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Wealth report: The success of the family office

A staff reporter

13 February 2005

The family office is a dominant force in the US for coordinating and managing the funds and affairs of the country's über-rich. The past few years have also seen a growth in the popularity of the ultra-high net-worth family office, with many new firms sprouting up. State Street Global Advisors, rated 26th in Barron's private banking survey of the US' wealthiest firms, has $19.4bn in assets under management and an average client net worth of $1m. It created an office of the family adviser for UHNW private investors earlier this year, integrating financial planning, investment management, trust and custody services. "Family offices represent a unique level of customisation and specifically tailored solutions for a particular family situation. The reasons for establishing a family office vary. Some families would rather not bring in outside advisers, or they believe from the pricing perspective that they maintain the best ability to negotiate as part of a larger entity that will exist for generations," John Duffy, managing director of the north-east regional client practice at JP Morgan Private Bank in New York told Private Client Management. "In the US, many family offices originated from family businesses. The family office was a result of a spin off of the family's wealth following the sale of the business. In the family business, the CFO or lead attorney managed the family wealth and the corporate wealth. Once the company was sold, the head of the family entrusted the family wealth in the person who had been managing their money all along. Europe has had a similar structure in the Swiss banker. Swiss bankers provide many of the same elements of convenience and service. "The family office concept has been alive and well in Europe, but in the US it extends state and constitution lines and as Europe becomes one economy it may well move to this model. Many banks in Europe are talking about introducing family office services, though it's not an inexpensive business model to introduce," he added. US Trust Corporation, one of America's oldest investment management and trust companies recently expanded its presence in Philadelphia with the launch of an office that caters for HNW families in October, which is headed up by Frank E Rutan IV. It also opened a specialist wealth management practice in North Carolina this year to cater for the families who have a net-worth of $50m or more in the south-eastern states of the US. Swiss wealth manager Julius Baer is also toying with the idea of establishing a US-based multi-family office. The family office differs from standard private client firms because it will often step in and take care of all of the family's wealth coordination and management needs. State Street's family office, for example, offers investment management, consulting, fiduciary services, financial planning, master custody, philanthropic advisory services and low-cost-basis stock strategies. It has assigned a senior officer to each family to work in conjunction with the family's attorneys, accountants and other advisers. A family office will quite often exist specifically to serve one family but the multi-family office, which caters for several different families is also becoming popular. Rob Rowan, founder of the Family Office Exchange, an independent advisory firm to UHNW families, believes the super-rich primarily use multi-family offices because it is too complicated and expensive to do so independently. "If you're running your own family office, you have to develop strategic plans for family enterprise, hire all the right people and retain them and this is all bundled with operational issues. What some families find is that these functions would be better and cheaper if they outsourced them to someone. The other reason, and I'm speculating here, is that there is a feeling that if you pay for something, it's better than something you get for free. Banks would counter this, but it's an instinctive thing among people," Rowan told Private Client Management. Rowan also believes the UHNW family office has been such a successful phenomenon in the US during the past few years because of supply and potential revenues. The number of US wealthy families has boomed because the IPO market started to explode and many family businesses went public. The US has also had a number of very successful businesses in the last 25 years, which is making the country much wealthier in global terms. The new UHNW individuals and their families want services that are specific for them and they want help managing the impact of taxes on their wealth, and governance for the next generation. Family offices provide and grow these services, he noted. The copy-cat syndrome? One New York banking consultant who deals with UNHW clients told Private Client Management that the phenomenal growth of the UHNW family office in the last decade seems to be part of a 'programme' for the nouveau riche. "When you make a lot of money, you hire a lawyer, an accountant and an investment banker and then you hire a family office because the last guy who generated $500m had one. It's like a copy-cat syndrome. The money that was generated in the 90s was so vast that people didn't have a good place to go that was confidential, or orientated enough to meet their needs, or qualified to provide advice for them so they set something up themselves," she told Private Client Management. "The ultra-wealthy want a distinctive, tailored service. The family office became an industry in the 90s where there was a market for it — it was a status symbol and the thing to do. This gap has slowly been filled because many firms now have units that serve the ultra-high net-worth families and so the trend is turning towards multiple family offices. Families with similar business interests join together and there is a number of these in formation now in the New York area," she added. Family offices also became more prevalent in the 90s because of significant advances in IT and telecommunications. People could access information more easily through technology and outsource the information more effectively through computer systems. Remote families are now able to buy services from around the world, but talk to each other regionally. UHNW family groups are springing up all over the US which are offering these services, the consultant said. There are now more people who are qualified to run such offices and have the experience and education needed in the area of accounting. In addition, there are clearing houses such as the Institute for Private Investors and the Family Office Exchange that travel around and talk to different UHNW family groups to help them set up new groups for networking and education. People are more aware of UHNW family offices and are becoming better at setting them up, which in turn creates new offices, she concluded. Josh Slater, a portfolio manager with T Rowe Price Private Asset Management, which provides investment management and counsel services to HNWIs and firms, believes that family offices are successful because they act as asset allocaters for the families that they serve. In doing so they have the ability to collect data on many different asset managers for many different asset classes — for example, from small cap growth to large cap value, he told Private Client Management. The family offices should also have no conflict of interest and can act as an open architecture platform, meaning that since they do not provide their own investment management they should be able to provide objective advice on the investment managers they choose for their families. Family offices can also provide trust estate advice and financial planning but a drawback for small family offices in the US is that it is hard for them to cover and research all of the available investment managers. In addition, family offices often have relatively high fees and require minimum investments, Slater concluded.