Amid all the turmoil in the global financial system, family offices are intensifying their focus on protecting the safety and security of their families’ financial assets. With some signs that the intense autumn days of this historic crisis are easing, some family office stakeholders are taking a step back and evaluating the lessons learned.
A consistent theme taking shape is that “information is power.” Concise, timely information is one of the most critical needs of family offices in making investment decisions that will protect their clients’ assets and provide sound risk management. While this has always been cited as a critical success factor for an efficient family office, the pace of investment decision-making and the dependency on solid investment information has been magnified during these volatile times.
“We see that family offices need to react quickly to changing circumstance on many fronts,” said Gregory R Friedman, chief investment officer for US-based Greycourt & Co, which oversees $9 billion in assets under management. “With today’s volatility, the frequency of change is higher than ever before, and if family offices are to respond quickly enough to change, they need the most accurate and timely information possible.”
“Additionally, families make important life decisions, such as buying a home or selling a business, which either generate cash or require that cash be raised,” Friedman noted. “Ideally, the family office will have enough lead time to prepare for such an event, but often it doesn’t and that underscores further the importance of having the information and expertise to respond quickly to their clients’ needs.”
Few family offices have the technology, staff or expertise to cope with the current tumult or to optimise the careful risk management and oversight required in this climate. Then there is the added complexity of supporting a family whose members reside in different countries and wish to monitor investment results according to local conventions and in local currencies.
“These administrative limitations can seriously inhibit the family offices’ ability to perform, among other functions, the degree of risk analysis that is key to protecting their clients’ wealth,” agrees Jim McEleney, managing director of BNY Mellon Wealth Management, Family Office Services.
Recognising this, many family offices have turned to outside custodians to support them in managing their clients’ increasingly complex financial lives. But for many family offices, hiring a number of custodians hasn’t proved to be a boon, but rather an added burden by introducing another layer of bureaucracy to their work. To the contrary, some family offices are concerned that having one entity handling the data and information for each family member puts at risk the confidentiality of the family’s dealings. Given this dilemma, is there a role for the custodian banks?
No matter where one lands on the running debate between single or multiple custodians, increasingly family offices are realising that they are becoming more akin to large, complex institutions, and therefore could benefit from working with custodian banks that have served the institutional marketplace for decades.
According to McEleney, family offices are increasingly turning to solutions that would have formerly been viewed as applying solely to institutions, so much so that the term “insti-vidual” has become a widely recognised phrase in family office parlance.
Take for example a single-family office overseeing a diversified stable of investment managers with global mandates including publicly traded equities, fixed income instruments and an array of alternative asset classes for the benefit of family members who live in five different countries. Over the years this family office had enlisted a patchwork of different investment managers with varying custody agreements to help oversee this sprawling portfolio.
But the family office found that the format and frequency of reporting from these different advisors was inconsistent, their classification and valuation methodologies weren’t uniform and variations in pricing were common. In addition, this piecemeal information made it difficult for the family office to develop a comprehensive view of the family’s overall financial picture.
Ironically, the family office found that managing the flow of information from so many managers was a particularly challenging by-product of the good practice of diversification.
Another family in the Asia-Pacific region decided to create its own family office after realising $600 million from the sale of a family-owned business. But, in their formation, they challenged themselves to define what specifically they wanted as their “in house” expertise, versus what skills and requirements they were better off bringing in from the outside. As they began to examine the different models for their office, they decided they did not want to build an internal reporting platform that would require ongoing investment (which can be significant) or to be dependent on any one individual who knew how to operate that technology for fear of employee turnover. Ultimately, this led them to tap a custodian bank whose principle business relied on a regular investment in technology as part of its core offering.
In identifying the type of custodian that best fits its needs, a family office should consider the following set of key criteria:
• Servicing private clients and families is a core business.
• A professional staff that understands the unique needs of financially successful families.
• Expertise in the treatment and handling of an increasingly complex array of portfolio investments by families (eg, categorisation, valuation, analysis).
• “On demand” client desktop tools that are intuitive and easy to use.
• Committed annual spending on the technology it places inside family offices.
• Ability to seamlessly integrate client information to mitigate the potential for human error.
• Segregation of client assets for protection and privacy.
In addition to considering a custodian’s experience, professional expertise and its technological capabilities, the selection ultimately comes down to chemistry.
“What distinguishes a truly excellent custodian is not only that it has the best technology systems and experience to satisfy large and complex families, but also that it exemplifies a culture of service,” said Friedman, whose average client holds $150 million in assets.
“Such a custodian is more than just a provider of tactical functions. A custodian like this can also serves as a trusted advisor to your family office.”