A Family Office for the Superrich, and Lessons for the Less Wealthy

A Family Office for the Superrich, and Lessons for the Less Wealthy

FEB. 14, 2014

Wealth Matters

By PAUL SULLIVAN

STEVEN A. COHEN, the billionaire hedge fund manager, has been in the news for a string of insider trading convictions of current or former portfolio managers at his SAC Capital Advisors. But less attention has been given to his decision to convert his hedge fund into a family office to free himself fromSecurities and Exchange Commission regulations.

To do so, he has to return all the money that does not belong to him or to key employees — although many of those outside investors have already asked for it back. He’ll be left with about $9 billion and 800 employees to pay without the revenue from hefty management fees from outside investors.

While this may sound like the realm of billionaires — and it is, for sure — the purpose of family offices is broader than just avoiding oversight. Real ones do much more than just manage money, as a hedge fund does: They have to take into account family relationships, taxes and, of course, employees who can be privy to personal information. How family offices work well — and sometimes not so well  is also instructive for people whose wealth wouldn’t even cover the annual expenses of a family office.

Family offices date to the 19th century in the United States — with John D. Rockefeller’s being the most famous — but few family office advisers can agree on a precise definition of the services a family office should provide or how much money a person even needs to start one. (The range is $100 million to closer to $1 billion for it to be worth the associated costs.)

They can operate as a premium concierge service — booking vacations to far-flung locales and scheduling dog grooming appointments — or be purely financial in focus, with rows of analysts poring over a family’s every possible investment option.

They are just as likely to be used to find outside managers for the family’s wealth, pay bills and taxes and coordinate meetings among generations of family members.

Jon Carroll, president and chief executive of Family Office Metrics, a business consultant to family offices, said the best ones act like multidisciplinary professional services firms with experts in investments, auditing, legal servicestax preparation and compliance all under one roof, with the family as the only point of concern.

Not all of them are so complex. Some family offices have only an accountant and an assistant to keep track of statements and help the family.

Either way, they can be costly. Charlie Grace, managing director at the Family Office Exchange, said the annual costs could run from $400,000 for a couple of employees for a $100 million family office — which would be on top ofinvestment management fees — up to $8 million to $12 million per year for 30 or 40 employees at a multibillion-dollar office.

“That’s a significant operation to be running,” Mr. Grace said. “Compared to that single accountant, you have to think about real managers, compliance officers, a technology group, something more sophisticated than Excel to do some of the reporting.”

Mr. Cohen’s decision to set up his own family office makes sense given his wealth, and it has precedent. In 2011, George Soros converted his hedge fund to a family office, and other investment managers have done the same to take advantage of a provision in the Dodd-Frank Wall Street reform bill, said David S. Guin, a partner at Withers Bergman.

The provision allows true family offices to protect their privacy by being exempt from having to file certain financial documents with the S.E.C. But it also narrows the definition to prevent people from taking advantage of the system, like hedge funds that become family offices in name only.

While privacy is certainly important for any family, particularly in a time of online breaches, there are other ways that family offices are better than having various advisers performing financial tasks independently.

A good family office will think beyond the present, both in terms of investments and the family itself. “The best family offices are really getting to know that family and thinking broadly and holistically on a multigenerational level,” Mr. Grace said. “Their ultimate test is the transition from one generation to the next.”

Mr. Carroll said that when family offices work well they give a family three things: control, security and quality. Control comes from knowing that the people in the office are working only on the family’s behalf — and not for another firm that is paying them to offer advice. Security means that only the family members know what they have and what they’re doing. And quality refers to having people who can devote their days to finding the best there is, from investments to legal counsel to vacations.

But family offices have their limits.

While family offices need to be run like companies, they are still a collection of individuals related by blood who may not always get along. To manage that, there needs to be a system of governance and a plan for how the family office will function for future generations.

“As the family gets larger, family office members have less wealth or there is an imbalance of wealth, since someone was more entrepreneurial or someone had five children and someone else had one,” said Mindy Rosenthal, president of the Institute for Private Investors, a membership organization of wealthy investors. “You’re going to find different levels of wealth in a family and it gets harder to hold everything together.”

Another problem comes when the person setting up the family office thinks he still needs a large staff, as he had at the company that created his wealth.

“Most family offices are way overstaffed unless they have functional activities, like investing or managing real estate,” said Paul Comstock, chairman and chief executive of Paul Comstock Partners, which acts as a chief investment officer to smaller family offices. “They should really treat it as an investment partnership and should look at the services you would need in a partnership.”

But finding that number is more art than science. Having too few employees with too much authority can also be problematic. “The family needs to understand how to govern and supervise management,” Mr. Comstock said.

Few people have the hundreds of millions of dollars needed to justify having a family office, but there are still lessons to be learned from those who can. For one, a family office at its core is looking out for the family first. “A family office is a concrete symbol that there is no one responsible for your affairs but you,” Mr. Carroll said.

Its emphasis on security is also important, particularly in the sense that many family offices work hard to conceal their true wealth to protect family members — and don’t post their vacation plans on Facebook.

And, of course, just thinking in terms of the whole family shifts a person’s frame of reference. Tavan L. R. Pechet, president of Pechet Advisors, who previously ran a family office, said the best thing a regular family could learn from a well-run family office was how it managed everything.

“In virtually every household, even if it’s just choosing which bank for your savings account, you are still in some ways a family office,” Mr. Pechet said. “You need to select the right team, manage them effectively and get them to work together. The important challenges and benefits in life come back to families: how they work together, how they can collaborate and cooperate, how they can educate their children and give back to their communities together.”

You don’t need to be a billionaire to see the value in thinking that way.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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