I have also pointed to three key drivers behind the desire to establish a family office: control, privacy and cost saving.
In this article I draw together some of the topics that have been covered in previous articles and see what steps investors can take to improve the management of their portfolios.
Of course it is not feasible for everyone to establish their own family office, or even to become a client of a multi-family office (which probably requires a portfolio of £10m).
However, I believe that everyone with an investment portfolio can try a couple of ways to build a ‘family office mentality’ that will guide you through the jungle of investing and provide greater peace of mind and better investment performance.
The first, and probably the most fundamental of these, is to try to emulate the very rich by taking a long-term view.
Investing for the long term is a great deal easier than for the short or medium term – over 20 years or so the asset classes tend to revert to their long-term trends and so become much more predictable.
Equities come out as the best performer over long periods, and if one can ignore their roller--coaster volatility, or better still use this as an opportunity, they are the best choice for an investor looking to keep pace with or beat inflation.
Taking this long-term view makes it easier to buy on those rare occasions when assets are demonstrably cheap and sell in bubbles. The main thing is to avoid doing exactly the opposite.
Finally, taking the long-term approach enables one to harness the extraordinary power of compound income; particularly if one can find a way to roll up the income in some kind of tax-free way such as in an Isa or life-insurance wrapper. Over 20 years most of the growth in a portfolio will have come from reinvested income.
In normal times a portfolio would include a percentage of government and corporate bonds, which would provide a decent income and dampen the volatility of the portfolio. The current position, five years after the greatest financial meltdown of modern times, is much more difficult.
To try to generate growth, Western governments have artificially reduced interest rates and so driven down the yield on these bonds, making them produce less income than equities. This has increased their vulnerability to increases in inflation and also interest rates as they rise to more conventional levels over the next few years.
In this scenario, one of the main building blocks of portfolio construction has been lost to us. In response to this state of affairs, many wealthy families have concentrated on equities, including direct investments in private companies, and property.
The second message involves potential conflicts of interest when discussing fees with any type of adviser, be they stockbrokers, asset managers, financial advisers, private banks or anyone else.
An investor with a family-office mentality will ask a few simple questions to establish whether the firm is really going to be financially motivated to maximise their portfolio, or just make money for the firm.
To conclude, by taking a long-term view and making sure you as an adviser are properly aligned, you will have taken the two most important steps towards managing your clients’ money in a ‘family-office way’.
In these ways, and others I have covered, a client can move from being just another retail investor to feeling more in control of their assets and getting better performance.
William Drake is co-founder and chief executive of Lord North Street
