The Rise of the Family Office01.08.2020
The following article first appeared in GlobalTrading Journal.
By Amit Gandhi, Sales & Trading, Americas and Robert Dardzinski, Sales and Trading, Europe, Pavilion Global Markets
Over the past decade, the wealth management landscape has faced a tremendous amount of change and upheaval. Increased regulation, rapid technological improvements and greater access to capital have all played a role in creating an environment where industry disruption is anticipated, if not expected. One such area of disruption is the rapid rise of the family office – which has seen a 10-fold increase in growth over the last decade.
With the stock market at consistently new all-time highs and more than a decade since the great financial crisis, global wealth has reached never before seen levels. A greater share of the wealthy have looked to take firm control of their financial futures through single family offices or multi-family offices. Recent statistics suggest family offices now control in excess of $4 trillion. This rapid growth is due in large to expansion over the past decade of the multi-millionaire client segment. According to the Global Wealth Report from Credit Suisse, there are now currently 46.8 million millionaires, accounting for almost 44% of the world’s total wealth. New technological advancements and access to information has provided these newly wealthy individuals with the opportunity to explore investment management solutions that were previously the exclusive domain of large investment banks. Driven by a desire for a more customized, cost-efficient service offering with greater control and flexibility it’s no wonder the worlds wealthy are flocking to the family office model. Furthermore, there is increasing interest in the hedge fund community towards shifting to a family office model and eschewing much of the regulatory oversight that professional money managers and hedge-funds deal with on a daily basis.
Within the framework of the family office, portfolio managers are free to make investments across a wide scale of asset classes. Private equity, liquid alternatives, and real estate investments can all be a part of the strategic asset allocation on the PM’s discretion. Global equities, however, still play the largest role in most mandates, and stock selection remains as important a consideration as ever. Today’s single or multi-family office has access to trading technology and solutions that rival those of the most sophisticated hedge funds. Pairing their customized investment philosophy with a customized broker for tailored execution and settlements makes sense for an industry that has been founded on disruption. Outsourced trading desks can serve as one such area where family offices can gain access to highly specialized trading professionals on an as-needed basis to aid in their execution needs. The agency-only broker model in particular can offer a wide variety of services to partner with family offices, allowing them to focus on investment and estate management instead of on the actual trading, settlement operations, and post-trade analytics. The latter of which, thanks to such regulatory scrutiny as MiFID II (introduced in Europe in 2018), is becoming not only an important but also a crucial part of any brokerage platform. As well, some agency-only brokers offer additional services such as customized global macro research, allowing portfolio managers to peruse actionable and timely investment ideas to pursue opportunities unconstrained by borders.
Traders at a true agency-only brokerage avoid the conflict of interest inherent in the traditional brokerage model and as such are able to offer a greater level of service and partnership to their trading clients. Agency-only brokers that offer outsourced trading desks partner with family offices to create a customized trading approach by keeping abreast of the family office’s core holdings and work to keep the family office portfolio managers well informed. By using broker neutral platforms (i.e. true best execution), these traders are free to access a wide variety of liquidity pools – ultimately resulting in a high-touch, low cost service that creates greater trading transparency, and a more favourable execution with respect to price for their asset managers. These traders also work to handle all FX considerations, communicating with custodians to ensure smooth settlement and delivery, and offering flexible service that seamlessly integrates with the needs of the family office.
As the first figure illustrates, according to recent survey of family offices, approximately 80% of family offices still rely either solely (blue shaded area) or partially (grey) on their in-house investment professionals for the execution part of their mandates. Conversely, the majority of family offices (63%) solely use outside legal counsel whereas almost all family offices sampled (combined ~96%) use some mixture of outsourced counsel to complement their inside legal staff. For this reason, we believe the move to outsourced trading desks – if not fully, then at least partially, complementing their own trading desk – has just started. Pavilion Global Markets trading staff already has experience advising and executing on the most simplest of market orders in a broad liquid market such as the Nasdaq; as well, is happy to provide a price quote, execute, and post-trade transaction cost analysis on an illiquid block of shares on the Kenya Stock Exchange.
Clients are asking for transparency, liquidity and communication. Perhaps even more important to the family office model, those 3 central tenets of a buy-side/sell-side relationship should be constantly evidenced to ensure they are being delivered to the forefront of a trading day. If you are an investment professional on the asset management side who is looking for some out-of-consensus trade ideas on a global macro scale; or, if you are on a firm’s dealing desk and consistently use a third party to execute trades, do reach out to us to hear about our unique tailored service and ultra-competitive rates which may indeed lead you to not only fulfill the best execution part of your firm’s fiduciary mandate, but also go above and beyond what is expected on the transparency and regulatory side.
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