With capital in the billions, it can be difficult for wealthy individuals to find asset managers capable of protecting their vast fortunes. So who better to rely on than a member of your own family? Jules Gray investigates the heritage of family offices and how they keep money within a dynasty
Accumulating vast wealth obviously takes time and hard work. However, maintaining that wealth for future generations could be even more difficult. The saying ‘from clogs to clogs in three generations’ is one that represents the difficult families sometimes have in sustaining the wealth that has been accumulated by previous generations.
However, most successful wealthy dynasties have realised that some sort of planning and management has been needed to avoid the trap of children and grandchildren frittering away the family fortune. Many have opted to form organisations that advise and administer their wealth, long after the initial breadwinner has passed on. Well-known families that have gone down this route include such names as the Rockefellers, Goldsmiths, Sainsburys and the Guinesseses.
Family Offices are private companies that represent the financial interests of wealthy families. Many family offices grow around a single family’s wealth, or emerge out of a family run business. The concept of a family office emerged from the private banking system in Europe in the 18th century, before transferring to the US. It was in the US that the model was developed, in particular by the Rockefeller family. They can be single (SFO) or multi (MFO) family offices, and are usually designed to manage the running of families
estates, but have recently become more focused on providing financial management services, including tax management, investment advice, risk management, and trusteeship.
The advantage of family offices to clients is that they offer objective financial advice, as they do not provide or sell products that a brokerage firm might profit from should they advocate a particular financial product. It is estimated that there are around 6,000 family offices worldwide, and that number has grown in recent years as families seek to benefit from the sort of services provided by wealth managers, but offering a more integrated service for the many members of a family.
Typically, family offices require members to invest in the region of $25m, although are more likely to want members to have a net-worth of at least $50m. They tend to have fewer clients than normal wealth management firms, but as a result spend more time developing a relationship with their clients and tailoring their services to the clients’ specific requirements. The investment strategy tends to be conservative and long-term, with the main goal being to conserve wealth rather than achieve rapid returns.
Under lock and key
Considered highly exclusive and secretive, one of the main criticisms of family offices is the expensive cost for the services. Usually a lot higher than standard wealth management services, the costs tend to deter members that are not considered part of the super-rich.
Industry specialist Campden Research, in conjunction with Merrill Lynch, estimated in 2010 that the average cost of running a family office was 0.6 percent of funds under management. Larger family offices tended to reduce this figure, hinting that the multi-family office was a more sensible proposition for the average wealthy family.
A recent convert to the idea of family offices is legendary investor George Soros. In July 2011, Soros announced that his investment group Soros Fund Management would be returning nearly $1bn worth of investors’ money and restructuring the firm as a single family office. Designed to avoid new reporting requirements under the Dodd-Frank reform act that would require the firm to register with the Securities and Exchange Commission (SEC), the new structure would focus purely on investing the Soros family’s $24.5bn.
The new rules are a consequence of the desire to regulate some hedge funds, which until recently have been exempt from regulation because they had fewer than 15 members of staff. Dodd-Frank will end this rule, and mean that financial institutions with small teams will still have to register if they offer services to the general public. The new rules would have impacted on multi-family offices, in particular those firms that offered investment advice to non-core family clients which would have had to register with the SEC, and therefore open themselves up to greater scrutiny.
However, the industry in the US successfully lobbied the government to get an exemption arguing that as they are not open to members of the public, they should remain exempt from the rules. This was seen as the first time the industry had come together for a common cause, especially with it being notoriously fragmented and secretive. Two groups, the CCC Alliance and the Private Investor Coalition, were behind the lobbying.
What happens with European regulators is unclear, although some form of regulation is expected. Robert Hille, Head of Compliance at UK family office Laird Norton Tye, told Campden: “Since the risks are essentially the same, it makes sense that European and US regulators would share similar concerns. It will be interesting to observe whether Europe’s old and venerable family offices object to or influence future regulations.”
The growth of the industry could be seen as a reflection of the increase of the super-rich in emerging markets. There are currently around 500 family offices in Asia, but that figure is expected to climb to 1,500 over the course of the next decade. The importance of preserving the family fortune over generations is something that successful businessmen often obsess over. Are the benefits of setting up, or joining, a family office worth the costs?
Sand Aire is a family office that emerged from the sale of Provincial Insurance to French insurance firm AXA. Provincial had been set up in 1903 by Sir James Scott in the north of England, and at one point had John Maynard Keynes, the father of macroeconomics, as its principal advisor. It was Keynes who suggested the firm diversify into equities, resulting in a hugely successful asset management division.
