The credit crunch has brought into sharp relief the importance of adequate communication between families and family offices. Where multifamily offices have lost investors' capital, good communication can be the difference between losing and retaining client trust. Meanwhile, the very existence of single family offices is being called into question if vast sums have been lost and communication is poor or lacking.
Should family offices view the post financial crisis world as an opportunity to redefine how they communicate with the families they serve?
David Lifschultz is president of his single family office, L Investments, which is based in New York and caters for 40 family members. He says only a couple of family members have been asking for more information since the financial crisis began, but he puts this down to the fact that the majority have confidence in the leadership of the family office.
"I try to keep the family abreast with periodic reports as you want everyone in the family to know what is going on," he says. "Those members that ask usually keep other members informed."
These "periodic reports" focus on the progress of the family's private equity investments and publicly traded stock investments. "We focus on incubating new disruptive technologies. But we have made exceptions; for example, by investing in Barclays Bank after it collapsed with the rest of the banking sector," he adds.
Fundamentally, Lifschultz says the family office is doing exciting things that have delivered positive returns, which has kept the family happy and the need for drastic changes in the way they communicate unnecessary. "We have not failed on one technology," he claims, which naturally makes reporting such findings a much more palatable exercise and keeps questions to a minimum.
At the other end of the spectrum, William Drake, co-founder of London-based commercial multifamily office Lord North Street, says he has considerably upped his contact with clients over the past 18 months, although mainly for reassurance rather than for specific updates on their portfolios.
Multifamily offices will generally have a more structured approach to communication, as Drake explains: "If you have a lot of clients you have to commoditise your communications to some extent, through post or email. It is the only practical thing to do. We have relatively few clients, around 26, so personalised client communication becomes much more manageable. We see them all regularly at a series of review meetings. Again, this will vary from client to client, but we will see most of them at least quarterly. The extent to which we see them between meetings depends entirely on the client. We ask them when we take them on when they want to be called. Some are giving you their money to manage and don't want to know anything more. Some will say to call if we are making a significant change. Others want to know everything. It is totally personal."
Daniel de Fernando, of Spanish multifamily office MdF Achievers, says the increases in contact tend to be led by the family office managers rather than by clients, adding: "We want to make sure they understood that someone was looking after them properly. Also, part of our job is to educate clients about their finances and we wanted to use the current volatility to help them understand markets a little better."
However, some family offices have had poor performance to explain away. Michael Hutchinson was head of the Guinness family office for 20 years before he founded his own advisory business - the Hutchinson Consultancy. He says that strong communication can impact significantly on how such information is received.
"Some multifamily offices have been very arrogant and have not taken a personal approach to their clients. Now we are in the middle of this very difficult market, they suddenly go all nice and people are not interested. A lot of the private banks were persuaded that they had the right process to get people into hedge funds, for example, which included Madoff feeder funds. It is difficult to convince these people that they have got value for money," he adds.
Gero Bauknecht, president of a Swiss-based single family office, stresses the importance of not only regular but relevant information for families relating to their investments. "Communication has to be first and foremost regular reporting in the form of written reports and face to face meetings. It has to be focused on the readers' interests, but be deep enough to give him/her an proper overview," he says.
"It should give all the relevant information plus an explanation of the situation of each of the holdings and all decision and necessary steps which need to be taken. More in-depth reporting can be added, but only if the reader really wants it. Typically standard reporting overloads the reader with unnecessary details and does not provide a good overview," he adds.
Meanwhile, Lifschultz highlights the benefits of being able to communicate with complete transparency within the single family office setting: "In the case of our private equity investments, I can say more to the family office than I can to those public companies where I sit on the board," he says.
Hutchinson agrees that the size of a family can determine exactly how communication is dealt with: "It can sometimes be easier with entrepreneurs and small families where you are dealing with only a limited number of individuals – ie, in person or via video conferencing. It becomes more complex when the family has become more diverse and widespread in number."
Hutchinson says that in his experience some family members will want to be hands-on and very much involved, while others don't want to know. Some family heads want everything channelled through them, while others want communication with the wider family, possibly through family meetings or quasi-social events. Hutchinson concludes: "It is all about knowing the family, what each family member wants and what their wealth is for."
Drake says that among his clients, the larger families will tend to have their own regular meetings. Representatives from Lord North Street will attend these meetings, sometimes several times a year, and make presentations for the investment committees. The family office representatives also serve families in an educational capacity, ensuring the next generation become fully involved in the business.
Family office communication has been aided by the increased use of technology. De Fernando says he has benefited from this when working with his clients: "A number of things that used to be done in person can now be done via email, such as position summaries, market updates and weekly commentaries. However, nothing replaces face-to-face contact. Technology can complement it, but cannot be a substitute."
For those family offices that are looking to increase or improve how they communicate there are going to be cost implications, which lead to delicate discussions in the present climate.
In the Merrill Lynch/Campden Research European Single Family Office Survey 2009, only a handful of family offices were able confidently to provide an idea of how much the process of reporting cost them. For the 15% that could quantify how much that communication strategy cost, the average was approximately 2.5 days a month. Costs were estimated at between €10,000 and €150,000 annually.
There was a direct correlation between those firms that reported higher spending on reporting systems and those that had more complex and frequent reporting systems. Other offices pointed out that while they had been using sophisticated reporting systems initially, these were not always deemed appropriate to use when communicating with the family.
Both Lifschultz and Bauknecht agree that for their family offices, the cost issue is not prohibitive, but Drake has a different take: "Billed time becomes more important and therefore taking a completely personal approach is less practical," he says.
Overall, communication is about understanding what the family wants, finding ways to provide it and, if you can't, explaining fully why you can't. It is difficult to disagree with Hutchinson's summing up.
"Family offices need to have a global approach in most matters. They need to take advantage of the best technology and develop processes to implement it. But in my view it is still important for the family office to retain that personal feel," he says.
"It's still about relationships, understanding and standards. It can be about intuition but it's also about wanting to do the best in a modern, efficient and systematic way. It's about finding ways to enable the family to make informed decisions without taking up too much of their time and so allowing them to enjoy their lives to the full - thereby giving them freedom from wealth."