Considering the Family Office

10/6/16, 6'04 PM

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Considering the Family Office

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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. Its an ambitious mentality that is
quick to spot opportunities to upgradea
bigger house, a better bottle of wine, private
education or an exotic car. And when it
comes to managing ones 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 cant afford a family office, and in its classic form as an entity dedicated to a single-family unit, neither
can the average millionaire. Thats precisely the reason that family offices are changing. Enter the multifamily office.
Recently weve seen an influx of multifamily offices, says Anthony Rochte, senior managing director of State Street Global Advisors, one of
the industrys 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
thats 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 varytwo 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 clientsbut 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.

Broader Access, Broader Appeal

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 offices effectiveness. More families also create additional opportunities for the
families to interact with and learn from one another.
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Considering the Family Office

10/6/16, 6'04 PM

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 Streets 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.

The Framework of Elite Wealth Management

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 thirdparty managers on behalf of the families.
About two-thirds of family offices use
alternative investments in their portfolios
namely hedge funds, private equity and fundsof-fundsand roughly half say tax
management is a core part of their investment
strategy.
According to State Streets 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 todays 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.

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Considering the Family Office

10/6/16, 6'04 PM

In contrast, there is also a distinct group of

families that has transitioned from the wealthcreation 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. Its 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 Streets 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 familys 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 cant 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, youll 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: Theres 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,
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Considering the Family Office

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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 doesnt exist within most family-office environments.
In some cases, multifamily offices charge their clients an asset-based fee that gives them access to the
organizations 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.

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