When the Scott family, who owned 90 percent of the business, sold Provincial to AXA in 1994, they netted £350m. Alexander Scott, the head of the family and the man tasked with sustaining the fortunes they had amassed over the previous decades, decided to form a single-family office in 1996 after researching the business model in the US. He told the Financial Times: “I was a pioneer in this. If we are right, this is a new development in the financial services wealth management opportunity.”
Although initially a single-family office, the plan was always to welcome other wealthy families into the fold, which Sand Aire did in 2002. Sand Aire bought another multi-family office, Northbridge, and looked to offer a range of investment services to new clients. These included asset management, and Scott felt that bringing in third party managers would help build the group’s expertise. He told the Wall Street Journal’s Financial News: “I had always been interested in asset management and I wanted to use third-party managers to look after the money. We were early movers in multi-management. I felt we could use them to offer new clients a deeper and richer level of skill.”
They do not offer their own products, however, preferring to act as a trusted advisor to clients. They say that they instil their staff with a ‘service mentality’, rather than the sales mentality that other investment institutions operate by. “Conflict of interest is a feature of the wider financial services market. It is something the Scott family were determined to avoid. We have no products; we only provide impartial advice,” said a representative of the Scott family in relation to the services they provide.
They are also selective with what clients they are willing to act for. A minimum investment fee of around £20m is what they ask; although any clients taken on below that figure must show that they have the potential for considerable growth. They now have around £1bn in funds under management. Incorporating a number of families within the umbrella of a multi-family office is beneficial to all of them, Sand Aire say, because of the collaborative nature of the structure: “Wealthy families provide experience, knowledge and interesting financial opportunities. We encourage a mutually beneficial environment of information exchange amongst our clients.”
Sand Aire also offers estate management advice to families. Scott told Financial News: “A lot of wealthy families want the stress taken out of managing their affairs. I remember the day someone turned up in our office with carrier bags full of papers and asked us to sort them out.” Sand Aire say their aim is to break the clichéd three-generation trap that often befalls wealthy families. Their founding family couldn’t have a better track record.
Fleming Family & Partners
Spawned from one of the most distinguished names in international banking, Fleming Family & Partners (FFP) has established itself as one of the major players in the family office industry. A family that includes amongst its numbers Ian Fleming, the creator of James Bond, the Flemings have a long history in global banking, most notably with the investment group named after its pioneering founder Robert Fleming.
Robert Fleming & Co was one of the world’s most well known banking firms, growing from its beginnings in Scotland as a group of investment trusts in 1873, to managing around £63bn of outsets around the world in 1997. However, towards the end of the 1990s the firm, alongside other UK independent institutions, was struggling. It was badly exposed to the 1997 Asian financial crisis, which contributed to a fall in profits in 1998 from £91m to just £20.8m. Attempts to restructure business in 1999 were in vain, and a sale to what was then Chase Manhattan Bank (now JP Morgan Chase) in 2000 for $7.7bn was agreed. The sale price was considered particularly high, and the Fleming family used the considerable sum to launch FFP soon after.
The new firm, spearheaded by Roddie Fleming, was set up to manage and sustain the family’s considerable assets. There are a number of members of the Fleming family working at FFP, and the company is mostly managed by a group of advisors that include chief executive Mark Davies, who took over as CEO from Gavin Rochussen in 2009. With their headquarters in London’s West End, the hub of boutique investment institutions, FFP also have offices in both Liechtenstein and Zurich, and employ nearly 150 people.
In 2002, the firm welcomed its first non-Fleming family client, and have subsequently seen another 40 clients join from both the UK and globally. They now have approximately £4.5bn worth of funds under management, and provide their clients with services ranging from private equity, corporate advisory, financial planning and asset management.
Indeed, unlike many other family offices, FFP offer its own funds. Other areas that the group invest in include Russian real estate and gold mines. Roddie Fleming decided to invest £40m in Russian gold mines, through the Highland Gold company, in 2003, and it is thought that by 2008 it had quadrupled in value, and in 2005, 20 percent of the business was sold to Hong Kong bank Standard Chartered, for £45m.
The question of whether the Fleming family takes precedence over the other clients is one Davies is quick to clarify. In an interview with industry magazine Campden Family Office last year he said: “There is an alignment of interest between clients and the family. They pay exactly the same fee as the family and are given the same level of access as everyone else.”
They recently launched a service for high-net-worth clients called FF&P Wealth Planning, with the intention of attracting individuals that might not be part of a traditional wealthy family, but do have significant capital to invest. The capital required for this is around £2m, considerably less than the minimum of £10m that clients in the FFP’s asset management business have. FFP’s expansion into other areas is a sign that it is using the wealth of experience it has gained from its prestigious name within the banking industry.
