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THE PRESTIGE OF SETTING UP YOUR FAMILY INVESTMENT OFFICE CAN SOON GIVE WAY TO THE UNIQUE FRUSTRATIONS AND CHALLENGES OF ACTUALLY MAKING THE CONCEPT WORK, WRITES PETER GUY
Aprivate banker sarcastically remarked that a family office is notoriously known as “the most professional of unprofessional organisationsº. 5any family offices are formed for all the wrong reasons, started for the sheer prestige of telling your peers that you’re rich enough to need a separate organisation and a staff of professionals to manage your immense wealth · or giving your relatives an office to pretend that they’re gainfully employed.
Family offices originated as a -uropean and American concept, which can either act as ideal investment platform to manage wealth outside of the family business, or to pursue philanthropy and other causes. 1f its management is especially talented, a family office can successfully manage other people’s money too. George ;oros did this through his 9uantum fund. 7thers, such as the Bill and 5elinda Gates Foundation, ambitiously try to solve global challenges.
Like any other investment enterprise, it’s important to set realistic obRectives. “-veryone wants to go to heaven, but no one wants to die,º is how one banker described the misguided expectations of some family offices. Besides unifying and consolidating your entire family’s multi-generational investment goals and decisions, it’s best run as a professional enterprise in a businesslike manner.
Generating sustainable returns and managing risk so that everyone is supported by investment income rather than eating through capital reYuires a team of experienced professionals. Possessing more money than mere mortals’ only means you have more ways to lose it all. -mploying your son or daughter who worked a few years in banking is usually a recipe for disaster.
5ost ultra-high-net-worth individuals are probably better off finding a private banker to manage their assets and setting up a trust for their kids’ futures. Traditionally, family offices were evolved to handle the multi-generational investment demands of family members. Directly making investment decisions was a means towards beating market returns and controlling strategy. 1n the past, the costs of a family office reYuired assets under management starting at about 00 million.
Today, cheap and powerful technology allows almost anyone to call themselves a family office. 5obile access to data and processing power, research and portfolio-management tools can serve any family-office sibe without the clients leaving their private bank. The allure and prestige of establishing and running a family office has become so strong that private banks now promise and market a full range of technology and services to keep their ultra-high-net-worth clients.
The potential prestige can soon give way to the uniYue frustrations of actually making the family-office concept work. The main goal is to invest and diversify away from the family’s operating business. ;o, if your wealth is generated from property development or technology, your family office should be trying to diversify into other areas, to reduce portfolio concentration and market risk.
0iring and building the right kind of investment team who can do much more than buy passive instruments, such as -TFs, and can access private deals · and all while avoiding big losses · reYuires financial and economic commitment. That’s why the family offices of property developers inevitably end up investing in properties rather than establishing new skills.
A family office will only grow if it hires outsiders · non-family members · and grants them the authority to professionalise the investment-decision process. Cultivating an intellectually fertile and disciplined investment environment is the standard that every successful investment-management organisation needs to attain. Aet, not every family, especially first-generation wealth, is comfortable with trusting the professional investment process.
;econd- and third-generation families are more accustomed to distancing themselves from the family-office investmentmanagement regime. The original family business may have been sold long ago. ;ubseYuent generations are more removed from the first generation’s values. They’re more concerned about sustaining their lifestyles and nurturing their dreams, so the family office needs managers to produce enough income.
The family office best works at managing unwieldy wealth. Conservation of wealth, capital preservation, downside protection are all issues that today’s “new moneyº must contend with as they pass on or monetise their business’s assets. They will either reYuire a trust or family office to manage the proceeds. Family members must eventually make an income from investment assets versus their operating business.
A multifamily office · a combination of co-operative family offices · is one framework employed to reduce the costs. 0owever, this set-up is only practical if the families trust each other and share similar values and strategies.
The latest type of platform combines technology and social media to enable a virtual family office. John Prince is the founder of :espada, an investment, knowledge-sharing and social-media platform specially designed for billionaire family offices. 0e observes, “Family wealth has rapidly grown and they’re seeking a secure forum to share experiences, investments and philanthropy. The ability to access opportunities and a wide array of expertise on an »on demand’ basis and achieve liYuidity across numerous activities is what billionaires seek today.º
-ach family office needs the appropriate vehicle and strategy to manage change. 1t’s only worthwhile to build a family office if it can effectively serve these multiple purposes.