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Considering the Family Office

By Russ Alan Prince and
Hannah Shaw Grove

Even though world wealth is down for the second straight year, the preceding years that witnessed a run-up in private wealth created a culture of connoisseurs that still remains. It’s an ambitious mentality that is quick to spot opportunities to upgrade—a bigger house, a better bottle of wine, private education or an exotic car. And when it comes to managing one’s wealth, it means a family office.

Until recently, family offices were the domain of the super-rich: low-profile entities established by and for the ultra-wealthy to coordinate their financial, and sometimes personal, affairs. Think the Pews, the Phipps, the Rothschilds. The collective assets of a typical family with its own office can rival those of institutions; by sticking together, an extended family unit can achieve true independence and privacy while creating negotiating leverage and a shared culture for its individual family members.

Suffice it to say that the average person can’t afford a family office, and in its classic form as an entity dedicated to a single-family unit, neither can the average millionaire. That’s precisely the reason that family offices are changing. Enter the multifamily office.

“Recently we’ve seen an influx of multifamily offices,” says Anthony Rochte, senior managing director of State Street Global Advisors, one of the industry’s largest asset managers, a specialist in quantitative investing and the sponsor of SPDR ETFs. “It reflects the heightened demand for personalized, responsive and objective services among the investor community and a fundamental desire for the high-quality experience that’s been the standard among wealthier populations for years.”

Multifamily offices borrow their mission and structure from the single-family offices of yore, but extend their capabilities and oversight to more than one family. The origins can vary—two families that discovered they had similar investment goals; or a single-family office that invited other families to join it as a way to share infrastructure costs; or a boutique advisory firm with a small, select list of clients—but the end result is an organization that handles the various financial, planning and lifestyle needs of several unrelated affluent families.

Russ Alan Prince and Hannah Shaw Grove are longtime collaborators and represent the largest pool of knowledge available on the high-net-worth market. Together, they oversee the editorial function for Private Wealth, a magazine for professionals serving an ultra-affluent clientele, and have co-authored numerous reports, columns and books on various aspects of living and dealing with money, including the groundbreaking volume Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy (2004) and the forthcoming title The Family Office: Advising the Financial Elite.

The rise of multifamily offices means that the high-touch, high-customization model that was once a distant dream for many is now within reach of a much larger group of people. In fact, multifamily offices comprise the majority of the family-office universe, and they continue to grow in number (see figure 2a). Much of that growth is fueled by the appeal they hold for the affluent. In a study of private jet owners, each with roughly US$100 million in net worth, these structures were lauded for their service levels, their client orientation and their integrated approach.

Pooling the resources of several families creates a number of other attractive benefits. The more families there are in a given family office, the lower the likely average net worth of the families. Because of the shared infrastructure at a multifamily office, a decrease in per-client wealth does not have an adverse affect on operational efficiency or the office’s effectiveness. More families also create additional opportunities for the families to interact with and learn from one another.

“Having the sophisticated applications and the operational scale to expand or acquire is a rapidly emerging concern,” says Martin J. Sullivan, senior vice president of State Street’s Wealth Manager Services, a unit of the bank that provides intellectual, operational and technological solutions to family offices. “It takes a tremendous infrastructure and commitment to lead and manage a family office, so a partnership with another office or an established provider can be an appealing and viable alternative.”

By their very nature, family offices are customized vehicles that are built around the explicit needs of a family and all its members. That said, there is some consistency across the platforms of products and services within most single- and multifamily offices. Nearly all family offices are organized around the investment function.

The way investment management is handled, however, can vary from office to office, as can the individual products they choose to use as part of their investment strategies. Broadly speaking, about 40% of family offices have an in-house proprietary asset management capability, and 96% select and monitor third-party managers on behalf of the families. About two-thirds of family offices use alternative investments in their portfolios—namely hedge funds, private equity and funds-of-funds—and roughly half say tax management is a core part of their investment strategy.

According to State Street’s Rochte, “More family offices are turning to professional asset managers to fill specific investment mandates than ever before. This frees them up to focus on macro concerns like asset allocation, along with the other day-to-day responsibilities of managing a multifaceted operation.”

On a related note, there is a bifurcation among today’s family offices when it comes to investment strategy. The average age and net worth of families are decreasing. There has been a commensurate increase in the number of families focused intently on generating additional wealth with the assistance of their family office.

In contrast, there is also a distinct group of families that has transitioned from the wealth-creation stage to the wealth-preservation stage (see figure 2b). These families will expect the associated range of risk management and investment capabilities from their family offices that will allow them to protect their hard-earned fortunes.

Furthermore, as private wealth becomes a more global proposition, family offices must stay abreast of the cross-border affairs of their clients who have business interests, homes and investment holdings in more than one country. It’s customary to rely on a local expert to help navigate the maze of foreign currencies, languages and regulations, but those arrangements are becoming more formal as multifamily offices forge mutually beneficial alliances.

As more affluent households choose to work with family offices for an integrated approach to managing wealth, it will become more critical for the service offerings to evolve in ways that can better meet the needs of a broader cross-section of customers. “Investment strategy and portfolio construction get more complex as wealth increases,” notes State Street’s Sullivan. “A number of families rely on us for the institutional-quality risk management and performance analytics tools that let them make more- informed choices.”

In addition to investing, four other key categories of services comprise the standard multifamily office platform. Not every office will provide every category of service (see figure 1), but most have handpicked a selection of these capabilities that allows them to function as holistic overseers of a family’s personal and financial affairs.

Criteria for Selecting a Family Office

A family office can play a central role in how a family coalesces around its wealth, so finding a firm with a good attitude and great capabilities is important. Following these guidelines can help you find the “right fit” in a family office.

• Integrity: The strongest relationships are built on a foundation of trust and honesty, so look for a family office that is both scrupulous and transparent in its actions and motivations.
• Expertise: Successfully managing a sizable portfolio and all the associated issues calls for a team of leading-edge professionals to maximize opportunities and minimize exposures.
• Networked: Even the most adept technicians can’t know all the nuances of every strategy, so the best firms have an established network of specialists to call upon for unique situations.
• Client-centric: Hold out for a family office with employees who take the time to really understand your goals and concerns, and who are proactive and responsive when they interact with you and your family.
• In-synch: Ideally, you’ll find an organization with which you share a philosophical and practical approach to matters large and small, especially those that can affect your security and well-being.
• Experience: There’s no substitute for the knowledge and insights gathered from hands-on work with people who have portfolios and needs that are similar to your own.

Source: Adapted from The Family Office: Advising the Financial Elite

“Outsourcing relationships are an essential part of a successful family office,” explains Ed Orazem, president of Fidelity Family Office Services, a unit of Fidelity Investments that provides custody, brokerage and investment services exclusively to single-family offices. “One of the first things a family member wants to know is ‘What do I have, what am I worth, and how am I doing?’ and, unfortunately, that answer requires a sophisticated reporting system that simply doesn’t exist within most family-office environments.”

In some cases, multifamily offices charge their clients an asset-based fee that gives them access to the organization’s entire range of services. As clients demand greater transparency and choice in their fee arrangements, their family offices have responded with more-flexible approaches, including flat rate, commission and percentage fees. Family-office vendors have responded accordingly. At Fidelity Family Office Services, for example, family offices can choose to pay transaction fees based on usage as opposed to custody fees based on assets, according to Orazem.

“Family offices have a highly sophisticated and demanding clientele. The solutions that are developed in response to their needs are essentially the R&D for products and services that will ultimately be available to a broader marketplace,” says Orazem. “In many ways, the family-office universe is a leading indicator for the rest of the financial services industry.”