Family Offices Stand Alone

Terry Flanagan

Family offices are picking up the traits of institutions, but service providers haven’t figured that out yet, said industry expert.

In the investor community, it may be said that there has been a long standing dichotomy of retail and institutional investors. But today, middle ground exists within the family office. Such vehicles manage wealth for a single or multi family unit, via trusts.

In the case of some high-profile hedge fund managers, notably, George Soros, a family office can be borne from the resistance to financial regulation. Soros closed his 25 billion fund, Soros Fund Management LLC, to outside investors and declared himself a family office.

“Family Offices are neither institutional nor retail, but they use more institutional products; they follow the model of endowments, quite often,” said Robert Testa, senior analyst at Cerulli Associates. The firm tracks trends within asset management via compiling data and conducting research.

“Their investment horizon is long, and there is a less of a focus on wealth creation, but rather, preservation,” Testa noted. Such a long-term view groups the asset allocation of family offices with that of pensions; both are heavily concentrated in fixed income, and diversify via alternative strategies.

“Family offices use alternative asset classes, such as timber, and private equity. They have a lot of open architecture and use third party asset managers,” Testa noted.

Family offices are usually the first to allocate to newer, unknown managers, Testa cited.

“They’ll work with those with just a three year track record and with a variety of different strategies,” he said. “They also really like separate accounts, because separate accounts harbor a lot of transparency and liquidity.”

Family offices are also active in using consultants for manager selection, and consultancies are taking note. Global consultancy Mercer acquired Hammond Associates earlier this year, a firm well-versed within the wealth management channel.

“They will engage with consultants, but many actually do the full CIO (chief investment officer) outsourcing,” Testa noted of family offices. “They’re weakly staffed and they don’t have a lot of professionals to invest in operational due diligence, so they look outside for that.”

Consultants can help family offices conduct “operational due diligence” on managers, but don’t fulfill all third party needs. One area that is particularly lacking is in within technology, according to Testa.

On providing technology and infrastructure to family offices, Testa said, “nobody has truly nailed it yet.”

“There are different providers out there. We’re seeing custodial banks starting to provide technology solutions, such as Northern Trust. They’re providing everything from order management; to the aggregation of net worth…the same is true for Fidelity. Many of these places have in-house technology.”

Testa highlighted that family offices are arising in different shapes and sizes—from small, single family units to larger, multi-family trusts that may even be subsidiaries of large banks, which calls for “a lot of activity, and new product and development” within the technology vendor space.

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