The value of running single family offices is being reconsidered
by some wealthy families at a time when their wealth has been hit
hard by declining investment markets. Some may have suffered from a
lack of ability to refresh their staff and infrastructure.
William Cain reports.
Closures of single family offices have been accelerating in recent
months as wealthy families re-evaluate the costs and benefits of
managing their own financial affairs.
As investment losses mount families in that situation are
considering whether to team up with other families, creating
multi-family offices (MFOs), or transferring their wealth to
private banks. The formation of new SFOs is also likely to slow, as
wealth creation and the liquidity events that unlock those assets
“There are some families we have worked with who have had 50
percent to 60 percent exposure to hedge funds, and a lot of these
people have been badly burned,” said Rupert Phelps, director of
family office services at Bank of New York Mellon.
“Some of these people will come back to big banks and may give more
share of wallet to the private banks. One of the interesting things
we’ve seen this year is family offices actually closing, and no-one
wants to advertise that, but it’s going to happen.”
As well as their greater exposure to illiquid products,
particularly in the form of gated hedge funds, single family
offices may have been caught out by the need to refresh their
investment management business.
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David Poole, in charge of Citi’s UK private bank, said: “Some
family offices finding things more difficult recently is an
interesting point, and why is that? Is it because suddenly people
funding an office are re-evaluating cost, and realising they could
actually give it all to an existing institution? That’s possibly
one of the reasons. Perhaps they’re not in a position to refresh
their intellectual property. When family offices are set up at the
outset, they are set up with the best intentions, but dare I say
it, three years later, the market has moved on, things have
changed, and to refresh the whole system is an expensive
“Ultimately you need to refresh with new IT, streams of information
and that’s something investment houses have to do anyway otherwise
they also struggle.”
The need for consolidation among single family offices presents
opportunities for the small but increasingly prominent group of
multi-family offices: the likes of Rockefeller & Co, Genspring
Family Offices and Bessemer Trust. There are also a growing number
of businesses offering family office services.
Family office services
The most important services a family office offers to its clients
are asset allocation and the ongoing placement of investments. Some
family offices buy this capability in and others outsource,
according to Phelps.
“I think there’s also the question of what you should actually pay
for,” he said. “One of the functions of the internet has been to
commoditise a great deal of wealth management.”
“No-one is willing to pay for execution. So what should you pay
for? You should actually pay for advice. The trouble is, it’s the
hardest thing to charge for, it’s the hardest thing to have a
structure that is transparent, but that is what clients should pay
for – conflict-free advice, whether they are core affluent, all the
way to the top. Transparency means family offices, and clients more
generally, will want to see a business model that is aligned with
their interests, and could lead to wealth managers offering their
clients fewer products and services.”
Phelps added this focus on transparency, and where and how products
are sourced for family offices, was a particular issue for wealth
“This doesn’t mean family offices don’t need to have relationships
with the banks and wealth managers – of course they do,” he
said.“At one point, it’s going to literally be depositary,
clearing, cheque books and lending. Someone asked me last week why
a family would want to have a relationship with a bank apart from
custody and lending. That’s arguably a purist’s view, it might be
too extreme for some people, but there is that in the
David Poole said family offices, large banks, medium-sized
investment firms and partnerships could all coexist.
“It’s a smorgasbord of capabilities,” he said. “You go to the
counter and you choose a product or a service.”
There has been recent evidence family offices have moved more
assets to private banks during the financial crisis, particularly
in Switzerland, because of their reputation for conservatism.
Anthony Burrell, an investment manager for Mirabaud Investement
Management, a division of Swiss private bank Mirabaud, said the
bank had benefited from this.
“The quality of service and performance you provide is the ultimate
reason why money may arrive and stay at the bank from family
offices,” he added. “But it’s unlikely you’ll ever be managing all
of this type of client’s money.”
From left: Anthony Burrell, Mirabaud, David Poole, Citi, Rupert
Phelps, BNY Mellon