To preserve and grow a family’s wealth for current and future generations, it is ncessary to find the fine balance between strategic and tactical allocation when managing financial assets, according to speakers at the recent Family Office Forum in London.
The biggest danger to a family wealth is short-termism. “Our clients should think long and deep about what assets are going to be considerably more valuable in 10 years, rather than constantly following short-term market movements,” said William Drake, co-founder of private investment office Lord North Street and speaker at the event.
Getting the long-term mixture of assets right is the number one priority, although one has to be prepared to make quite large dramatic tactical adjustments too. “But we try not to capture every wave and trade the whole time,” said Mr Drake.
Equally important is the ability to manage family members’ expectations and “to pour cold water” on what are the groundless promises of high investment returns often made in the financial services world, where a widespread product-push mentality still prevails.
“Managing expectations is absolutely crucial, when planning for investment matters,” said Richard Fitzalan Howard, chairman at Fleming Family & Partners Asset Management, which serves 48 wealthy families in addition to the Fleming family.
What is paramount is to make sure wealthy families have the right structures in place, from the tax and generational planning point of view. They should also divide the money into different pots, for the longer and short-term requirements.
“We have just been through a decade when equity markets in most parts of the world have had a pretty rough time in contrast with bond markets. The idea you can spend the income and still educate your children and fill up your bucket with champagne is not very realistic. For some clients their best investment strategy would be to go and get a job,” said Mr Howard.
Increasing regulation represents a major burden and may drive consolidation in the industry. “Most financial organisations would probably agree that the compliance department is the fastest growing part of the business,” noted Mr Howard.
Regulation is a growing cost not only to the business but ultimately to the clients. The history of regulation in the financial world has always been “closing the stable door after the horse has bolted,” he said, while authorities should try and anticipate the next problem instead. “It is slightly ironic that the same people who are loading all these new regulations on us are pretty much the same people who oversaw the crisis.”
Family offices, which often struggle to achieve profitability, will be under increasing pressure to reach a certain scale to remain independent. This is especially true if they manage a variety of asset classes in-house.
“For some of the smaller independent institutions is going to be harder and harder,” predicted Charlie Hoffman, managing director and responsible for the largest clients and family offices at HSBC Private Bank.
“We are going to see a lot of consolidation in the industry. There is not necessarily a cutting point whereby you can survive as an independent asset manager, but you have got to have a pretty phenomenal global coverage or footprint to service some of your client base.”
The level of critical mass also depends on what the founders want to take out of the business, said Lord North Street’s Mr Drake. “We did not pay ourselves for three and a half years, so that is a different way to keep the critical mass low for a while.”
However, the reason to set up family offices is often not about economics but it is a lifestyle decision, believes Jonathan Bell, CIO at Stanhope Capital. These institutions will not necessarily be very profitable, as they cannot afford the resources to do the job efficiently and effectively.
Founders themselves would be more valuably employed, and they could outsource the management of their money. But some people do like the lifestyle they can have in a small family or multi-family office, although issues will arise when these firms aim to be multi-generational.
At the same time, large organisations, who try to do everything everywhere, are generally producing mediocre results, believes Mark Kary, head of the UK ultra-high net worth business at Rothschild, the independent group of companies with operations in the UK, Guernsey and Switzerland.
The main issue with the big banks is that they are nearly all large public companies, and as such they need to focus on growing their earnings.
“But wealth management business is not an easily scalable business, unless you have a fund,” said Mr Kary.
Large organisations need to scale the business, and serve a range of clients from ultra high net worth to high net worth to mass affluent, in order to be able to make that level of money necessary to justify having a business in the first place. That generally brings a level of mediocrity.
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