Profiles of family offices
Kedge Capital
The LongChamp Group
Lord North Street
Rockefeller & Co.
Sand Aire
AN INCREASING NUMBER of lawyers, accountants, private banks and ultra-wealthy families themselves are trying to break into the family office sector, describing themselves as multi-family offices, or multi-client family offices, private investment offices or even virtual family offices.
There are now an estimated 3,500 family offices in the US and about 200 in Europe. But the influx of players, each with its own terminology, is causing confusion for families. So much so that an increasing number have turned to consultants for help.
And while each hybrid of family office has its merits, can they all succeed when there are only 70,000 potential clients?
Employing an entourage might sound like an extravagance, but for the ultra-rich family the family office could well be a necessity.
Families that have acquired vast sums through the sale of a family business do not necessarily come from a financial background. A group of investment advisers to ensure that their money is looked after and passed on in good order to succeeding generations can be a good addition to the household staff. Families that have inherited money will similarly need advice on how to ensure that the needs of each family member are met. For families in their sixth generation of wealth with over 200 members, often scattered across the globe, this can be extremely complex.
And perhaps most important for wealthy families, the establishment of a dedicated team of advisers ensures that the family has complete control over any decisions, and that family affairs remain confidential.
Family offices can take various forms, ranging from those employing a single secretary to organize travel and bill payments for the family, to a team of investment professionals, accountants, tax lawyers, and suppliers of concierge services.
They do not come cheap – a rough guide is about 1% of assets under management annually, and the average asset threshold recommended is $400 million.
"In the late 1990s, as significant pools of wealth were being created, family offices became en vogue," says a senior executive at a private bank. "But now families are realizing the costs involved. Often our discussions with families lead to the conclusion that they don't need a family office or simply cannot afford it."
Property roots
Family offices in Europe were embedded in the estate offices of French, British, and German nobility in the nineteenth century and earlier. "Property and land have played a far greater role in wealth preservation in the UK than the US, and many families built up landed estates rather than establish a dedicated investment office," says Charles Cade, head of research at Close WINS.
Property development company Grosvenor Estates, for example, also looks after the affairs of the Duke of Westminster, and traces its roots to 1677 when Sir Thomas Grosvenor obtained a piece of land in west London by marriage. The emphasis on property explains why just 200 family offices are estimated to be in Europe.
It is rather in the US that the family office earned its label, with John D Rockefeller Sr becoming the first of the great industrialists to employ staff to advise on his newfound wealth.
In the mid-20th century, family offices lost their appeal as wealth diminished but the new money liberated through company sales since the 1980s has caused a revival.
The multi-family office evolved from families that opened the doors of their offices to other families in order to cut costs, or those that were interested in a new business venture.
One such family was the Phipps. The Phipps family office, Bessemer Trust, had been established in 1907 to look after the $50 million Henry Phipps, partner of Andrew Carnegie, had made from the sale of Carnegie Steel to JP Morgan. But taxes, philanthropy and the expansion of the family had meant that the wealth was being spread more thinly. By the early 1970s the cost of the family office was becoming a drain.
"There was about $1 billion split between about 100 descendants. The family office had 200 staff and many of the jobs were being duplicated. For example, there were four people in estate planning alone, and no-one had died in the family for 10 years. The Phipps family was probably paying about 2% of its assets under management for that office and it shouldn't have been paying more than 1%," says Robert Elliott, senior managing director of client account management and business development at Bessemer Trust.
The Phipps had various options. "They considered selling the office, but they did not like the idea of giving up control, or changing the type of business that it had become," says Elliott. "They also considered outsourcing some of the services such as estate planning but had been used to comprehensive wealth management and weren't keen to hand parts over to different people."
Instead, in 1975, the Phippses decided to employ new management and open up to other wealthy individuals and families. Bessemer Trust now has $41 billion of assets under management. Today, the Phipps' wealth, while significant, accounts for just $4.5 billion of the total assets.
For families smaller than the Phippses, opening up to other families can be a way of achieving critical mass and therefore buying power. The Scotts, owners of medium-size insurer Provincial Insurance, set up the family office Sand Aire two years after selling the business in 1994, with the intention of opening it up to increase assets under management, thereby achieving better returns, and the opportunity to hire and retain more experienced staff (see box).
The multi-family office is an attractive concept for families that do not have enough money to form a single family office, or who prefer the comfort of investing alongside one or more other wealthy families. But they are not to everyone's liking. "Family offices are initially established to cater to the specific needs of one family, so new families that become clients should ask whether the services and products are suitable for their own family," says Stephen Martiros of family office forum CCC Alliance. "And families need to be sure that cost savings are being passed through."