Family offices are poised for
a significant period of evolution as they start to address risk
management issues thrown up by the financial crisis. Charles Davis reports on this and an
‘operating company effect’ which has an important bearing on
factors like assets under management and staff levels.
Go deeper with GlobalData
The family office business enters
2010 amid unprecedented turmoil, according to the latest US
Trust/Campden Research North American Family Office Survey.
Ultra high net worth families are “taking a
long, hard look at the performance of their family offices as
events of the last year have laid bare weaknesses and strengths”,
the report said. Many will concentrate on core wealth management
functions while considering offering services to outside families,
consolidating with other family offices or closing, the report
said, painting a picture of a once-tranquil industry turned
topsy-turvy.
The survey provides a comprehensive look at
the state of the family office, the most pressing issues they face
and the road ahead now market volatility appears to be
subsiding.
With 81 percent of their investment strategies
impacted by the recent credit crisis and market correction, the
study looks at how family offices are focusing resources to
concentrate on core mandates, addressing risk and planning for the
future.
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By GlobalDataThe research was conducted between June and
September 2009 by interviews and an online survey with family
office executives and family principals from 40 single-family
offices and 10 evolving multi family offices in North America.
Changing spectrum of
models
The survey captures a changing spectrum of
family office models, as family offices transition from closed
operations serving only the founding family to operations opening
specific investment or advisory services to non-family clients,
consolidating into private multi family offices, and becoming
full-fledged commercial operations.
“Like most financial services organisations,
family offices were not immune to recent market upheavals,” said
Belinda Sneddon, group executive at the US Trust Family Office,
part of US Trust, Bank of America Private Wealth Management.
“Scandals and widespread investment losses
have left family offices poised for a period of significant
evolution. The family office model is turning back to basics,
enhancing risk assessment and focusing on its strengths which lie
primarily in wealth management services.”
The survey found family offices are recruiting
in-house research analysts and expanding their interest in
proprietary research. Twenty-three percent of family offices
acknowledge financial analyst skill shortages, and 22 percent plan
to recruit them over the next three years.
Family offices also are rethinking long-held
models with an emphasis on managing liquidity and becoming more
opportunistic, even as they return to core mandates of consolidated
control of wealth management.
Nearly all respondents offer financial
advisory services (92 percent offer trust and estate planning,
financial planning and tax planning), with a minority (49 percent)
offering life management or concierge services.
Not surprisingly, family offices are placing
renewed emphasis on their credibility as trusted agents, and are
paying more attention than ever before to features such as the
reputations and recommendations of financial services
providers.
On a scale of one to five, with one as “most
important”, “confidentiality” (1.58) and “reputation” (2.17) ranked
among the top criteria for selecting a financial service
provider.
Long resistant to broader competitive forces,
family offices increasingly are considering opening to non-founding
family clients (28 percent). Their main motivations are increasing
their access to investment opportunities by having greater assets
under management (54 percent), and retaining their top investment
professionals by providing more opportunities to earn and run more
and larger investments (31 percent).
Developing in-house
products
They are focusing on opening an
internal hedge fund or private equity fund (23 percent) or, to a
lesser extent, a private equity or hedge fund of funds or
diversified investment services (15 percent).
Though none of the respondents expressed
specific plans to close, 31 percent said it was a possibility, even
if remote.
“The tumultuous economic and market climate of
the last 13 months has exposed the weaknesses and strengths of the
family office model, and as a result, we are going to see family
offices increasingly concentrating on core competencies and looking
to others to provide non-core services,” said Mindy Rosenthal,
managing director of Campden’s North American Business and author
of the research.
“Now more than ever, family offices will be
considering significant organisational changes ranging from
consolidation with other family offices, opening services to
non-family clients or possible closure.”
‘Operating company
effect’
The study also highlights what it called the
‘operating company effect’, which highlights the differences in
approach between families that have operating companies and those
that do not.
It found that operating company offices often
represent families of greater net worth and keep higher assets
under management than non-operating company family offices.
Thirty-seven percent of operating company family offices cater to a
founding family with a net worth of $1 billion or more, as compared
to 14 percent of non-operating company family offices.
While family offices with operating companies
tend to be younger and serve fewer generations of the founding
family, they have larger full-time staffs than their non-operating
company counterparts.
Family offices with operating companies
outsource more investment advisory services (accounting/reporting,
asset allocation, risk and investment management), and keep more
financial advisory services (trust, state, tax and financial
planning) in-house, with 47 percent relying solely on outsourced
providers to perform manager selection and oversight, as compared
to eight percent of non-operating company family offices.
Additionally, 30 percent of family offices
with operating companies solely outsource asset allocation, as
compared to 14 percent of non-operating company family offices.
