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Catering to Family Values
Want to attract wealthier clients or keep them from joining the ranks of those  who manage their own assets? Try taking a family-office approach

rominent old-name families--Rockefeller, Whittier, and Pitcairn among them--chose to keep the family fortune together by entrusting the stewardship of their  wealth to a dedicated family office instead of selecting more-traditional  fiduciary arrangements. The size of their wealth made establishing and maintaining a family office not only affordable but a more effective solution.

"The family office is an old idea that came back into fashion in the 1980s," says Charlotte Beyer, founder and CEO of the Institute for Private Investors in New York. The fashion is still very much in vogue. Beyer credits the wealth creation  of the past 20 years for renewing interest in family offices. Fueling  the trend is a growing dissatisfaction with bank trust departments--their high turnover rates, limited investment choices, and the tendency of old-money institutions' marketing departments to neglect "new money," says Mark  Spangler of Spangler Financial Group, a financial-planning firm in Seattle.

And don't underestimate  the desire for status. "The family office is a declaration to the world that you have money," observes Michael Stolper, a consultant in San Diego  who works with foundations and families of high net worth. He likens choosing the family-office route to driving a $60,000 luxury car instead of a $30,000  luxury car. "Either vehicle is going to get you there in comfort," Stolper says. But onlookers are sure to appreciate the difference. Also playing  a role in the decision to set up a family office, he believes, is the overwhelming burden of too many choices. "Sell a company these days and the salesmen line up the day before to solicit your funds," says Stolper. "In some ways, family offices create distance by fulfilling a gatekeeper  function."

Regardless of the  reasons, what was once a wealth-management option affordable for only a handful of families is now considered an industry that meets the needs of a growing market segment. Family offices--both single family and multifamily--centralize  information and services and coordinate philanthropic and business activities. In most cases the offices do not manage money in-house. More often they play the role of a consultant to the family; they establish family objectives, keep records, assess risk tolerance, set financial goals, satisfy liquidity  and personal needs, and determine asset allocation. Most preside as managers  of a stable of outside specialists.

If you're planning to offer family-office services, you'll find that the wealthy themselves are on the list of those you're competing with. The primary advantage when a family sets up its own family office is that personalized service is truly assured. The family may hire service providers or build a staff to do what's needed. It's these kinds of individualized services and solutions  that the superwealthy expect from their managers; wealth preservation is a given.

Keep in mind that  wealthy families want the best their money can hire. They aggressively  seek out the best providers of each specific service they need--from custodial services to estate planning--says Louise Wasso Jonikas, president and  chief operating officer at Graystone Partners, a consulting firm headquartered  in Chicago that works with wealthy families. "No matter how good any one  institution is," she says, "even the best cannot be the best at everything.  Twenty years ago families may have given up performance for safety and  security. But now they want performance [for their fee dollars] as well."

The character and  scope of the services they expect are broad. As the influence of the institutional  market on the structure and delivery of financial services has increased, wealthy families have demanded similar services, opportunities, and attention. "Wealthy families seek a level of sophistication [in financial services] that, prior to this, only big institutions were able to access," says Wasso Jonikas. "They are looking for the best of the best globally. A  one-stop-shopping solution is not realistic when approaching this market."

Rick Waddell concurs.  He's executive vice president of Northern Trust Co.'s wealth-management  group in Chicago. Northern Trust has a lengthy history of working with  families and family offices. For many families, Northern functions as  the family office. "The expectations of this market segment have changed as the ranks of the superrich have swelled," says Waddell. "Whereas families  might have given all of their assets to a trust department in the past,  wealthier families [$100 million - $1 billion or more] now are more likely to contract for master custodial services instead. They seek investment  opportunities and returns beyond what the trust department has traditionally offered."

Wealthy families want  multiple managers, on-line delivery, and global-investment opportunities. Northern's families now have instant access to holdings, transactions, and performance data. Given the premium placed on performance, Northern  has become a primary provider of performance-analysis services. "The demand for information keeps climbing as clients want more, faster," says Waddell.  "The days of just sending out monthly statements and meeting quarterly or annually are gone." Northern facilitates conferences among family members and can customize reporting formats by item to suit each client's needs.

"A family office is  like a buying consortium," says Wasso Jonikas. "Family members pool their  monies to gain access to more-competitive fees and lower commissions."  By essentially becoming a volume buyer, a family office has sufficient  asset size to garner the expertise and personal services of specialists.  "This gives family offices access to much more than any one institution  can offer," says Wasso Jonikas.

Although Wasso Jonikas acknowledges that there may be some similarity between the functions of advisory or financial-planning firms and those of family offices, she  points out: "A money manager or bank trust department may have the perspective of a family office and even offer a selection of styles of investment management. They also may offer certain levels of expertise, but they still have products [and services] they have to sell."