Established in 1976, Stonehage is unlike other family offices in that it did not evolve from a single-family business. Instead, it was set up to manage and advise the families of a group of wealthy South African entrepreneurs. Their reputation grew, and an international presence soon spread. They now have a staff of 400 and offices in 13 offices around the world, including London, Cape Town, Geneva, Dubai, Sydney, and Philadelphia. They also count as many as 1,000 families as clients based all around the world.
The firm was built by entrepreneurs with the intention of providing them with the opportunity to consolidate their wealth and plan for future generations. They found those with a lot of money were struggling to manage the new wealth that extended through their families. In an interview with industry magazine Professional Wealth Management (PWM), Stonehage’s Head of Family Office Advisory Andrew Rodger said: “It was a classic example of an emerging market wealth story. These rich families found themselves wrestling with challenges outside their direct immediate business experience and dealing with international issues relating to wealth preservation.”
The family office advisory service is the central hub of the business, providing clients with advice and bringing together outside expertise. Around this structure are a number of other services, including investment advice through Stonehage Investment Partners (SIP), tax services, property advice, and even a philanthropic arm called Stonehage Philanthropy Services. SIP has over $2bn is assets under management. Having a broad range of services means that specific expertise is required in each of the areas, and so Stonehage separated the divisions.
The attitude of the business is very much geared towards capital protection, as with pretty much all other family offices. Stonehage’s Head of Investment Advice, Ronnie Armist, says this reflects the wishes of their clients, telling PWM: “They may have the objective of growing their assets in excess of inflation, in excess of fees, but they are not looking to create extra wealth in the very short-term. They really want to build their portfolios in the long-term.” Stonehage have also found that because many of their clients are experts in particular fields of business, they often have ideas of their own on how to invest their money. Armist adds: “Quite often clients bring ideas to us. It is a very collaborative approach and portfolios are entirely bespoke and tailored to each family.”
It might be argued that this independence from any particular founding-family allows for each of the client families to feel as though they have an equal footing within the business: the firm is owned by its management, and so they are therefore entirely focused on delivering the best results for each of their clients. It is this structure that sets them apart from other family offices, and it seems to have served them well.
Rockefeller Financial Services is perhaps the most well known family office in the world. Despite labelling itself now as a ‘full-service wealth and asset management firm’, the group initially began as the family office of founder John D Rockefeller in 1882.
John D Rockefeller had made his money from oil after launching the Standard Oil Company, which alongside his other investments netted him nearly $1.5bn, an amount that likely made him the wealthiest private individual in the world at the time. His lust for greater wealth was evident when he once said: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” After retiring in 1897, however, he pursued a life of philanthropy, giving money to the church, medical research, and education, founding the Rockefeller University and the University of Chicago.
His commitment to establishing a family dynasty resulted in him setting up Rockefeller Family and Associates in 1882. It was launched to preserve the Rockefeller’s family’s assets, as well as manage their philanthropic missions, and several other members of the family rose to prominence off the back of the family office support, including former US vice-president Nelson Rockefeller.
By 1980, the family-firm had secured such a reputation for financial expertise that it decided to incorporate itself as Rockefeller & Co., offering investment advice to a number of other wealthy families, trusts and foundations. The company now reportedly has $34bn of assets under administration. Among the myriad of services it offers today are asset management and wealth advisory services. It also offer capital advice, pointing their clients in the direction of private equity and hedge funds, although they do not run
their own funds.
Rockefeller says it is different to a typical wealth management company in that it remains objective in the advice it gives, and is more geared towards long-term, sustainable growth. Recently, the firm announced it was partnering with another famous banking dynasty, the Rothschilds. The deal saw RIT Capital Partners, the UK-based investment vehicle chaired by Lord Jacob Rothschild, take a 37 percent stake in Rockefeller Financial Services for just under $100m.
The purpose of this financial union is to allow each company to gain footholds in each other’s local markets, whilst also allowing the launch of a number of investment funds. Lord Rothschild said of the deal: “We’ve known each other for a long time, they have a good business. We haven’t got a presence in the US and this brings together two formidable names in finance.”
David Rockefeller, the 97 year old grandson of the John D Rockefeller, added: “The connection between our two families remains very strong.” In fact, this strength of the relationship between the families goes back a long time, all the way back to when John D Rockefeller’s Standard Oil tried to form a global oil marketing alliance with the Rothschilds in the 1890s. The alliance of these two financial dynasties represents a new chapter for the Rockefeller family, offering a number of new opportunities. The Rockefellers have proven that consolidating the wealth of a family can pay dividends in the future.