Business models in the world of family offices are as varied as the families that run them. But Paul Golden says pressures on many family offices will lead to greater conformity in the years ahead.
John D Rockefeller, who, according to most estimates, was the richest man ever to have lived, once said if you want to succeed you should strike out on new paths, rather than travel the worn paths of accepted success.
Just as great wealth comes from a huge variety of sources, so are there as many ways of managing it. Most families will have their particular method of investing their nest egg, usually influenced by the way they made their money in the first place.
So, finding a one-size-fits-all family office model might be as ludicrous as trying to get everyone to accept the best way to make money is to buy one type of financial product and stick to it no matter the performance. That’s why many family offices are as diverse as the individuals and families who set them up in the first place – and it is inevitable that the family office industry will adopt multiple business models.
To add to this diversity many family offices have had to come to terms with the fallout of the financial crisis of 2008/09. Huge falls in asset markets, coupled with scandals like Madoff, blow a hole in the models that had evolved during the boom years between 2003 and 2008.
“The demands placed on family offices have become much more diverse in recent years – for those that offer non-financial services as well as purely investment management,” says Simon Paul, director of wealth management at the London- based multi family office Sand Aire.
A further complicating factor, says Paul, is that it has become commonplace for investment managers, trustee companies and private banks to rebrand at least some of their services if not all of them as family offices. Banks like UBS, Credit Suisse and Citibank, not to mention many small asset managers are all building “family office” offerings post the financial crisis. Paul says this as an attempt to access the marketplace through name association. “But this only adds to the confusion of what exactly is a family office – and, worse, could lead to a conflict of interest, whereby the ‘family office’ ends up just pushing bank products,” he says.
Yet there are some developments whose effects are felt across the family office spectrum such as the increasing complexity of the financial industry. Raimund Kamp, co-founder of Dutch multi family office services provider Guidato, reckons this will become an even greater concern over the next few years for families located across multiple jurisdictions, putting more pressure on the family office model.
“The importance of family dynamics and governance will add to this complexity. Very few family offices advise on such issues, yet there is growing interest in the next generation theme and we believe that demand for advice on preparing families for transfer of wealth will be high,” he says. “Our recent wealth transfer research among wealthy heirs shows that it is a huge challenge to prepare the next generation for the responsibilities that comes with wealth.”
Charles Lowenhaupt, founder of the US- based Lowenhaupt Global Advisors and co-founder of the Institute for Wealth Management Standards agrees that “multi-jurisdictionalism” has become difficult as the US, UK and other countries become more rigorous in their requirements. “Currencies are more volatile, making it more difficult for a multi-jurisdictional office to maintain appropriate currencies and determine cash needs,” he says.
“Moreover, as cultural divides seem to widen – particularly in the Islamic relationships with western countries – multiculturalism is harder to achieve.”
There is also broad consensus on the extent to which the family office should be pushing the children and other descendents of the principal to create their own wealth. Kamp feels that encouraging the next generation to be entrepreneurial is the responsibility of the patriarch/ matriarch rather than the family office and that in any case it is healthy for parents to let their children lead their own life. “In some cases it is not a good idea to push them towards entrepreneurship” he says.
There is only so much a family office can do in this regard, agrees Andrew Rodger, executive director at the multi family office Stonehage, pointing out that wealth itself can discourage entrepreneurialism and wealth creation. “On a purely anecdotal basis, it can be argued that the majority of great entrepreneurs were not born with money. The risk appetite of the successful entrepreneur is frequently not seen in the next generation, who are often the ones more inclined to try and bring less risk to the family’s affairs by establishing a family office.”
The focus of the family office has always been on investment services that are seen as measurable and easy to evaluate, says Lowenhaupt, adding that there is a lot of talk about outsourcing the chief investment officer role and other services. Chris Wyllie, head of portfolio management at the London- based private investment house Iveagh is candid about the motivations of the majority of family offices.
“Most are more concerned with stopping the next generation wasting the wealth rather than being generators. In our case the family has asked us to focus on investment management rather than getting involved in soft issues and family politics because these factors can get in the way of generating good investment returns.” He adds: “In cases of offices dealing with first generation wealth there is more emphasis on soft issues.”
You are either entrepreneurial or you are not – it is not something that can be taught, says Paul. “Our founding family, which now extends across five generations, has found satisfaction in a range of vocations that don’t necessarily involve the creation of wealth. They have all been encouraged to seek out rewarding professions. Other clients involve their children in philanthropic activities and such like, but you know when there is entrepreneurial flair, as no encouragement is needed. Others need to be encouraged to not fear failure in the shadow of overwhelming success.”
There is less uniformity on other issues, for example the extent to which the global financial crisis encouraged families and high net worth individuals to take a more active interest in how their wealth is managed. James Thompson, head of business development at Fleming Family & Partners, says clients reconsidered their time horizons, particularly as far as illiquid investments were concerned.
