Family Office

Process Is Key To Performance At Single Family Offices - Wharton School Study

Harriet Davies Editor - Family Wealth Report 1 November 2012

Process Is Key To Performance At Single Family Offices - Wharton School Study

Codifying management policies enhances performance among single-family offices, according to Dr Raphael Amit, a professor at the Wharton School of the University of Pennsylvania.

Codifying management policies enhances performance among single family offices, according to Dr Raphael Amit, the Robert B Goergen professor of entrepreneurship and professor of management at the Wharton School of the University of Pennsylvania.

“When you deal with governance, when you deal with documentation,” and issues like human resources policies and education, that pays off, says Dr Amit. “Process” is the key to performance, and the data is “strikingly clear” on the importance of governance structures.

Dr Amit, who is also chairman of the executive committee at The Wharton Global Family Alliance, was not downbeat about the prospects for “smaller” single family offices despite the fact that a recent study he authored showed these tended to underperform large offices.

The study, Benchmarking the Single Family Office: Identifying the Performance Drivers, found that SFO performance does seem to be linked with the scale of deployable capital. However, Dr Amit does not believe that this spells the end for smaller SFOs, instead pointing out that as well as having more capital large offices tend to have more processes in place. Therefore smaller offices can still be sustainable if they are professionally managed.

Staff headcount has been rising at $1 billion+ offices since 2009, and falling at SFOs below this level, the study found. The average number of staff at billionaire SFOs was 25 in the latest study compared to 16 in 2009; “millionaire” offices “generally reduced” their headcount over the same period.

The 2012 study found that in terms of expense-adjusted quality, high-performing SFOs “far surpass” low-performing SFOs in the following areas: governance, documentation, investment management processes, communication, human resources issues and education and succession planning.

Bringing activities in-house

However, Dr Amit said the study raised some concerns for the wealth management industry. Contrary to some other studies, Dr Raffi is adamant that what he’s seeing is “a sharp increase in per cent of total expenses spent in-house.” What’s more, he says this is because family offices are worried about vendors’ conflicts of interest and performance.  

As things stand, single family offices in Europe spend a larger proportion of their expenses on investment related activities, at 71.6 per cent versus 65.9 per cent in the Americas. European offices also tend to spend more on in-house investment costs (49.3 per cent of overall expenses) than family offices in the Americas (only 20.8 per cent).

Dr Amit says while he can’t back this up with data, his opinion is that European offices have traditionally placed a greater emphasis on confidentiality and privacy, hence the tendency to maintain activities in-house.

Looking at the data at a more granular level, he says that the trend toward bringing activities in-house stretches across asset allocation, manager selection and monitoring and risk management – the latter of which emerged as a top priority for family offices in 2011.

The new definition of risk

“There’s no doubt that risk management is front and center,” said Dr Amit. “Risk is managed now in a much broader context…a much more holistic way.”

While traditional measures such as volatility and beta are still used, family offices now look to diversify in new ways – across geographies, and to take account of political risk, for example. This is driven “by the great financial and political uncertainty,” said Dr Amit.

Risk management entered the top five activities, as rated by SFOs. These are now, in order: asset allocation, investing, manager selection and monitoring, risk management and estate planning.

In 2009 they were: asset allocation, investing, manager selection and monitoring, investment performance measurement and estate planning.


Another area where priorities are changing is technology. Within technology systems, the custody platform and consolidation/aggregation platforms are critical to family offices. Family offices rated the top three criteria for selecting a technology platform as: adaptability to context, ease of use and accessibility and complete confidentiality.

“Price comes way down…the mindset has changed,” said Dr Amit. “The price is not of top concern for families in deciding what technology to use.”

For example, family offices want to avoid platforms that allow the vendor to “see through” into the performance of each investment manager the family office is using, as they feel this is giving away too much information to businesses which have an interest in knowing this. 

Broader remits

In other findings, the survey showed how single family offices in the Americas tend to have a broader remit than their counterparts in either Europe or “rest of world”. They are more likely to perform family-related (such as educating younger generations) and administrative tasks for the family, rather than be purely focused on investment. Family offices that serve families with operating businesses are also more likely to perform these “soft” services, which the report says may suggest that wealth management is more complex in this context, requiring more emphasis on succession and family control.

The sample included 108 SFOs, with 50.5 per cent coming from Europe, 41 per cent from the Americas, and 8.5 per cent from rest of world. Over one third has assets under management under $500 million; 42.4 per cent had assets in excess of $1 billion, and the remainder falls between these two categories.

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