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Robert Kiyosaki – Family Investment Offices: When Do They Make Sense?

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Bill Gates has one, and so does Michael Dell. But should every super-wealthy family form its own investment office?

Family offices often fulfill multiple functions that wealthy families need, such as managing philanthropic pursuits and estate planning, Bill Woodson, Managing Director for Credit Suisse’s Family Wealth Management group, said. But when it comes to investment advice, some families outsource investing strategy entirely to banks or other investment consultants. Others closely control investments in a certain asset class, but outsource the rest.

Some families, however, prefer having their entire investment portfolio under one roof – their own. That requires hiring a top-notch chief investment officer, who then works with third-party firms that can offer specific expertise or provide access to capital markets, Woodson said. Bill Gates, for example, created Cascade Investment to manage his Microsoft riches, while the Dell family has MSD Capital.

Bringing the CIO Home

The size of the family’s total assets dictates whether a family investment office makes sense. A family with a net worth of $ 1 billion or more can certainly justify – and afford – hiring a top-flight investment manager, Woodson said. With assets between $ 500 million and $ 1 billion, the decision requires a more careful cost-benefit analysis. Below $ 500 million, “it’s very hard to make it work properly” because spending seven figures to hire a savvy Chief Investment Officer and buying the trading and back-office technology he or she needs can be onerous, Woodson said.

“Keep in mind that when a family is hiring a CIO, they’re competing against firms like Credit Suisse and others for similar talent,” Woodson said. “They are expensive staff. They are the most experienced professionals with the exception of the president (of a firm) and often times even more expensive than the president.”

A confidential survey of single-family offices released last year by the Wharton Global Family Alliance said 37 percent of single-family offices had less than $ 500 million in assets under management, while 42 percent had more than $ 1 billion. On average, single-family offices managed nearly 45 percent of the wealth of billionaires and nearly 66 percent for millionaires.

But the survey also showed that billionaire family offices performed better than those of mere millionaires, suggesting that having more money to invest leads to better results.

A Family-Specific Investment Strategy

Most families create their own investment offices because they want to keep a tight rein on investment strategy. Some also think they can perform the function cheaper in-house, rather than outsourcing to a third-party.  Some offices target long-term, time-consuming asset classes such as private equity that require substantial in-house staff, Woodson said. But there is no cookie cutter wish list super-wealthy families have for their investments, he said.

“The families bring substantial individual investment biases to how they want to invest the money, and sometimes those biases are dictated based on a relative lack of sophistication or a great deal of sophistication,” Woodson said. “Sometimes those biases are dictated on the other assets that they’ve got.” If the family still has a lot of money tied up in a business that is risky by nature, for example, their investment portfolio needs to offset that risk by investing in safer assets.

Woodson points out that wealthy families sometimes stumble at first because the original moneymakers believe too much in their own investing prowess.

“They aren’t necessarily making the right decisions because they made their money in manufacturing or media or tech, and now they’re investing across the globe in a host of different asset classes,” he explained.

Family investment offices, however, tend to change over time.

“There tends to be an evolution that occurs within these families as they invest, in that they become more institutional in their approach,” Woodson said. “By that I mean they start adopting more traditional investment management practices in terms of asset allocation and diversification of risks and processes for identifying managers and evaluating those managers.”

The Wharton Global Family Alliance suggests that family offices start to perform better as the family’s assets move away from the business that made it rich. When a family’s wealth is still tied to active businesses, as it usually is while the founder and his or her children are in charge, the office usually focuses on financing the family business or businesses as well as maximizing returns, the study said. But subsequent generations, who have often sold off pieces of the business for cash, have altogether different goals.

“The (family office) acts more like a professional investment institution, for which maximizing investment performance is a primary goal,” the study said.

Best Practices

The Wharton study said high-performing family investment offices had better governance, documentation, investment management processes, communication, human resources practices and education and succession planning measures than their low-performing counterparts.

Woodson advises ultra-wealthy families to develop a specific investment strategy through a designated committee that includes outsiders. A robust reporting mechanism should also be in place, and families should rebalance their portfolios periodically to evaluate whether they are reaching their investment goals. He also suggests that families use third-party managers and firms to advise them when they need it. For one thing, he said, outside firms have a better bird’s-eye perspective on how other people with similar-size pools of money are investing.

“One of the limitations that creeps in with these family investment offices is that they have their views and way of thinking, but they get isolated very quickly,” he said.


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