In the Family Way While the UKs family offices stick to investment management, across the Atlantic the entrepreneurial spirit is being nourished and encouraged. Freddy Barker begins our US special with a look at what the British are doing to catch up with their cousins
In the Family Way
While the UK’s family offices stick to investment management, across the Atlantic the entrepreneurial spirit is being nourished and encouraged. Freddy Barker begins our US special with a look at what the British are doing to catch up with their cousins
EVER SINCE BARACK Obama promised the world a Pacific presidency, the special relationship hasn’t looked very special. Wealthy Londoners, however, should now more than ever be looking across the Atlantic to see what their family offices can learn from America’s, where they were pioneered in the Robber Baron era. Most importantly, family offices in the two countries now differ in their attitudes to wealth preservation. Both crave it, but New York’s financiers believe that next-generation entrepreneurship is the most effective way to achieve it, whereas London’s think investment management is.
‘Such a divergence is tragic,’ says James E Hughes Jr, an expert on US family offices, ‘as preserving capital through the ages depends not just on beating inflation but also on countering the astronomic rate at which families compound. So you can’t rely on diversified investment portfolios returning 5 per cent per annum — you must nurture the entrepreneurial streak that made the family rich in the first place.’
American firms thus share stories about families’ histories and create funds that allow the next generation to develop their own enterprises. Alongside offering mentoring and business support, they hold the young accountable for their investments and ensure all ventures are aligned to core businesses.
Yet London’s family offices, whose key exponents increasingly offer investment only, remain unconvinced of the need to advise on intellectual as well as financial assets.
‘It comes down to education and transmitting values within the family,’ says Julien Sevaux at Stanhope Capital. ‘In Europe, there is greater privacy and separation between the family office and the family so, as a private investment office, we can give guidance on investments and on how to organise things but it is very much up to the family to nurture its entrepreneurial DNA.’
That is reasonable. Inspiring the next generation is notoriously tricky because of the pressure they are under. After all, how many people are inspired to create new fortunes when they can live on the proceeds of an old one? The second and third generations on from those who created fortunes with their Herculean acts are vulnerable to all the problems of inherited wealth. One need only open a newspaper for evidence: if it’s not Hans Rausing’s drug problems, it’s Gina Rinehart, the Australian mining and media tycoon worth $18 billion, publicly falling out with three of her four children over the vesting date of their trust and their lack of ambition.
A second difference in the way US and UK family offices are run is investments. ‘London wants to make decisions in-house,’ says Sara Hamilton at Family Office Exchange, ‘whereas the US use outside consultants and managers so headcounts are typically lower.’ Figures obtained by Spear’s suggest that the average enterprise in the UK costs £2.4 million per annum, a stark contrast to America’s wealth hubs of New York and Chicago where investments are increasingly outsourced and offices cost £730,000.
Although the British are starting to walk the American way, there is some debate as to why they have not run to catch up. ‘The pros of the new outsourced CIO model,’ says Gregory Curtis at Greycourt in Pittsburgh, ‘are based on the importance of avoiding small investment mistakes in a low-return environment, the increased cost of regulatory compliance after Dodd-Frank and the challenge of recruiting and retaining investment talent which costs roughly $1 million per year plus bonuses.’
Consolidation is coming, perhaps to outsourcing daily decisions while an investment committee oversees asset allocation each quarter, a model that the Family Wealth Alliance in Illinois estimates that four in ten US families use today. A halfway stance for UK family offices might be to do as SandAire has done by pooling its research with the Wigmore Association, and as Stanhope Capital has done by sharing its ideas with Bessemer Trust.
Illustration by Russ Tudor
BUT IS AMERICA really still the worldwide thought leader? Traditionally such a statement could never be doubted. It has a long history of family offices, starting with the Mellons (1868) and Rockefellers (1882) in the aftermath of the Civil War, whose practices laid the foundations for modern private finance.
Uncle Sam continued to lead the pack into the 1980s. Peter Davis at Wharton and Howard Stevenson at Harvard united academic thinking on family and enterprise, while the disappearance of many European private banks to bankruptcy or acquisition left the arena empty of foreign threats. As such, American ways of thinking were formalised in affinity groups such as the Family Office Exchange and the Institute for Private Investors and then spread worldwide.
Perhaps more important than the proliferation of hedge-fund investing was the notion of open architecture. Alex Scott at SandAire was the first to bring this to Britain in the 1990s, a trend reinforced by Adam Wethered, who was so influenced by American thinking over 24 years at JP Morgan that he put independence at the core of Lord North Street’s investment philosophy.
In 2012, pretenders to the worldwide family office crown are few and far between. Asia is more concerned with wealth accumulation than preservation, so family office innovation is low on the agenda; Europe is taking a different stance but, as we have seen, is slowly coming round to the US model.
So how can HNWs identify American-style advisers in London? James Hughes, the author of Family: The Compact Among Generations, says they should look for people in practice not in business, those who address the profound issues before the profitable. To do that, the questions to ask are: do you have fewer than twenty clients? Is it more important to develop new business or serve existing clients? And do you ultimately want to be your client or a serving professional?
Indeed, employing US-influenced thinkers is win-win for both parties. Baby boomers are disappearing off the stage, so engaging the next generation is an excellent way for advisers to ensure that books of business stay in place once patriarchs die, a feat which only 2 per cent manage currently. The challenge, then, is for both families and family offices: the former to keep their fortunes and make new ones, the latter to keep their clients’ fortunes under their management. A little Americanism might just help.
Read more by Freddy Barkerhttps://www.spearswms.com/spears-world/wealth-wednesday/36037/what-should-uk-family-offices-be-learning-from-the-us.thtml