Is the family office a serious alternative to other forms of private banking or wealth management? asks Sebastian Dovey
Is the family office a serious alternative to other forms of private banking or wealth management? asks Sebastian Dovey
In the event of their business being sold for between £20-£100 million or more, the question on the lips of most entrepreneurs is ‘what next?’
Managing this surge in wealth capital is very different from making the capital in the first place. Most will later acknowledge that they probably didn’t make good decisions on managing their wealth immediately after they accrued it. Crucially, most do not consider long-term strategic asset allocation and family succession as an immediate priority.
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When the dust settles, however, most will take a serious look at the private banking and wealth-management world. Rest assured there will be no shortage of offers to manage the money. There are more than 500 private banks to choose from worldwide and at least 1,000 more investment boutiques that offer some form of wealth management.
The choices are overwhelming and the differences hard to fathom. A few investors in Europe I met recently said they couldn’t face the endless pitching any more. ‘Too many bad lunches and PowerPoints give me indigestion and heartburn,’ said one. ‘I almost regret having the choices presented by this wealth.’
Nonetheless, a growing number note that private banks are excellent at presenting their products, but poor at providing the service clients expect with managing their personal fortunes. Over time there is a groundswell of disenchantment among clients. Some come to feel they have actually lost control of their fortunes, by handing them over to third-party banks to manage, while others feel they get no advice and are just being force-fed products. Most believe there must be an alternative.
With eight or more figures on the ‘liquid wealth balance sheet’, there is. In fact, this segment of money has a choice not accessible elsewhere: the family office.
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The family-office world, in wealth management terms, has specific characteristics that appeal to many investors. Critically, family offices are smaller than private banks in terms of business size and client numbers. Furthermore, the client typically has the potential to receive better advice and thereby greater control over the management of his or her wealth.
Control is a word most entrepreneurs like to hear in the context of their money. So, family office it is then. Sounds simple enough? Not quite. Even in the family-office world there is a choice to be made between the single-family office (SFO) and the multi-family office (MFO).
The former represents an office entirely concentrated on the management of the assets and liabilities of one family, while the latter manages the assets of multiple families. An SFO represents the ultimate in control – it’s your own investment house.
Consequently, when we outline the options to individuals with wealth of eight figures or more, many initially indicate a preference for the SFO. It represents the absolute in control. Examples are the offices representing the likes of the Oppenheimers, the Guggenheims, the Rockefellers and so on.
t this point, a few wealthy individuals recognise a pattern and they blanch – they realise that these are serious-money players with wealth in the ten-figure realm. Indeed, an effective SFO will manage at least £100 million in assets, though to make it cost-effective and efficient it requires ten times that figure.
Among the reasons are the high costs of running an office with top professionals who are prepared to give up lucrative careers in the financial markets to work for one client. The human resources bill alone could reach into millions of pounds if the family wants the best that money can buy. At that level of wealth, why settle for less?
Perhaps the MFO presents, in harsh terms, a better package deal that is affordable to the regular deca-millionaire. First, the costs of the business are distributed across a broader asset base and clientele. Second, the MFO leverages the buying power of each investor through mutualizing.
Third, they often acquire better market professionals than the SFO because executives see diversity and opportunity in managing more than one client. Moreover, these employees do not feel at risk from the one ‘irrational master’ who is the source of the wealth.
Some public examples of the MFO model in the US are Greycourt, Lydian Wealth Management, and Threshold Group. In the UK, examples are Fleming Family & Partners, Stanhope and Sand Aire. There are, in our assessment, as many as 250 MFOs plying their trade worldwide with the deca-millionaire client.
The common feature, particularly for the non-US firms, is that at their foundation there is a principal family that has opened its doors to additional clients. Typically, the minimum entry level for new clients is lower in asset terms – usually in the eight-figure zone – and so it is more accessible to the freshly-minted entrepreneur.
A hook for new clients is often that the founding families have a specific investment they can tap into, such as private equity or real estate. Moreover, new clients may gain access to these opportunities ahead of the rest of the market. And, with an MFO they have the syndicated purchasing power to secure access to better deals from the wider investment community. ‘We reach the parts other investment business can not get to,’ is a comment I recall on this concept.
Such factors of access, control, independence, service, accountability, and a larger family underwriting the process, while being actively invested as well, are among the major factors promoting the argument for taking a serious look at the MFO sector.
So, is the MFO all hype or really worth the bother? The honest answer is, who knows?
Ultimately you, the client, will have to decide. In my view, the MFO is far from perfect and is definitely an acquired taste. Also, it may not be the ‘cheapest’ option, as the big banks can usually take a more aggressive stance on fees in order to win business. The MFO may not even be the most effective in terms of performance. There are also a lot of print column inches spent on the concept of the family wealth world and this leads to the MFO having a mystique and cachet that is at times far beyond its merits.
But, equally, at the heart of its solution the MFO principal is sound. It is a gateway advisor to the vast array of financial products. Having this trusted advisor putting together the right solution is invaluable: they advise on the ‘what next?’ question.
Crucially, the MFO model was developed for a limited clientele with similar levels of wealth and requirements – the best are rather like a club or syndicate. The model attracts professionals, who choose not to be in a product-pushing environment, but who are oriented toward providing unbiased advice.
For some clients this last point is the deal-clincher. In a world of myriad choices, having someone you can trust, particularly when deciding on managing your fortune, is hard to come by. The MFO might be a reasonable place to start looking.
