Increases in costs and an optimistic performance outlook for the year ahead are some of the main findings to come out of Campden Wealth's second Global Family Office Report, produced in conjunction with UBS. This year the annual report, which sheds light on investments, costs, and services within family offices, takes an in-depth look at three asset categories: private equity; real estate; and hedge funds. This special section includes interviews with family office executives and service providers, who have helped question a few commonly-held beliefs.
The Global Family Office Report 2015 surveyed 225 offices across the world and included 22 in-depth interviews with principals, executives, and advisers. Estimates put the total number of these private family wealth vehicles at upwards of 7,000, but their discreet nature makes this figure difficult to calculate. More than 70% of respondents surveyed were from single family offices, which on average had assets under management of $806 million, while multi family offices represented needed to manage at least $3.5 billion in assets to be included.
Stuart Rutherford, head of research at Campden Wealth, says the scope of the Global Family Office Report is considerably larger in 2015. He says the increase in costs was a surprise, but suggested this could be due to positive investment returns they had seen in the previous year.
Costs, which were up seven basis points (bps) from last year to 99bp, stemmed from a willingness to take on staff or to restructure. A quarter of family offices in the report say that they had changed the location, number of branches or size of their family offices over the previous years. Rutherford says participants expect surprisingly high levels of return from their portfolio, relative to their typically lower actual returns.
The report found that the return on the average family office portfolio fell to 6.1% in 2014, compared with 8.5% in 2013, due to weaker asset performance, notably in equities.
Philip Higson, vice chairman of UBS global family office group, whose insight and experience helped shape the report, says good returns could still be found. “Lower portfolio returns in 2014 were primarily due to poor performance of developed-market equities, as well as lacklustre performance of hedge funds, commodities, and developing market assets. Private investments and real estate delivered the majority of the returns,” he explains.
The report also reveals staff compensation packages for the first time. It finds that the majority of family offices pay higher salaries to senior executives from outside the family as they seek to recruit and retain talent. The report says that the average non- family CEO received a base salary of $338,000 in 2014, compared to $302,000 for family members. It warns this could be an area for resentment among family member staff.
Looking forward, Rutherford says there were three areas that family office executives should consider in order to best serve their employers moving into the next financial year.
“Firstly, costs within family offices are markedly higher this year. Family office executives in charge of managing costs must ensure their costs are aligned with the needs of the family so that they get the best value possible.”
“Secondly, as family offices become more risk orientated, executives need to ensure that mistakes made in the past are not repeated. Those with track records and specialist knowledge are perhaps best placed to play a lead role as guardians against risk, including the dangers of counterparty risk and pro- cyclicality.”
“Lastly, we found that a third of offices in the study do not have any risk management procedures around family reputation. Though offices are well geared to look after investments, through written, internal, and external evaluation, reputation isn't getting the attention it deserves. In a digital age, that's a real familial risk,” he says.