Investments  

Safeguarding family values

Having your own family office has become something of a fashion statement in recent years among the super rich. Of course, there have been such offices for generations but only recently have they flourished in such numbers in the UK and Europe. As with many developments, we must look to the US for its origins; they had a decade or so head start and there are many of them operating there.

Apart from the bragging rights of having a family office, there are a number of practical reasons that drive this trend, although it should be emphasised that, like their founding families, no two offices are alike.

The first driver is control. Successful entrepreneurs are used to running things their way and having their own office with its in-house staff allows them to do so with family matters. The alternative would be to farm duties out to outsiders, perhaps a combination of a bank, lawyers, tax advisers and investment managers. But rather than being on the receiving end of a stream of proposals emanating from the wealth management industry, with your own fully resourced office you can decide exactly what the family wants to achieve and look for the best ways to do so.

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Privacy is another important factor. Wealthy families often do not want outsiders to know too much about their wealth. They might well reveal part of their fortune to outsiders, but only the family office will know the whole picture. And this desire for privacy is not just about money. Many want to keep a low profile for the sake of their safety. Of course, they will still need to have confidence in the staff at the family office but there is a feeling that leaks are more likely to occur with outsiders.

Saving costs is often a big driver of families wanting to establish their own office. There are many ways banks have found to make money, either via transaction charges, structured products or commissions and fees; and their clients will often not even know about them. The family office’s role is utterly different, striving to reduce costs and obtain transparency for the family. Unlike a bank, the staff remuneration is certainly not based on increasing costs.

Another driver, and not entirely driven by cost, is the desire to cut out the middleman. One of the fallouts from the financial meltdown was to make wealthy families much more wary of “advisers’, fund managers and third parties generally.

Finally, philanthropy can be an important role for a family office. The trend is for philanthropic families to seek more control over their giving rather than rely on gifts to third-party charities. Again, this trend concerns disintermediation and a desire to exercise more control over charitable work.

But how do less wealthy families operate in this way? For some, generally with liquid assets in the tens of millions, they could consider using a private investment office or a multi-family office, which are set up to operate in the same way as single family offices but for a range of different families. But for most families this is not feasible. Nevertheless, if one thinks through the reasons behind setting up the office, there are some lessons to be learnt for all of us. Firstly, the very rich are interested in knowing what they are paying for from third-party services; all of us could and should be much more enquiring about fees payable to our advisers and managers. They also want to know if the money the advisers make is skewed towards any particular outcome, in case they perhaps make much more money from one asset class over another.