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Research: building for the future - how family offices are evolving to meet new challenges

The US Trust/Campden Research North American Family Office Survey 2009 provides a unique insight into the issues family offices are facing in the light of the turmoil of the last 18 months. This summary highlights some of the key findings of the research.

The financial crisis proved the ultimate test of the family office model in North America. It highlighted areas of both strength and weakness and encouraged family offices to revisit their core values. It also caused an almost paranoid focus on risk management and due diligence, which in turn increased demand for clear and proper reporting. Opening the communication channels between the family office and their service providers has also increased in importance.

However, the survey demonstrated it was not all negative. For many family offices the crisis, coupled with the scandals and pyramid schemes that came to characterise the end of 2008, created the perfect opportunity to re-examine their outgoing costs and the very operation they are running. It made many revisit their core philosophies in an attempt to re-establish what they intend to do and how they intend to get there. Although family offices are generally cost-conscious, the financial crisis highlighted areas where costs could be reduced.

It also provided the perfect incentive to examine their business model and see if it really is the best for the founding family. Consolidation became more common, while for others it cemented their faith in the single family office model.

This survey was conducted between June and September 2009 when family offices were still to completely understand the full impact of the crisis, however it gives a balanced view of the most pressing issues for family offices in the wake of the financial difficulties that gripped the world in 2008-2009.

Re-examining the role of the family office

The events of the past 18 months caused many family offices to revisit their core values. When asked about the motivations behind starting a family office, the majority of respondents, 73%, said it was to manage and oversee liquid family wealth. "The family sold its operating business and created liquidity that required management," explained one family office executive. Respondents ranked preservation of wealth as the number one overarching goal of a family office, illustrating they are not as concerned with growing wealth as with consolidating it.

Family offices are defined by the financial and investment advisory services they offer, as explained by one family office executive: "We started the office to manage the family's assets." Confidentiality was another key issue when looking at the reasons behind starting a family office.

Certain services that were seen as important when creating the family office slipped down the list of priorities when families were asked about their current objectives. This is shown most keenly with concierge services, which were cited as a reason for creating a family office by just 18% or respondents, but came bottom priority when asked about current objectives. This suggests the crisis has highlighted the need for cutbacks – services that are seen as non-essential, such as
concierge, are the first to go.

One way to cut down on costs while still offering the same amount of service is to outsource non-essential and non-core services. While 87% of those surveyed provide some form of investment advisory service in-house, most of the family offices in the survey provide a mixture of both in-house and out-sourced services, proving that no family office can be expert in everything. Of the family professional services offered, those most commonly kept in-house are philanthropy and family governance services.

As part of redefining their core values and roles, family offices were forced to look closely at both their approach to investment and their specific investments themselves. Much of the emphasis as we exit the crisis is on how to move forward and for family offices, redefining their investment strategy is part of this move. This is illustrated by the fact that investment management was the service selected by family offices as increasing in importance in the next three years. Asset allocation and trust and estate planning were also highlighted as services family offices believed were gaining in importance. 

Risk management

In the near term family offices have an overarching goal that defines all they do; risk management. When looking back on the scandals and shocks that have rocked the whole financial world in the past 18 months, the collapse of Lehman Brothers, the Madoff and Stanford frauds and the credit crunch, this is hardly surprising. As family offices are not known for their risk taking at the best of times, this has only served to consolidate their outlook.

One family office summed up the feelings of many from the survey: "To the extent we did not trust investment advisors in the past, our lack of faith has been justified."

This increased risk awareness translates several ways into family office operating practice. The first is a demand for greater and more in-depth communication and due diligence from managers. "I am more concerned about transparency. The due diligence process has been extended," said one SFO executive. Another, who is responsible for her family's wealth, said: "Now I am more aggressive. I'm demanding and getting transparency." Others are engaging in more vigorous background checks in order to prevent fraud. "We are doing far more personal due diligence," a family principal said.

Only 2% of the SFOs in the survey and 20% of the MFOs have someone in-house dedicated to risk management. That is not to say family offices do not have in-house risk management, but that is usually comes as part of a family office executive's role as opposed to their dedicated role. However, 49% of SFOs do still outsource risk management.

Despite the crisis and the emphasis this has placed on the need for transparency, almost a third of SFOs invest in black box strategies and will continue to do so. Managers of black box strategies are notoriously secretive with the promise of outsized returns if the family office is prepared to take the chance. The guarantee of outsized returns is not traditionally one that holds much appeal for family offices, who see themselves as the stewards and protectors of wealth first and foremost, but it seems for some the benefits outweigh the risks.

That such a high number still invest in these strategies after the problems of the last 18 months may seem somewhat surprising and those who did were quick to note that a lack of transparency does not equate to fraudulent activity.

However, even those who do engage in black box strategies sense a growing unease surrounding them. "I've had some complete disasters," said one wealth creator. "We are asking more questions and are shying away from black box strategies." But even these experiences has not put him off completely: "I invest reluctantly, but I do it," he said.

MFOs were much more reluctant to even contemplate such strategies, with only one in the survey admitting to using them.

Across the board family offices are lowering their exposure to risk and increasing due diligence, however they are not adding to their personnel in order to do so. 


A small number of SFOs offer services to families and institutions that are not part of the core family. This is more common with MFOs but the reasons behind offering these services remain the same for both SFOs and MFOs; access to additional assets to help defray the cost of the family office, retain investment talent and gain access to certain investments.

