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  1. Wealth
March 1, 2008

For Your Advice Only

By Spear's

As the number of ultra-high-net-worth families grows globally by more than 10 per cent each year, so too does the business of managing the money belonging to this new elite.

As the number of ultra-high-net-worth families grows globally by more than 10 per cent each year, so too does the business of managing the money belonging to this new elite. Multi-family offices (firms that offer wealth-management advice to several families), which just a decade ago were few and far between, are springing up on every corner, eager to counsel wealthy clients on everything from investing in hedge funds and setting up family trusts to decisions such as whether to buy or lease a Lear jet.

While just a decade ago only a handful of multi-family offices served America’s financial elite, there are now an estimated 125 such firms in the United States, according to the Family Wealth Alliance, a US-based group that helps clients find the right multi-family office to guide them.

But while multi-family offices are now readily available to those boasting a net worth of $25 million plus, deciding first to use one, and then selecting the right one, isn’t always easy. It took Eric Wagner – a self-described ‘computer nerd’ who made his fortune running a technology investment fund during the 1990s – three years and many missteps before he found a multi-family office to properly look after his new-found fortune.

‘I’m great at picking stocks, and that’s how I’ve made my living, but picking bankers and financial advisers, now that’s another matter,’ says Wagner, who explains that he spent his university years at Stanford chasing Wall Street tips instead of sorority girls. ‘It paid off financially, but I think my interpersonal skills and ability to judge people suffered.’

Wagner’s troubles began when he cashed out of the tech markets in 1999 before the internet bubble burst, taking with him an estimated $80 million. But while his friends and family applauded his keen eye for picking a winner, Wagner felt under siege. Everyone wanted a piece of his success, and having grown up in a family of relatively modest means, he felt obliged to share his fortune, literally.

‘Between friends, family, lawyers, accountants, investment bankers and snake-oil salesmen, I almost lost everything,’ says Wagner, who estimates that at one point he had over 30 different active accounts, and even a slice of an unfinished hotel in Florida. ‘One friend got me to invest in his internet start-up, and another bugged me to start a venture-capital fund. It got out of control. I couldn’t keep track of what I owned. I was close to having a breakdown.’

By 2002, Wagner knew he was in trouble, but he had no idea just how much money he had lost through sheer mismanagement. One of Wagner’s close friends sat him down and said that he should approach his finances like they were a business, and that he needed a single, trustworthy person to set his ducks in a row.

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‘That’s when I began investigating multi-family offices,’ says Wagner. ‘It was like a lightbulb went on. There were these people who existed whose sole priority was to make sensible decisions with my money. They weren’t trying to get me to invest in this or that pet project.’ In fact, Wagner says that since he hired a multi-family office in 2003, his adviser has talked him out of what he describes as ‘some really, really stupid ideas’.

Unfortunately, once his new adviser had sorted through Wagner’s finances, he found that almost half of Wagner’s one-time net worth of $80 million had been lost to bad deals. ‘It was a learning experience,’ says Wagner. ‘It was painful to see the big picture, but I’m glad I finally found someone who could show it to me.’

Wagner’s situation is all too common. With about 70 per cent of high-net-worth individuals in the United States being first-generation wealthy, most aren’t prepared to manage their own finances.

‘It’s a mystical world, and we are trying to demystify the whole thing,’ says Thomas Livergood, founder and chief executive officer of the Family Wealth Alliance. Livergood explains that the majority of high-net-worth families in the United States become so following the sale of a family-owned business. These new rich, dubbed middle-market families (so named because the businesses they sell are middle-market companies) may be savvy businessmen and women, but more often than not they aren’t prepared to navigate today’s increasingly complex investment arena.

‘The landscape is not easy to figure out, and the pretenders are out there versus the real McCoys,’ says Livergood. So how do families tell the difference between a respectable multi-family office and an adviser driven by a personal agenda? In Livergood’s experience, they often can’t.

Livergood describes his organization as ‘an independent advocate for families’, explaining that that the fee structure he uses backs up this assertion. Unlike a bank or a traditional financial advisory firm that takes fees for selling financial products, the Family Wealth Alliance charges a flat retainer in return for helping to select a multi-family office.

‘There is no monetary incentive to push someone toward one multi-family office or another,’ says Livergood. Reputable multi-family offices work the same way: they charge families for their advice, and refuse money or incentives from firms peddling their products.

Michael Zeuner, chief strategy and client experience officer of GenSpring Family Offices, one of the largest multi-family offices in the United States, explains that wealthy people such as Wagner are increasingly eager to find the kind of unbiased investment advice that multi-family offices offer.

‘We’re seeing a growing demand for objective, buy-side advice,’ says Zeuner, who works out of GenSpring’s newly expanded midtown Manhattan offices. The firm currently works with 600 families and has $15 billion in assets under advisement. In 2001, GenSpring, which then went by the name Asset Management Advisors, worked with just 25 families and had $500 million in assets under advisement. Its massive growth over the past seven years is a testament to the demand for independent advice.

‘Our role is not to be a financial-services manufacturer, it is to be the adviser,’ says Zeuner, who before joining GenSpring two years ago was a Managing Director and Global Head of Wealth Solutions at JP Morgan Private Bank. Having worked on both sides of the fence, at a private bank and a multi-family office, Zeuner is privy to the pros and cons of both, though it is clear that he feels multi-family offices are the future of wealth management. ‘We are not a substitute for a private bank,’ says Zeuner, adding that private banks will always have a role in serving the super-rich.

In fact, Sara Hamilton, founder and CEO of the Family Office Exchange, an independent adviser for ultra-wealthy families, explains that the origins of multi-family offices can actually be found in old-fashioned European private banks. ‘The multi-family office in the United States is modelled after the old-line Swiss banks,’ says Hamilton, adding that private banks have long recognised the need to separate their advice from a defined set of products.

But while today’s private banks may claim that there is a Chinese Wall between the advice they give and the products that they sell, Hamilton explains that ‘the trend in the States shows us that a client prefers to have an adviser or multi-family office that does not have a captive product.’

In addition to bifurcating advice from the sales of financial services products, Zeuner says that another characteristic that sets multi-family offices apart from other types of
financial-services firms is the intimacy of service they provide. He adds that ‘In this industry, business is still local’, explaining that GenSpring has fourteen offices across the US, and the firm is continuing to expand to be close to its clients: ‘People want to be able to walk into an office near where they live.’

One myth that Zeuner is keen to dispel is that multi-family offices can’t compete with private banks when it comes to offering clients the best or most sought-after
financial products. ‘We can get families into hedge funds that are otherwise closed to small or new investors,’ he says. ‘In fact, we can often save clients money by negotiating for discounted fees.’

So what does the future hold for multi-family offices? Livergood and Hamilton both agree that their evolution is further advanced in the US than it is in Europe, but perhaps not for long. ‘There are small, independent boutiques that have been forming in Europe since 2000,’ says Hamilton.  ‘As soon as more of these independent wealth advisers have a track record, the wave of change will occur there.’

While Zeuner admits that there is no branded, global leader in the multi-family-office market, he makes no bones about the fact that GenSpring is aiming to change all that. ‘This is a new industry emerging in response to challenges families have found,’ he says. ‘The trend is unstoppable.’

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