Business Maverick

BUSINESS REFLECTION

After the Bell: What is a family office and why is it so unfamiliar?

After the Bell: What is a family office and why is it so unfamiliar?
The headquarters of the Swiss banks Credit Suisse (right) and UBS (left), at Paradeplatz in Zurich, Switzerland. 19 March 2023. (Photo: EPA-EFE/Michael Buholzer)

Once you hit your second or third billion, you initiate something called a family office. Family offices are essentially stock brokers who look after the money of a single client.

If there is one thing the plot of the TV series Succession demonstrated, it’s that rich families can be brutal. All of us want to be rich (I guess some people don’t want to be — I just never seem to meet them), but maybe we want to be rich because we have no idea what comes with being rich.

We can imagine some of the good stuff: life on the family yacht or the private plane, the incessant bowing and scraping by people in grand hotels in grand countries, the polo tournaments — and never having to balance what we used to call our cheque books.

But can we imagine the bad stuff? Life on the family yacht or private plane, our own incessant bowing and scraping before the patriarch, and those insufferable polo tournaments.

I have a friend who was asked to write a biography about a very rich person and he describes it as the most loathsome period of his life. It wasn’t because of the subject of the book, necessarily, but because of the constant bickering and manoeuvring of the family members.

Eventually, he walked away from the project even though it was almost absurdly lucrative. It turned out that even the book itself was the idea of one of the kids who was trying to further ingratiate himself in that incessant bowing and scraping way with the patriarch.

For a glimpse into the travails of a rich family, you don’t have to look far — just consider Britain’s richest family, the Windsors. Until recently, the relationship with the matriarch (in this case) was absolutely crucial not only because she was head of the household, but also because she was the controller of the money. And somehow that often results in some weird stuff going down, like your grandson moving to Hollywood with an actor.

If you are that patriarch, think about your position. It’s almost impossible to trust anyone absolutely because whoever they are, it’s almost impossible that there isn’t some aspect of your relationship, however small, which is about the money. And often, it’s all and only about the money.

Being rich is better than being poor. But being rich does have challenges, as trivial as they might seem to people with very little money.

And about the money, how exactly do you deal with that?

Money management 

After a long history of bitter disappointment handing it over to your second cousin who went to Yale, the very rich have now adopted, by and large, a new mantra: professionalism.

Just as there is a burgeoning market for stupidly big yachts, there is now also a burgeoning market in bespoke money management. This is nothing as trivial as having a financial advisor. Once you hit your second or third billion, you initiate something called a family office. Family offices are essentially stock brokers who look after the money of a single client.

What do they look like? How are they different from a small, stock-broking operation? What do they invest in? All this stuff is fascinating and becoming more visible to the general public as it grows in popularity among the ridiculously rich.

Naturally, the Swiss have a bit of a lock on this market and the largest Swiss bank, UBS, on Wednesday brought out its most extensive report on family offices. UBS is huge but it does service family offices, so it has a big incentive to understand them.

The report reveals many aspects of family offices, but sadly without reflecting on the family squabbles that go on behind the scenes, although presumably some of UBS’ employees must have some jaw-dropping stories to tell.

How rich do you have to be to warrant a family office? There are, of course, no rules here, but UBS surveyed 320 of its clients across more than 30 countries and the average assets under management come to around $2-billion in each office.

What do family offices invest in? Rather disappointingly, much of the same stuff as the rest of us: equities, bonds and property.

Read more in Daily Maverick: Family offices: More than just keeping it among kin and paying it forward

But there is a twist: family offices have their own 60/40 rule; that is, they invest around 60% of their wealth in conventional investment vehicles, like equities, and the rest goes into alternative investments. But even in the “alternative pot”, there is a conventionality about it — it’s mostly focused on private equity and property.

That makes sense. Most family offices are running the money of people who are business owners, so there is a bias toward entrepreneurial flair, which means some creativity in investment spending.

The other good thing is that there is also a bias toward longer-term investment and a sensible approach to diversification. This is about wealth preservation rather than wealth creation, first and foremost.

That’s particularly visible in the breakdown of investment types. There are a lot fewer investments in things like gold, art and private debt than you might expect. Total anticipated investment in gold, for example, is less than 1% of the total portfolio — the same with art. Even investment in hedge funds is pretty light, at about 5% of the total.

Also interesting is their location focus.

It’s amazing how little family offices invest in developing markets and how much they invest in the US.

Africa gets zero from family offices and Eastern Europe and the Middle East get less than 2%, apart from home investors.

Even Chinese family offices expect to invest about half their portfolios in the US and only 20% at home.

US investors invest about 82% of their wealth at home. The report quotes the president of a US family office saying, “If the US is doing fine, why do we need to invest somewhere else? At the end of the day, this is an absolute return game, not a relative return game.”

Interestingly, there is something of a generational split, UBS officers say, with the younger generation very concerned about environmental issues.

Often, a member of the family will be part of the investment group, which is usually about 10 people, so family members other than the main investor can be influential.

The big concerns over the longer term are interesting: big worries in most parts of the world about geopolitical issues and also levels of government debt.

What’s not in the report is the complicated issue of working with personalities.

A friend of mine who has run a family office says one of the problems in many, but not all, family offices is that the patriarch is often very successful in a particular line of business. That means they feel they could or should be successful in all kinds of investments involving totally different businesses. Inevitably, they are Type A personalities, and, shall we say, pretty forthcoming about their views, however right or wrong they may be. It’s tricky.

Still, it’s interesting to see how the very rich handle their cash — the short answer is: with extreme care. A lesson for the rest of us. DM

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