Although SFOs may initially be reluctant to expand and offer services to other families, those who did found it had advantages; for example, the entrepreneurial business spirit of the families can lead them to offer their expertise to those outside the core family, which in turn could prove profitable. 

However, when expanding in this way family offices must be careful not to expand too quickly and only offer services to families with similar philosophies and objectives as the founding family. "It's a balance between personal control and access to the benefits of the family office," said one family principal. 

Cost conscious

Families recognise that although a family office can be expensive to run, the benefits of confidentiality and control are worth paying for. Only 11% of SFOs surveyed believe a family office should be profitable. That is not to say family offices can lose money, but they do not need to have outsized returns either. It is a delicate balance between costs and performance. "Family offices can pull apart. It's part return and part costs – if you have a few down years or are not up that much, people can get antsy about the value equation," said one family principal.

It was generally agreed by 72% of those surveyed that a minimum of $100 million is necessary to successfully run a private investment office. This figure increases to $500 million to offer fully integrated services or to retain top investment professionals.

Investments and opportunities

Despite not being highly leveraged, family office found that the events of the past 18 months had a significant impact on investment strategies. All the MFOs and 76% of the SFOs surveyed said they were directly or indirectly impacted, and to a significant degree. They were exposed indirectly to leverage as, although not being highly leveraged themselves, they used managers who were.

In terms of how investment strategy has changed, family offices are moving into new areas of opportunity that may appear safer, while moving away from areas they have previously concentrated on but they can no longer access. "I was looking at real estate, but can't get loans. I get high yield by lending, participating in bonds," said a family principal who formed a family office in 1999. Another, who sold his operating company before the market collapse, said: "We are more conservative in our investing."

In order to successfully invest, family offices need to be more opportunistic in their approach to investment strategies. They realise they also need to be more flexible in order to make the most of opportunities when they arise. "Now we can adjust on market activity. We have enough guidelines to expand our ability to sell on a rally," one SFO executive noted.

Those family offices that have cash to invest are finding opportunities that were created by the lessening availability to credit over the past 18 months. "It's amazing to see the swing in the pendulum," said a family office executive. "The cost of borrowing is too high – cash is king." 

Mistrust of service providers

Family offices have plummeted to new depths of scepticism and mistrust when it comes to service providers. Not only are they demanding greater transparency and communication, but they are highly intolerant of product pushing. "Do not push products at us. Work for us. Understand our needs. I want extraordinary service with no conflict of interest," explained an SFO executive.

This scepticism was echoed by many family offices in the survey, illustrating the widespread nature of this problem. One family office executive, who rated flexibility as important in a service provider, said: "Firms are always flexible when they are trying to get your business. They are as flexible as can be."

Because of the damage done to the relationship between family offices and service providers, family offices now place a greater emphasis on reputation and recommendation when looking for a service provider. "What other family offices who have used the firm think about the firm is very important," said a family principal. He went on to say general market perceptions do not hold any weight in their decision.

The strongest negative comments were reserved for firms that offer in-house investments. Eighty-eight percent of family offices consider in-house products a direct conflict of interest. "They are always saying 'We have the greatest VC guy, we have the greatest tech guy.' There are so many funds, but they don't have the greatest," said a family office executive.

The most commonly used service providers are asset managers and private banks. From their bankers, family offices desire traditional credit services and they look to their investment banks for research and company information. "Wisdom is very important to me," said a family principal who looks to his broker to provide more than off-the-shelf research.

Even when family offices have lost their trust in most service providers and institutions, their faith in other families remains strong. The family office community is small and tight so it stands to reason they would co-invest. The researched confirmed this; 68% of family offices co-invest, most often with each other. "We mostly do our own deals, but we will sometimes co-invest," said a family office executive who concentrates on buying smaller companies.

The impact of operating companies

If a family office's founding family still has an operating company it has a significant impact on how the family office operates. Those with operating companies often have more assets under management, larger staff, serve fewer generations and fewer clients, and outsource more investment advisory services.

"Families with successful operating companies have a stream of income coming into the office," said the head of a family office with an operating company.

One reason family offices with operating companies serve fewer generations is they are often younger. Forty-two percent of family offices without operating companies were established during or before the 1980s, this is in contrast to only 19% of those with operating companies.

Although both types of family office have similar goals and objectives, how they offer them differs. Family offices with operating companies are often larger concerns and so can offer more services. One of the largest differences is in the family professional services area, in particular life management and concierge, with 70% of family offices with operating companies offering these services compared to 29% of those without offering them.

There are subtle differences in outlook too. While none of the family offices that do not have operating companies believed the family office should be profitable, almost one-fifth of those with operating companies feel the family office should be profitable.

Family offices have emerged from the last 18 months wary and not entirely unscathed, but those that survived now understand their operations better, can see their strengths and are attempting to address their weaknesses. Risk management and due diligence will be the mantra of family offices for the foreseeable future, but this is no bad thing.

While some family offices are looking towards consolidation to shore up their future, others are more determined than ever to remain as single family operations. All are looking for ways to trim costs, but not at the expense of the core services the family office was created to carry out.

The past 18 months have impacted investment strategies, while the relationship between family offices and service providers has become immensely strained and a lack of trust is endemic.

This will take longer to rebuild and service providers will have to listen carefully and work hard to regain the trust of their family office clients.

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