For family offices it is always about the future. As the funds dwindle as the generations multiply, maintaining the integrity of the assets is crucial. But how? The answer is simple: for a single family office to survive the triple onslaught of death, divorce and taxes, the solution is to open the doors. It should move from a single family office structure to the multi family system.
Simon Peck is chief executive of FF&P Asset Management, a multi family office set up by the Fleming family, a respected British banking dynasty. He says: “By gathering families together you gain opportunities through increased asset size that enable you to attract and hopefully retain very high-quality investment professionals who then will be able to help you with the task of distilling market information to form strategy.”
This is important. Family offices are redundant if they cannot attract or retain good investment staff who will – at the very least – be able to preserve the initial capital. But being able to hire the best employees is only part of why most single family offices should seriously consider the multi family structure.
Simply increasing scale and revenues will automatically enhance the office’s sustainability, points out Mariann Mihailidis, managing director of the Family Office Exchange in the US. More fundamentally, she says, looking back over her 15 years advising wealthy families through Fox, what we are seeing is the transformation of a family office into a wealth-generating business in its own right.
“Many entrepreneurs – whether first or second generation – start a family office, but the US. And with regulations come tighter governance controls – although Peck believes these act in the favour of the offices – and their clients. “Multi family offices end up achieving better governance than would be normal for a they always have in mind that they are going to create a business and make a profit. So after two or three years of running it for the family, they open the doors as it has always been part of the business plan.”
But while there is a certain inevitability to single family offices taking this route, it is not without its drawbacks. Mihailidis warns of what she calls “service creep” – the idea that with external clients comes a downgrading of the service offered to the original family. “So Jane Doe was my relationship manager,” she says, “but now that she is also serving four other clients, what does
that mean for me?”
Also – and this is crucial – how does the ownership structure work? Will the original family end up ceding control of the office? The biggest change is regulatory. Once a family office starts to manage the money of external clients then it must be registered with the Financial Services Authority in the UK and the Securities and Exchange Commission in the US. And with regulations come tighter governance controls – although Peck believes these act in the favour of the offices – and their clients. “Multi family offices end up achieving better governance than would be normal for a single family office, because it is performing more of a fiduciary role – so governance becomes more critical.”
Ultimately, the family office exists to preserve and grow its founders’ capital. Without that basic premise all else is lost. With the investment climate still markedly uncertain, this is no time for amateurs to be in the game. Investment professionals need proper remuneration, and questions remain about whether that is really possible in a single family environment. Increased regulation can be onerous, but the beneficiary will be family members, who, with additional governance and transparency, will be able to see just how their money is working for them.
The only question left to answer, says Chris Chris Wyllie, chief investment officer for Iveagh, which looks after the family money of the Guinesses and Challons and runs a range of mutual funds, is knowing when to stop – something Iveagh has successfully achieved. But, he warns: “You can get to the point of when a multi family office becomes an institutional wealth manager – albeit one for very wealthy clients.”