How to protect and grow wealth in a world of negative real interest rates - that is the question faced by firms such as Bedrock, the private investment office that has launched a family office platform.

Protecting ultra high net worth clients’ wealth and growing it can be a complex process but at present, the challenge can be framed very simply: how to invest in a world of negative real interest rates?

With official interest rates at virtually zero in the UK and US, for example, and with inflation in low, but significant, single figures, the eroding value of cash looms large in the minds of wealth professionals such as Ariel Arazi, a founding partner of Bedrock, the private investment office.

Bedrock, which has offices in London and Geneva, announced yesterday it was launching a family office platform in response to client demand for non-investment-related client needs. But while Arazi was keen to discuss this and related developments, this former investment banking professional grew particularly animated about economic trends. And a big topic is the conundrum posed by low interest rates and inflation pressure.

“That [negative real interest rate position] is the only way for governments to reduce their debt overhang without taking real pain today. The most natural way to be invested is through equities. Real estate gives some protection but you give up liquidity,” he told this publication in an interview at his firm’s recently refurbished Mayfair office.

Since governments began to pump billions of credit into the system via “quantitative easing”, a concern for wealth managers has been how to protect wealth when cash returns are low to negative, and returns on bonds are so weak. The surge in the gold price and price of other commodities shows that “real assets” have appeal, but even here, some investors might be queasy on whether this commodity rally can continue. There are few easy options.

Arazi also noted the related investment problem of how clients have lost confidence in a number of mainstream currencies due to worries about government debt and inflation.

Investment background

An understanding of these issues comes naturally to Arazi, an investment banker by training and background. He founded Bedrock in 2004 with three other founding partners. Three of these four individuals had worked together at Republic Bank of New York, the business that was later purchased by HSBC in 1999. The other partners are Sandy Koifman, David Joory, (the worked at Republic Bank of New York) and Maurice Ephrati, who from 2000 to 2004 served on the private banking executive board of Banque Privée Edmond de Rothschild in Geneva. A Geneva office was opened in July 2004 and the London office, in the Mayfair district, was opened in January 2005.

In Arazi’s case, he worked from 2000 to 2004 with the Safra Family Office in Geneva, where he co-managed the financial assets of the family and the foundation with Joory. His time at a family office made him feel very comfortable with this business model, as it is a way of aligning client interests closely with those of the institution, he said.

In 2004, Arazi and his fellow partners decided to build an investment office, having gained valuable experience in the Safra operation.

“In 2004, we’d noticed that banks were less and less doing what they did originally in looking after clients and they were becoming more sellers of products and that this was becoming more of a commoditised business,” said Arazi.

The strict philosophy – put the client first – was what the partners wanted to enforce at the new Bedrock firm.

“The philosophy was to give private clients the opportunity to have someone looking after them who were not on a commission. They are very aligned with the client,” he said.

Arazi is responsible for running the London office, and the remaining partners are based in Geneva. The whole Bedrock business together holds SFr5 billion (around $5.66 billion) of client assets, of which SFr1.5 billion are investment management mandates. Bedrock has a total of 30 “core” family clients, and some smaller clients.

Capacity

There are capacity limits on the potential growth of the business, he said.  This is not a question of capacity but more a question of wanting to stay a boutique, Arazi said.

“We don’t want to grow like a bank because we want to be different from a bank; it is about the partners here being closely involved with clients. We may double, or treble client numbers but we want to stay like a boutique,” he continued.

No single family is allowed to dominate the rest of the business. “No single family is more important than another, which makes us different from single family offices,” he said.

Each client’s investments are handled by two senior people, to ensure that Bedrock’s partners and employees can cross-check ideas and recommendations.

“We check on each other all the time. We do [investment] through a committee and work together. In most of our competitors, they will have a single chief investment officer who takes the main decisions on a portfolio.

“Our approach comes from the way we used to work together in a big bank dealing with very large sums of money,” he said 

Fraud fear

“People still have 2008 in mind and they are still scared by the risk of frauds and a kind of Madoff event,” Arazi said, noting that Bedrock clients were not exposed to the convicted Ponzi fraudster. “Clients more than ever want to make sure their assets are safe,” he said. “It is good to have good performance but trust with the client is the key to a relationship,” he added.

On the family office launch, the firm said that over time, the multidisciplinary activities of a family office became an increasingly natural part of the Bedrock offering.

An executive committee comprised of existing Bedrock senior professionals has been set up to oversee the Bedrock Family Office. This consists of two of the managing partners, Koifman and Ephrati, as well as Bedrock’s chief financial officer, Jerome Zanus-Fortes and chief operating officer, Keyvan Khosrovshahi, with day-to-day management handled by the latter two executives.