Do You Need the Services of a Family Office?
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Do You Need the Services of a Family Office?

Written by

Alon Tal
November 23, 2016
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Do You Need the Services of a Family Office?

Alon Tal, Managing Partner

Alpha-TAO, Multi Family Office

www.alpha-tao.com

Managing family wealth successfully is a complex task. The mission of a family wealth manager is to execute with professionalism and care the assignment of protecting and growing a family’s assets for future generations.

Since the 19th century, family offices were professional organizations whose purpose was to manage the financial and personal affairs of families of wealth. Wealthy families such as Rothschild and Rockefellers established their own family offices having multiple tasks involving apart from investment management, also legal and administrative issues. Other families, such as Vanderbilt family, that is considered the one of the richest families in all times, with fortune estimated in 170 billion US$ (in currant US$), did not manage their fortune wisely, did not plan wealth transfer between generations of the family and lost their legendary wealth in one generation after it was generated.

types of family offices

There are two main type of family office: single-family offices (SFOs) that manage the affairs of one family only and multi-family offices (MFOs) who provide services to several families. SFO may suit the needs of a family have fortune of no less than a few hundreds of millions US$ and with multiple branches and generations. MFO, may suit most high net worth individuals since it enables its clients to enjoy the advantages of professional wealth management firm having sizable assets under management in access to financial products and offerings as well as sharing resources and fixed costs.

 

 

Who needs a family office?

Everyone certainly needs the services family office provides, but not everyone can afford them. The more assets under management the complex situation is and naturally the role of a family office becomes more critical and essential. If your investable assets exceed 5 million US$ you should consider using the services of a family office.

selection of the most suitable family office for you

A family office can serve many functions concerning business related issues such as investment management and risk management, personal issues such as succession planning, social responsibility initiatives and family governance and administrative tasks such as bookkeeping and tax reporting.

The choice of a family office should be taken in light of the needs, the objectives and the circumstances of each family, knowing that there is no "best" family office but only "most suitable" family office.

core services of a family office

Modern family offices act mainly as wealth management firms and as a coordinator for other professional service providers. This method allows the family to have holistic attitude to wealth management.

The main mission of a family office, different than regular portfolio manager, is setting and managing holistic investment policy, based on the family core values and goals that are defined together with the family. Each family has various needs such as producing of fix income to be distributed among family members, wealth preservation and growth of fortune for future generations, contribution to family legacy through philanthropy and various other needs that leads to different consideration for setting asset allocation for each family.  The MFO acts as internal chief investment officer (CIO) while other professional services are outsources to the best service providers in their area. The main focus of the family office in this case would be on:

  1. Planning: the family office collects from the client data and documents necessary to present report of resources and usage of funds, as basis for development of a comprehensive analysis of the client’s current estate as well as personal inspirations and financial plans. Based on this information the family office develops long term plan tailor made for the specific client's needs. Use of funds is based on family core values. For example, some families allow access to the family's wealth only to family members who meet certain criteria that are the family's expected norm. This method allows keeping the family's value's over time.

In regards with portfolio management the plan will refer to:

  • Asset allocation;
  • Risk management and asset protection;
  • Asset selection

Various empiric researches show that essential portion of the performance of investment portfolio is derived from asset allocation, more than from selection of specific asset composing the portfolio. Planning asset allocation depends on the investment goals and on the type of investor.

The famous investment manager, James Garland, characterized metaphorically two types of investors as "chicken farmers" versus "egg farmers". Chicken farmers investors have accumulated wealth that if consumed and spent shall be sufficient for their needs. They are sensitive to asset prices and to market volatility because they sell these assets to finance their goals. Equity markets are considered as risky due to the possibility of change in asset valuation. For example, the S&P stock index suffered decrease in its valuation in 17 of the last 60 years. Differently, "eggs farmers" investors have accumulated sufficient fortune that enables to fulfil their goals based on income produced from their assets with no need to sell the assets. In their view, equity markets are heaven. They are focused on income generation fix income from dividend distribution and interest and they are not sensitive to shares price volatility. For example, size of dividend distribution from companies included in the S&P index decreased (on year to year comparison) only in 6 out of the last 60 years. Categorization of the investor in one of the two groups effects essentially the planning of asset allocation.

Risk management is based on consideration of many factors of the investment portfolio (such as type of investments and, diversification of the investment portfolio, relationship between the family business and the separate managed investment portfolio), administrative aspects (usage of various banks) and personal aspects such as status of citizen / resident in various countries. Clear example is holding Israeli citizenship which is considered as an insurance policy to Jews worldwide versus not being defined as Israeli resident that enables tax planning and avoiding tax payments in Israel.

 

Additional recommendations of the family office, beyond portfolio management, may refer to other aspects of long term life planning such as:

  • Insurance needs;
  • Estate succession;
  • Minimization of income and transfer taxes;
  • Retirement planning tactics;
  • Business succession plans;
  • Philanthropy;

 

  1. Implementation of recommendations and execution: the plan approved by the client shall be used as guideline for the family office while making decisions to invest the assets comprising the portfolio with a view to achieving the investment objectives. Execution may be done in cooperation with other service providers such as investment bankers, fund managers and philanthropic foundations. Solid and long lasting relationship and experience in working with various financial service providers, including global prime banks are highly important to efficient service provided by a family office. Such relationship allows its clients access to unique financial offerings. Along with the financial management of the investment portfolio there are many legal aspects that require planning and affect the efficiency of the implementation of the policy. Asset allocation may have legal expression by formation of different legal entities and managed accounts according to different investment instruments or based on separation between family members. Such legal structure is derived from the characteristics of the family, its core values and goals defined by it.
  2. Consolidated Reporting: one of the most important tasks of a family office is preparation of a consolidated report that shall include all assets under management, in order to present full and detailed view of the portfolio's status and performance. Such ongoing reporting system enables the family office to efficiently make strategic decisions on asset allocation and risk management as well as ongoing necessary adjustments. The aim of the consolidated reporting is to help the client have better and holistic view as well as ongoing monitoring of the implementation of investment policy and its results.
The writer, Alon Tal, is a managing partner in

Alpha-TAO Multi Family Office.

alon@alpha-tao.com