good global custodian will provide the technology and security,’ says Rupert Phelps, a director at BNY/Mellon.
One of the most successful MFO models was set up by the Rockefeller family. Although JP Morgan had looked after the Rockefeller money for decades, some of the young Rockefellers felt that their needs were more complex than the bank could provide. In 1979 the heirs set up Rockefeller & Co, which now has about $3 billion under management. Each member of the family has their own account and adviser who tests the family member’s tolerance for risk.
They have been so lucrative that last year Société Générale bought 20 per cent of their company. It has been said that when a Rockefeller turns 21 he or she is formally invited to attend the family meeting and asked to speak about themselves for a few minutes so that the rest of the family gets to know them. It may seem contrived and formal, but this kind of structure opens dialogue about money from a very early age, something that is proven to help family relations in the future.
OF COURSE, SUCH a personalised service doesn’t come cheap, and to start an SFO you need to be very,
very rich. Typically, the amount of money required to start a family office was around the $100 million mark, but more recently, according to experts, the break is now more in the $300–$400 million category. The main problem is having enough money to tempt the best talent away from the bigger firms and still have high enough returns for it to be worth the trouble. This is why a lot of families that started their own SFOs have become MFOs.
‘$250 million might employ three people, compared to a company that has billions under management and employs 60 people. Lots of SFOs are moving towards MFOs as they provide the same services but more cost-effectively,’ says Steve Draper, managing director of Family Office Metrics, based in New York. However, this manoeuvre incurs one bureaucratic downside: ‘Bringing in outside money means that the firm must be SEC-regulated,’ notes Draper. Joining an MFO is substantially cheaper, the minimums varying from $1million to $25 million per family.
While the MFO has been rising quickly in the US, the European model has been slower to follow the trend. Historically, European families have entrusted their wealth to private banks for generations and therefore many of these institutions have developed reputations not just for stability but also for handling their clients’ affairs with discretion.
Additionally, the aristocracy have always had estate offices that can provide many of the concierge services that an American firm offers, such as paying and managing staff. The concierge services may not appeal to people who are more private in their affairs, as if you have someone who works so closely with you they tend to learn a lot of personal details.
If the patriarch is alive and well, he may continue to be a large presence in the family and may not be willing to relinquish control of the family funds, or may not feel confident that the heirs are ready for the responsibility that comes with sudden wealth.
Family governance is another issue. Europeans, on the whole, tend to be less willing to communicate openly about such important family matters with each other. The belief system is changing and, for many investment advisers, family communication and education are now being addressed much more comprehensively.
HOWEVER, THE TIDE is turning and more and more American firms have either set up bases in Europe or are looking to do so. ‘The model hasn’t been sold right to the European market. It is like going to Cazenove, with only 20 or 25 clients, personalised service and institutionalised safeguards,’ says Draper.
GenSpring, the largest multi-family office in the US with $16 billion under management, is looking to increase its presence in Europe. When GenSpring compares the US and European families, it has often found that a major roadblock is how families communicate. ‘We try to understand how our clients interact, and if we can get them to explain the issues that
the family have together. We want to educate the new members,’ says GenSpring managing director Santiago Ulloa.
Bertrand Coste of Clerville Investment Management, a London-based MFO since 2007, says that there is more opportunity in Europe but it’s more complicated. ‘In the US, you have one law, one currency, one tax law, and one federation,’ he says. ‘Everything is in the same net, more or less. In Europe there are 25 different countries, and the legal possibility to live offshore. The variety in Europe is something you can’t encounter in the US.’
One thing that did change the sector dramatically was the crash of 2008. Suddenly, ‘safe’ investments lost 30–40 per cent of their overall value and, with so many banks forced to make redundancies, a lot of talent was scooped up by the MFOs that they wouldn’t have been able to afford before. It’s given the MFOs a real boost and suddenly they are finding themselves in a position to go after clients from the biggest banks.
‘Big is no longer immunity against failure,’ says Chris Phillips of the Threshold Group. ‘It is no longer important to be intimate with your client so much as it is important to be sustainable. A lot of people are now talking about mergers and acquisitions at a rate we’ve never seen before in the family office space.’ To that end, the Threshold Group and Ashbridge Investment recently merged, proving the point.
Looking to the future, it seems the mergers will continue and MFOs will now have to think about how to position themselves in a tighter marketplace. John Benevides, president of the Family Office Exchange, an independent adviser to families of exceptional wealth, makes the case that while an SFO can afford to remain private and below the radar, MFOs are commercial entities that will have to think about how they will separate themselves from the pack and market their long-term objectives to their clients.
Investors now have their eyes very much open and will be wary of anyone — bank or business — who doesn’t provide them with a clear picture of what they are getting themselves into. If MFOs have the time and the ambition to educate their clients about investing as well as offering personalised, trustworthy service with a minimum of risk, they will continue to flourish in this rather unsettled new economic environment.