Family Offices

An option for helping to preserve wealth

In the USA there are around 3000 ‘family offices’. They are usually staffed by investment professionals who aim to manage and preserve the family’s wealth. Family offices may also take a role in educating the Next Generation and providing support services to family members.

How can family offices help business-owning families?
In the 1990s the Chen family set up a family office which has featured in a case study developed by Professor Carlock at INSEAD. The case study reveals some of the benefits of family offices. James Chen is quoted as saying, ‘Like many other Asian families, we had become so focused on improving the efficiency of the business that we weren’t paying enough attention to managing and preserving our wealth.

‘We had a very conservative, passive approach to investing, simply dividing up the pie among several different private banks, with only casual oversight. The situation was very inefficient.

‘My initial goals for setting up a family office were primarily financial. I wanted to consolidate the different investments, centralise the information and management of the assets and generally improve the asset management side of the business.

‘I also thought that a family office could serve as a platform to facilitate and promote communication and financial education among family members.’

The Chen family office is known as Legacy Advisors Ltd. Within a few years, its risk-adjusted rates of return were well above the returns that would otherwise have been achieved.

Legacy Advisors Ltd has now taken wider responsibilities in supporting the family. It provides services in tax planning and reporting, trust planning, corporate secretarial services and so-called concierge services (bill paying, balancing chequebooks, travel bookings and so on).

Family offices provide investment skills, independent advice and administration services

What types of family office are there?

Single Family Office (SFO)
The Chen’s family office is a Single Family Office (SFO) because it serves only their family. This is the traditional model but the model faces big challenges. If the SFO pays high salaries to its investment professionals then those salaries become a drag on performance. The result could be wealth destruction rather than wealth preservation. As James Chen says, ‘If not carefully managed, a family office can easily become bloated and expensive.’

A particular challenge is keeping staff. Year-end bonuses are limited by the funds under management, which are in turn limited by the success of the family company. Unless investment professionals are committed to the family, the most successful ones may look for better rewards elsewhere.

Multi Family Office (MFO)
If an SFO also starts to work for another family, or several other families, then it becomes a Multi Family Office (MFO). With more assets under management, it becomes more cost-effective to employ a larger team of investment professionals. There are economies of scale in providing access to investment skills, independent advice and administration services. Generally the trend is away from SFOs and towards MFOs.

Multi Client Family Office (MCFO)
Some MFOs also offer their services to other clients such as trusts, individuals, charities and foundations. They may position themselves as Multi Client Family Offices (MCFO) and focus on clients with, say, at least $40 million in investable funds.

Peter Leach, in his book Family Businesses: The Essentials (2007), gives examples of two large MFOs/MCFOs. The Bessemer Trust, based in New York, is controlled by the Phipps family. The Glenmede, based in Philadelphia, is controlled by the Pew families. Both have grown into large financial institutions.

Peter Leach also suggests what makes an MFO/MCFO successful:

owners who are committed to the organisation in the long term;
clients who fit well with each other;
a record of above average investment returns;
fees that are clear and match the level of service;
staff who have the freedom to find the best solutions for particular clients.

The business grew much faster than the family

Increasingly those ‘best solutions’ include not just investment services but also education for the next generation. Great wealth can have a great affect on young lives. Family offices of all types are developing programmes that help young family members understand the opportunities and obligations of wealth.

What is the future for family offices? Peter Leach says that there is evidence that the MFO/MCFO model is becoming more common. But at the same time he believes that growth is unlikely to be fast.

Many families continue to prefer the privacy of managing their own wealth, or see benefits in using other well-tested types of wealth management. Family offices are certainly one option for helping to preserve wealth, but they are only one option among many.

Family Offices

An option for helping to preserve wealth

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