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BUSINESS Office types


The key to providing any analysis of what a family office does is to understand the needs of the family in question. If the family doesn’t want or need a specific service, it won’t be catered for.


When is it appropriate to have a family office?


There are two factors at work here: value for money, which must be at the heart of any good business decision, and convenience, which is sometimes a luxury that some families are happy to afford. Value for money Looking at the former, we are often asked what the minimum assets under management should be to justify the expense of a family office. This is a valid question in the world of investment, as fund managers usually relate their percentage investment fees activities to funds invested or returns created. However, for a family office this may be less appropriate. Some examples are provided below to show the complexity in this area. Consider Family A, a middle-aged couple with one young child who have generated their wealth through the sale of a business they created. They have GBP200 million in liquid assets and have little experience in asset allocation or complex investment products. They have fairly simple day-to-day needs and are concerned mostly for the preservation of their wealth for the next generation. They have some experience in investing in overseas properties, to be held for the long term, and would like to continue that (with up to 10 per cent of their assets) as their ongoing business activity now that they have sold their business. While this couple have enough wealth to justify


an SFO, their activities overall do not seem to warrant it. They are content with being fairly passive with their investments, probably to be managed by a third-party investment manager, have little need for concierge services, and their active investment activities are not complex and do not require substantial expert support, other than legal advice. The couple may wish to approach an MFO that specialises in investment management activities only, or a larger institution such as an investment bank. If tax-planning activities so dictate, an offshore services provider may be involved as well. Now consider Family B, a married couple with two grown children. The asset base is also GBP200 million, and is inherited from the previous generation. The patriarch of the family has for many years taken an active interest in managing specialist assets such as precious gems and artwork, and is continually buying and selling in these asset classes. The family has a selection of homes and regularly flies around the world in their business jet. They also have two motor yachts. They have three offshore trust structures, and run an instruction-only listed equities portfolio. They also have a significant stake in a private business, which they actively manage as board members. They are high-profile charity benefactors, although they are private about their affairs and do not like too many outsiders to see their overall asset position. In this instance a family office seems highly


attractive, as it provides dedicated support, all in one place, for all the complex and wide-ranging activities described above. As they are also very private and do


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not like to share their information at all, their wealth level justifies an SFO. However, calculating a fee level is not as simple as applying a percentage to the assets under management, as concierge services, philanthropic support services and luxury asset trading are being undertaken and need to be paid for accordingly. In this instance, the cost of the SFO will be driven by the need to recruit the appropriate professionals at market rates. The annual fee base created by this is not comparable with an investment bank as they cannot provide the full suite of services required. Convenience Consider Family C, a high-profile celebrity couple who are continually increasing their wealth through their media-related activities and are currently worth GBP50 million. They are time-poor and for privacy and family considerations would like to employ agents who can deal with constant approaches from external sources, lifestyle management, oversight of financial affairs, travel arrangements, liaison with professional advisors, new media-related transactions and charitable activities. In this situation, a family office, whether single or multi, is a convenient response to a specialist set of circumstances. The cost of employing people capable of delivering solutions to these issues may mean that the family is paying 2 per cent of their wealth to support such an office, but it may be seen as essential for the lifestyle benefits that it creates.


Conclusion


Those who seek to justify whether a family office is cost-effective should ask certain questions first. Is the primary need discretionary investment-


management services? If so, there is a valid comparison between SFOs, MFOs and larger institutions such as investment banks. Where a family worth GBP500 million wishes to invest 80 per cent of its capital in publicly available capital instruments, it may find it more cost-effective to do so through an SFO, as the annual asset manager fees are likely to be lowest in such an environment. If the needs are wide-ranging and complex, then a percentage fee of assets under management is less relevant and the cost of the family office will be driven by the professionals required by the nature of the specialist activities. A family office that provides a narrow range of activities can be easily compared to competitors and its costs assessed in a value-for-money exercise. If it is charging 1 per cent to manage hedge fund portfolios, but an investment bank is charging 0.5 per cent, what is it doing to justify the extra cost? A family office that deals effectively with a complex range of issues, acting as the family’s agent in the world, should be recompensed not only through simple methods (such as asset management fees), but according to the skills required to deliver client solutions. As this is not something easily built or commoditised, it is unlikely to be easily compared to alternatives. Ultimately, it can only be for the family in


question to decide whether they want the expense of maintaining their own family office. Cost will undoubtedly play a part in this decision, but so will convenience and need.


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FAMILY


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