“Many of our clients were fairly actively involved in the decision making process, although they were officially managed on a discretionary basis, but the crisis encouraged many to re-focus their priorities. It was not that they necessarily needed the money, rather they were uncomfortable not having the flexibility of raising more cash to take advantage of opportunities elsewhere.”
He also reckons individuals with dynastic ambitions are more likely to see their corporate and personal interests as different sides of the same coin and says that members of his office’s corporate advisory and wealth management teams are being required to work much more closely than has been the case in the past.
Interest in the performance of investment portfolios, especially at an individual investment or manager level, has not diminished, according to Rodger, while the overwhelming importance of good asset allocation has returned to the top of the agenda. He adds that other, once rather theoretical, risks are also now at the forefront of minds – especially counterparty risk.
Wyllie’s experiences are rather different, although he acknowledges that mature investors who are several generations down the line and are aware of the nature of the markets are less likely to lose their cool in response to short-term market pressures. He refers to the principal of one family office established in the middle of the last decade who was less concerned about the losses suffered in 2008 than making sure lessons had been learned.
Sand Aire’s clients have shown similar reluctance to adopt a more hands-on approach, says Paul. “We focus on risk management and were not widely exposed to risky assets during 2008, which gave most of our clients a sense that we had done what we said we were going to do in protecting their wealth in all market conditions,” he says. “We are used to best effect when we are given full stewardship over all of a client’s wealth, which enables us to oversee the entire programme, working with existing advisers and often acting as the first point of contact for all matters.”
When asked whether he expected to see a migration from single family offices to multi family offices, Kamp acknowledged that there is interest in sharing knowledge and expertise. Campden’s European Family Office Survey 2010 indicated moves of some single family offices to seek fee income and attract outside families post the financial crisis. However, Kamp warns that while migrating from a single to multi family office has attractions from an investment perspective, each family has its own dynamics and structures that do not necessarily chime with other families.
“I would suggest co-operation with other family offices (both single and multi) is the best way forward for individual offices, although if the costs become prohibitive it might be sensible to close it down and become a client of a multi family office instead.”
Rodger is another who expresses optimism about the prospects for at least some single family offices. While recognising that multi family offices can provide more breadth and depth of expertise and continuity than smaller organisations with attendant economies of scale, he also accepts that some families will always want to go it alone. “We do expect to see more families retaining a lean in-house capability whilst outsourcing much of the work to multi family offices.”
An even more upbeat assessment comes from Lowenhaupt, who says multi family offices are sometimes seen as unregulated private banks and that families with the assets to support single family offices are not likely to turn to banks and multi family offices for help. “In fact, most of the complexities are not really in areas on which the multi family office will focus, so the wise ones will ‘outsource’ just as much as the wise single family office.”
Thompson says the costs associated with building a family office capable of covering all the different asset classes in diverse markets means many single family offices are becoming “sub-scale”, although he also acknowledges there is always a reluctance to cede control among the founding family. To address this, he says Fleming Family & Partners has developed a “virtual family office” service where families are invited to come in on an advisory basis, retaining their key adviser(s) as appropriate while using the full resources of the group.
When asked whether there is likely to be consolidation in the sector over the next five to 10 years, he referred to an increasing volume of family-to-family cooperation on a formal and informal basis, particularly in areas such as private equity investment.
Paul says he has noticed a number of new entrants into the market, some calling themselves private investment offices, as they were not founded by a single family with specific needs, but still offer a “competent range” of investment services. He describes this growing interest as a positive development because “there needs to be more alternatives to the private banking options that still dominate.”
It is inevitable that, over time, large financial institutions will make approaches to acquire family office clients and absorb them into their private banks, adds Paul. “Equally, multi family offices will struggle without scale. As management teams mature, the attraction of a monetisation event to the founders of some businesses is likely to mean that there will be consolidation over the next decade.”
Migration from single to multi family offices would seem to be a logical progression, according to Wyllie. “Between 2006 and 2008 there was a great bull market in family offices and I was puzzled when I looked at the sums involved. In many cases they had quite concentrated business models and there have been some chickens coming home to roost in recent years.”
Rather than closing the office and going to a private bank, moving to a multi family office might appear an easier option, but this requires finding families with the same attitudes to risk, the same disciplines and the same approaches to asset classes. Then there is the perception that one family will inevitably hold the whip hand.
Wealth generation saw the emergence of a lot of family offices in the middle of the last decade, but that process has slowed down, says Wyllie. “Also, the professional fund management industry has responded with more flexible business models that are more aligned with the interests of the clients and private banks have responded to disillusionment with their business model. Costs are yet another factor that will see the universe of family offices stabilise and maybe shrink slightly over the next decade.”
Among all this debate about the future of the industry and whether the demands placed on family offices have become more diverse in recent years, he says the most important factor is to get the basics right. “You need models and systems that fend off the tendency towards complexity and style drift and veering into areas that you should not be playing in, without allowing you to miss a trick. The number of strategies open to the average family office is much wider - we can all re-invent ourselves as macro hedge fund managers.”