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Paul Golden: Family offices must learn the dark arts of lobbying

Attempting to influence decision makers and managing the wealth of rich families are not such strange bedfellows. Both activities carry more than a whiff of intrigue, place great value on discretion and leverage long-established connections to achieve their objectives, writes Paul Golden.

It would be inaccurate to state that family offices have never lobbied on issues that impact on wealth protection – for example, several have made representations on changes to estate tax rules in the US.

However, they have never felt the need to collectively engage in the process. When special interest groups start to push for change they attract attention and that does not sit well with the concept of discrete wealth management.

This is why the formation of the Private Investor Coalition last year was such a significant development.

Created in response to a specific provision of the Wall Street Reform and Consumer Protection Act, the group (backed by about 50 leading US family offices) employed professional lobbyists to argue that advisors to private funds should not be forced to register under the Advisers Act.

Tim Terry, secretary of the Private Investor Coalition and deputy general counsel at a New Jersey-based family office, explains that the single family office community is not opposed to private investment reform per se, but is in his words "uniformly" opposed to being regulated under the Investment Advisers Act.

He says: "Single family offices are investors themselves, tasked with managing their own portfolios. They do not solicit non-family capital and do not hold themselves out to the public as investment advisers, so we do not believe they should be regulated as investment advisors." Family investment funds have never been subject to regulation in the US.

Despite claiming to have the support of the Securities and Exchange Commission, the coalition decided to hire two high-profile lobbyists from law firm Venable to put their case to the elected representatives. "To our knowledge, this is the first time single family offices have banded together to lobby on an issue that broadly affects the single family office community," says Terry. He has been gathering information from its members for the past 12 months (under lobbying rules, the coalition is not required to disclose the names of those funding its efforts).

Jake Seher of Venable explains that the group is pushing for the exemption to pass with a specific form of words or definition of the family office that can be used in any future discussion of their activities. Terry adds that the coalition has tried to educate members of congress and their staff about what a single family office is and does.

"Our community generally shuns the limelight and publicity, so talking about the many family-owned businesses that are part of the economic engine that drives this country, talking about the large philanthropic footprint of our community and talking about the value of family have all been important," says Terry.

The Wall Street Reform and Consumer Protection Act was passed by the House of Representatives in mid-December, but Terry says the fight is far from over. He explains: "The legislative process has many phases – the senate must still act, then the house and the senate must reconcile their differences and send it to the president, who will sign it or veto it. There is still a long way to go."

On the other side of the Atlantic, the European Hedge Fund Directive may have an even longer way to go before it passes into law. But European family offices opposed to some of its proposed elements are also further away from presenting the sort of united front shown by their counterparts in the US.

François Mollat du Jourdin, president of the European Network of Family Offices (ENFO) admits that high net worth families in Europe have not collectively promoted good practice in the wealth management industry in the past, but claims this is changing as they increasingly call on the services of external independent advisors such as multifamily offices.

According to du Jourdin, few family offices are active members of wealth management associations and/or professional groups because very few structures exist. He says: "In certain countries – such as the UK – multifamily offices are asset managers and regulated as such, and therefore belong to asset management professional groups. The French initiative Association Française du Family Office is one of the first to structure the family office sector locally inside a professional organisation, while ENFO has creating the first network of independent multifamily offices in Europe."

He is convinced that it will become increasingly important for family offices to play an active role in lobbying governments when regulations affecting the financial sector are being formulated, but identifies the first priority as defining precisely what a family office is as "[the definition] currently ranges from law firms, asset managers, portfolio managers and concierge services to pure global advisory structures for private wealth."

Richard Wilson, managing director of the Family Offices Group, a US networking association, also feels that family offices could exert greater influence if they presented more of a united front. "By virtue of their wealth they are generally powerfully people with strong political and corporate connections. But while some family offices publicly promote improved wealth management standards, I have not seen a large concerted effort on the part of family offices to improve overall industry practices," explains Wilson.

Du Jourdin says the adoption of defined standards for private wealth management would increase their credibility and therefore their ability to influence policy, adding that "this is exactly what AFFO is currently working on". Don Trone and Charles Lowenhaupt, co-founders of the Institute for Wealth Management Standards share this conviction that the best way to combat government interference is the evolution of self-adopted standards.

Trone claims family offices currently exert very little influence on governments and industry regulators when it comes to financial sector policy and that the adoption of defined standards for private wealth management would increase their credibility and therefore their ability to influence policy.

"There have been long standing agreements – some formal, some informal – between governments and standard-setting bodies to let these organisations lead the way when change is warranted. As a general statement, when government bodies believe that a certain industry group or sector needs to be regulated, they first try to influence change by recommending that a standard-setting body defines applicable standards," says Trone.

Regardless of future progress on standards adoption, Lowenhaupt does not envisage that representations to government will cease. Whether the Private Investor Coaltion achieves its objectives or not, it has established a template that other family office communities would do well to follow.

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