A survey spotlights some surprising preferences and motivations.
Editor's Note: This is the second in a series of articles taken from the authors' new book, Family Offices: Managing the Fortunes of the Exceptionally Wealthy.
As we saw last month, the family office, because of its perks, cost efficiencies and financial leverage, is the promised land for the very wealthy-the place where they can, in theory anyway, get the same kind of attention accorded to the Gettys and Gateses of the world. Furthermore, lured by the wealth and cachet involved, more and more financial services firms and high-end advisors are moving into the competitive mix-and through their ardor, dramatically lowering the bar of entry from the traditional $100 million all the way down to $5 million.
Because of the growing number of families who want to get into or open a family office and the firms looking to work with them, there's never been a greater need to understand the way that family offices function, what they want and how they get it. Yet, because of the desire for privacy and control that goes hand-in-hand with great wealth, there's been a paucity of accurate and available information on the inner workings of the family office.
To address that issue, we conducted a study that encompassed 653 single-family, multifamily, and commercial family offices. We defined the family office as an in-house operation built specifically to address the investment, tax, wealth management and lifestyle needs of a single affluent family or a number of affluent families. The difference between a multifamily office and a commercial family office, both relatively new variations on the family office theme, is that the former is built around an "anchor" family that has at least 30% of the office's assets and the latter is not.
A financially formidable group, those 653 family offices had a combined net worth of more than $2 trillion and investable assets of $1.2 trillion. Not surprisingly, the single-family offices were the wealthiest-that's why they can afford to go it alone and have things their way. The single-family offices in our study had an average net worth of $773 million per family and average investable assets of $697 million. In the multifamily and commercial family offices, the average net worth per family was $26 million and $5.3 million, and the average investable assets were $11 million and $3.2 million, respectively.
It's only by combining their assets that these less-affluent families can wield the same financial clout of the wealthiest single-family offices, getting institutional pricing on investments and getting access to investment opportunities that they would not be able to afford on their own. That clout also helps them find the best investment managers, and we'll examine in greater detail the mechanics of portfolio management in family offices.
Portfolio Management
Every one of the 653 family offices in our study provided portfolio management services. A slightly lower percentage, 94.9%, offered individual portfolio management (Exhibit 1). All of the commercial family offices and the majority of multifamily offices, with proportionately more clients having various investment agendas, offered individual portfolio management, compared to about two-thirds of the single-family offices.
A detailed examination of the approaches taken by family offices when it comes to portfolio management shows that they go to great lengths to assess the financial and personal needs of each family. They typically develop an investment policy statement, a "letter" in family office parlance, which is the family office's investing roadmap. The statement addresses values, goals, needs and spending, and might cover strategic asset allocation and the rebalancing parameters. It may also specify sectors or companies that the family doesn't want to invest in, say weapons manufacturers.
Finding Investment Managers
In an open-architecture environment, an investment management firm can manage money in-house, use outside money managers, or do both. While some family offices provide in-house investment management, nearly nine out of ten select and monitor outside investment managers.
In fact, one of the most important jobs for the executive director of the family office is finding and screening outside investment talent. All of the family offices have a highly systematic process that looks for a well-defined and delineated investment process and takes into account such factors as buy/sell triggers and style drift. The family office also assesses the other people who were part of an investment manager's team, learning about their experience, reputation and compensation. Increasingly, we found that family offices are taking due diligence to a new and higher level by hiring personal security specialists to conduct background checks on the principals of the investment management firms they were considering. Mountains of money can invite fraud and questionable ethics, particularly in the esoteric world of alternative investments, and there are enough horror stories out there to make family offices extra cautious.
Monitoring Investment Managers
After selecting the investment manager, the way in which the manager will be supervised is worked out. One key capability of the executive director is his or her ability to coordinate the chosen investment managers so that, for example, one manager is not selling a stock that another is buying. In short, there needs to be a clear direction, a sense of transparency and complete cooperation among all of the investment managers.