"Insurance people  and stockbrokers who do planning and give advice do so in the presence  of inherent conflicts--they ultimately sell product," explains Stanley Pantowich, CEO and cofounder of TAG Associates, a multifamily office in New York. "We run the family like a business. It takes the conflicts out of the process." TAG obviously charges fees for its services but in a  manner that removes any vested interest from the fee calculation. Family  offices are not about gathering assets under management but about providing  extremely personal service.

Providing such personalized services is more than just a marketing line; it means getting  involved with the family, adopting a point of view from within the family dynamic. "You need to have a family mentality for [a family office] to work," says Patricia Soldano, president and owner of Cymric, a multifamily office in Costa Mesa, Calif. "The complexity and dynamics of a family  can't be detached from the services. Outside advisers don't always make the commitment to understand the family."

The high-net-worth market knows that despite all the assurances that financial services and products are being "tailored to meet individual needs," that's not always the case. More often than not a brokerage firm, a bank, or a private investment firm will stress uniform solutions to asset allocation or investment selection. Soldano assigns this institutional mentality a low probability of succeeding with this market.

"To understand families," says Soldano, "means spending the time and listening. For too  many advisers this is not feasible. They are focused on their firm's need to sell a product or service. The premise of a family office is to put  the family's needs first. If you don't have that mentality, if you aren't compassionate and willing to make a financial and emotional commitment, you won't succeed in promoting yourself as providing family-office services.  Families are very relationship oriented."

Once established,  such relationships tend to be long-term, according to Soldano. This implies that time spent developing relationships ultimately works as a loss leader for a future stream of fee income. It's a business model based on patience.

It's not just the  superrich who can benefit from the services that a family office provides.  Northern projects that the number of millionaires--the middling rich--will grow between 8 and 9 percent annually over the next four years. Should  these mere multimillionaires for whom a family office is not an option be relegated to the realm of off-the-rack financial services?

Their needs are not  that much different from those of the vastly rich: They too have progeny  to provide for. They would no doubt appreciate lower investment expenses and better performance. Personalized attention would not be turned away.

This second tier is  the sector Spangler Financial Group serves. Drop a zero from the minimum  account size at TAG Associates and you have the minimum account size at Spangler Financial Group.

Over the last several  years, Spangler has been restructuring his practice to emulate a family office for the masses--the hordes of mere millionaires. "In the traditional  sense, a family office is an entity that acts as a service deliverer to  multigenerational clients," Spangler says. "I wanted to expand on the concept by bringing service to multiple individuals, aggregating investable funds the way a family office would, and investing as one entity." He  too acts as an investing consortium. Clients' available funds are aggregated under partnership agreements--typically as a limited-liability company--and  then invested with selected managers or through direct investment in companies or in assets such as real estate.

This transforms a  collection of decent-size accounts into one account of significant size.  That account then garners institution-like attention, clout, and opportunities that would otherwise prove elusive for Spangler's clients.

Spangler views these private investment accounts as critical to his transition into a provider  of family-office services. "Through the partnerships, I can deliver greater  tax efficiency, a more direct relationship with the money manager, and more-competitive fees," he says. "It takes everything to an institutional level."

What's more, Spangler's  $2 million minimum account size ensures that he is dealing with accredited investors, or the high end of the market. In Spangler's opinion, more-sophisticated  investors seek more-sophisticated advisers. "You can't, from a marketing perspective, recommend mutual funds or a typical investment package and expect to compete for this business," reasons Spangler. "The market demands access to private account managers, multiple custodians, alternative investments--meaning  hedge funds, futures trading, real estate, private equity, and venture  capital. It expects more-creative financial solutions."

Although Spangler  provides institutional-level investment opportunities for his clients,  he also offers the same personal, time-consuming attention that a family-office  manager would. These services are as likely to include bill paying and  sitting on the boards of companies in which he has invested client monies  as they are dog walking and arranging home-health-care needs. "It is not  that different from what a bank trust department has done traditionally for its old-money clients," he says.

Growing right along  with the high-wealth market segment is the competition for its business--banks,  consultants, investment-banking firms, investment boutiques; everyone wants a piece of it. For that reason, deciding to offer family-office  services for marketing purposes is not enough, cautions Spangler, especially  if no effort is made to change what a firm actually does for clients.  "The marketing literature may read better," he says, "but there will be a problem as that firm tries to deal with the larger clients the terminology is expected to attract. They expect more." And according to the experts, higher-net-worth families value expertise. If a firm fails to demonstrate it, the family has the means with which to create its own expertise in-house.

By Gayle Ronan, January/February 2000

Gayle Ronan  is an investment adviser who writes frequently about personal finance,  investment management, and banking.