The Growth of the Family Office: A Snapshot

With more and more top end clients (read billionnaires) becoming disenchanted with the model where investment advisors and bankers etc are in the same crowd of people who cannot accurately predict the future (including that of individual stocks or that of the stock markets), therefore, many wealthy people have opted to create their own investment offices from which they manage their own wealth. These are aptly called Family Office since they manage a family's money.

The main purpose of these family offices is to try to make their own investment decisions. There is no historical evidence that decisions made by self paid money managers are better than investment decisions made by bankers or other asset management companies like mutual funds or hedge funds etc. who have more resources at their disposal and the advantage of their huge size.

All models have their own positives as well as negatives since all are managed by human beings who have inherent biases and ability to make unique mistakes. It is likely that a family office manager may make decisions taking into consideration the overall big picture of the family's businesses, real estate & other assets, taxation, future generations, family preferences or family disputes etc. unlike an outsider who may not be encompass the criteria in its entirety nor have the complete information at their disposal, including not having their interest of profit maximisation aligned with that of managing the wealth of the family. The advantage of the banker or investment advisor includes access to huge network and immense resources that a large financial insitution can command including some of the most intelligent people.

The only focus that wealthy clients need to have is that they give money to a bank to manage for investment purposes and not for anything else. They must not expect tax efficieny or investment talent that is infallible or accuracy at all costs. They must also be aware that due to extremely high competition banks keep reducing fees (unlike family office which comes with its own set of high fees) and therefore clients get what they pay for!

However, the growth of family offices in the recent years indicates that more and more ultra high networth investors are getting disenchanted with banks or fund managers.

It remains to be seen whether family offices can directly invest into Private Equity, Stocks or Bonds etc with a better success rate than that of the various financial institutions over the coming years.

Love them or hate them, banks are such a financial institution that they are a necessity in todays world for many things such as current accounts & cheque books, Debit & Credit Cards, Trade & Corporate Finance, Fixed Deposits & Loans etc. Investors can avoid banks and asset management companies for investment purposes but the funds still need to be parked in a bank as cash or routed through banks to other opportunities and also given to other investment companies via banks and occassionally given to asset management companies who could be owned by banks.

It is interesting to read the article to get a better idea how and why family offices work and for who?

Family Fortunes
The firms at the top of the wealth pyramid, which manage the money of Europe's wealthiest families, cost millions to run
By TARA LOADER-WILKINSON