Service selection

  • Author : Richard Joynt
  • Author : Ian Slack
  • Date : April 2013
ABOUT THE AUTHORS: Richard Joynt and Ian Slack have managed the Crossland Private Office, a full-service family office, since 2002. They have recently joined Bedell Trust, bringing their clients and staff with them, and are now Directors of Bedell family office Services

Having run a family office for a single family for the past decade, we are regularly asked certain questions by our friends and business contacts. The most common are:

  • What is a family office?
  • Why does the family need their own dedicated people?

The answer to the first question is that it means all manner of things to all manner of people. The definition is wide-ranging and needs further clarification to understand their scope of services.

The other question is important because it deals with the central question with which any specific wealthy family must grapple: when is it appropriate to have a family office and when is it an unnecessary expense?

Types of family offices
Single or multi?

The first distinction to make is whether the organisation is a single-family office (SFO) or a multi-family office (MFO). These distinctions are usually glossed over pretty swiftly, as the difference appears to be obvious – it’s simply a question of how many families you are servicing, right?

Underneath this obvious simplicity lie core differences, some of which are explored in the table below.

Scope of services

The term family office can be, and is, used to describe a disparate number of organisations. A comparable example can be seen in the use of the word ‘bank’: there are many types of bank with different activities and aims – commercial banks, community banks, credit unions, private banks, savings banks, building societies, etc. Similarly, a family office might provide a very wide, or very narrow, scope of services.

Some European MFOs deal only with the more complex investment needs of their client families, such as managing hedge fund portfolios, property funds or listed bond funds. These organisations are almost always managed by banking and investment professionals.

Some family offices may deal with the basic practical needs of the family, such as organising travel arrangements, managing communication between family members, providing secretarial services and overseeing the smooth running of personal assets such as homes or vehicles. In a highly active family, this can be a crucial role that the family themselves are unwilling to undertake. In this sense, the family office becomes the face of the family to many outsiders. In these circumstances it is not unusual to have those with PA, secretarial or concierge skills managing the family office.

The key to providing any analysis of what a family office does is to understand the needs of the family in question. If the family doesn’t want or need a specific service, it won’t be catered for.

Single-family office Multi-family office
Accountability The professionals are employed directly by the family, creating a mutual reliance between family and employees – the family count on the staff to be effective and trustworthy, and the staff are reliant on the family for their livelihood. The professionals are employed by an organisation of which the family are one client group. The employees have the needs of multiple client families to service. Therefore, appropriate safeguards must be in place to ensure accountability.
Organisational design As the SFO is built around the needs of one family, it is a bespoke organisation, but this brings burdens: the family has to deal with personnel problems, and key-man issues regarding senior professionals are a risk. The family also has to be involved in matters such as premises and IT systems. The MFO takes away the burden of the mundane matters and provides a larger staff base to ensure continuity of service.
Cost The cost of the premises, staff, IT systems and compliance with regulations must all be borne by one family. They are also fixed, meaning that it is difficult to flex costs in line with income or with activity levels. Core costs can be spread across more than one client family, giving greater efficiencies, leading to a lower cost per family. The less active families pay less than more active families, yet get access to the same professionals.
The future of the organisation The SFO’s future is uncertain – it may be disbanded at any time if the family no longer needs it. This may cause recruitment difficulties as staff may not feel secure. The MFO exists as a separate organisation and continues as client families come and go. Skills can be grown and enhanced over the long term.
When is it appropriate to have a family office?

There are two factors at work here: value for money, which must be at the heart of any good business decision, and convenience, which is sometimes a luxury that some families are happy to afford.

Value for money

Looking at the former, we are often asked what the minimum assets under management should be to justify the expense of a family office. This is a valid question in the world of investment, as fund managers usually relate their percentage investment fees activities to funds invested or returns created. However, for a family office this may be less appropriate. Some examples are provided below to show the complexity in this area.

Consider Family A, a middle-aged couple with one young child who have generated their wealth through the sale of a business they created. They have GBP200 million in liquid assets and have little experience in asset allocation or complex investment products. They have fairly simple day-to-day needs and are concerned mostly for the preservation of their wealth for the next generation. They have some experience in investing in overseas properties, to be held for the long term, and would like to continue that (with up to 10 per cent of their assets) as their ongoing business activity now that they have sold their business.

While this couple have enough wealth to justify an SFO, their activities overall do not seem to warrant it. They are content with being fairly passive with their investments, probably to be managed by a third-party investment manager, have little need for concierge services, and their active investment activities are not complex and do not require substantial expert support, other than legal advice.

The couple may wish to approach an MFO that specialises in investment management activities only, or a larger institution such as an investment bank. If tax-planning activities so dictate, an offshore services provider may be involved as well.

Now consider Family B, a married couple with two grown children. The asset base is also GBP200 million, and is inherited from the previous generation. The patriarch of the family has for many years taken an active interest in managing specialist assets such as precious gems and artwork, and is continually buying and selling in these asset classes. The family has a selection of homes and regularly flies around the world in their business jet. They also have two motor yachts. They have three offshore trust structures, and run an instruction-only listed equities portfolio. They also have a significant stake in a private business, which they actively manage as board members. They are high-profile charity benefactors, although they are private about their affairs and do not like too many outsiders to see their overall asset position.

In this instance a family office seems highly attractive, as it provides dedicated support, all in one place, for all the complex and wide-ranging activities described above. As they are also very private and do not like to share their information at all, their wealth level justifies an SFO. However, calculating a fee level is not as simple as applying a percentage to the assets under management, as concierge services, philanthropic support services and luxury asset trading are being undertaken and need to be paid for accordingly. In this instance, the cost of the SFO will be driven by the need to recruit the appropriate professionals at market rates. The annual fee base created by this is not comparable with an investment bank as they cannot provide the full suite of services required.

Convenience

Consider Family C, a high-profile celebrity couple who are continually increasing their wealth through their media-related activities and are currently worth GBP50 million. They are time-poor and for privacy and family considerations would like to employ agents who can deal with constant approaches from external sources, lifestyle management, oversight of financial affairs, travel arrangements, liaison with professional advisors, new media-related transactions and charitable activities. In this situation, a family office, whether single or multi, is a convenient response to a specialist set of circumstances. The cost of employing people capable of delivering solutions to these issues may mean that the family is paying 2 per cent of their wealth to support such an office, but it may be seen as essential for the lifestyle benefits that it creates.

Conclusion

Those who seek to justify whether a family office is cost-effective should ask certain questions first.

Is the primary need discretionary investment-management services? If so, there is a valid comparison between SFOs, MFOs and larger institutions such as investment banks. Where a family worth GBP500 million wishes to invest 80 per cent of its capital in publicly available capital instruments, it may find it more cost-effective to do so through an SFO, as the annual asset manager fees are likely to be lowest in such an environment.

If the needs are wide-ranging and complex, then a percentage fee of assets under management is less relevant and the cost of the family office will be driven by the professionals required by the nature of the specialist activities.

A family office that provides a narrow range of activities can be easily compared to competitors and its costs assessed in a value-for-money exercise. If it is charging 1 per cent to manage hedge fund portfolios, but an investment bank is charging 0.5 per cent, what is it doing to justify the extra cost?

A family office that deals effectively with a complex range of issues, acting as the family’s agent in the world, should be recompensed not only through simple methods (such as asset management fees), but according to the skills required to deliver client solutions. As this is not something easily built or commoditised, it is unlikely to be easily compared to alternatives.

Ultimately, it can only be for the family in question to decide whether they want the expense of maintaining their own family office. Cost will undoubtedly play a part in this decision, but so will convenience and need.


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