Should we go for a family office?
We are a fairly big family corporation that wants to maximize company value,” says a reader. “Luckily, we are surviving in the pandemic. But we are tired of groups that charge hefty fees with no guarantees. My brother says we should go for a family office, but do they exist in the country? Is this a viable option for us?”
My reply: Family offices (FOs) that provide good service are generally private. “We’re the most important part of the investment landscape most people have never heard of,” says an executive interviewed by The Economist in 2018 for “How the super-rich invest: The rise of the family office” (from which most of the information below is sourced).
The most famous FOs serve huge, Rockefeller-like interests, with the majority established in 2000 or so in Europe and the United States and, to date, still serving the first generation. There are a few FOs in the Philippines, but they are highly discreet.
Traditionally in Asia, most wealthy families prefer to reinvest funds for expansion and development, so it is only now that they are “more comfortable cashing out, trading assets and transferring a slab of their wealth to an investment office,” says The Economist. “In the past 10 years, the number of Asia-based FOs have climbed from around 50 to somewhere between 500 and 1,000.”
There is no strict definition of an FO. Functions range from managing family wealth and doing major investments to preparing the family for transitions and serving as concierge (arranging travel, drafting prenuptial agreements, providing security).
You complain about no guarantees for poor service, and this is one reason why some wealthy families turn to FOs. They are disillusioned about “third-party money managers, fueled by scandals over opaque and abusive fees, and banks pushing their own expensive products, or those of partners, in return for kickbacks,” says The Economist.
One executive puts it this way: “The feeling is that if you want the job done well, you have to take it in-house.”
However, working with a good FO is easier said than done. Most families simply cannot afford any FO, since running costs are prohibitive. According to The Economist, the average FO oversees $500 million-$1 billion, and the bigger ones deal with much more. For example, George Soros’ FO handles $25 billion.
Because of demand, smaller FOs have arisen to cater to families that have $1 million or so, such as Conexion Capital in South America, which “focuses on early-stage investments of $1 million to $10 million in consumer goods firms with novel products, and looks to stay with them for at least 10 years … Conexion also serves as a kind of merchant bank for FOs, bringing other families, particularly from Latin America, into club deals—40 to 50 are now in the network.”
But critics say FOs may become a danger to the free market, as they remain opaque but use their clout to protect their own interests.
Whether or not you decide to do your FO, the main challenge is still ensuring smooth succession to the next generation, which is a matter more of values and practices when raising and communicating with children rather than a task delegated to outsiders. (See “Are you a steward?, May 17, 2019).
And if these are your main concerns, then counselors may do a better job for a fraction of the price.
“The threats to family wealth are primarily internal, not external,” Giuseppe Ciucci, the head of UK-based FO Stonehage Fleming tells The Economist.
“It is the soft stuff that can be most helpful,” says another executive, “preparing the children for the money rather than the money for the children.”
Queena N. Lee-Chua is with the board of directors of Ateneo’s Family Business Center. Get her book “All in the Family Business” on Lazada and the ebook version on Amazon, Google Books and Apple Books. Contact the author at [email protected].
