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SFOs in Action
How the Richest Families Manage Their Wealth
 For many of the world’s richest families, SFOs — Single Family Offices — play an essential role in their investment strategy. SFOs manage the family financial portfolio and often provide other services, such as handling children’s college applications, hiring domestic staff, or managing the family fleet of jets. About 1,000 SFOs are in operation around the world catering to families with a least $100 million in assets. More than half the SFOs are managing family wealth of more than $1 billion.
Up until now, little has been known
about these powerful entities. New
Wharton research, however, shows
that they play an important role in
managing major investment portfolios,
guiding significant philanthropic endeavors,
and maintaining a core set of
values across generations of extremely
wealthy families.
Wharton management professor
and Robert B. Goergen Professor of
Entrepreneurship Raphael (Raffi) Amit
says the survey’s most important contribution
is a better understanding of
why families set up SFOs. For the most
part, he says, it is to manage investment
portfolios, but to do so in a way that is
customized to the families’ objectives.
“First, and what surprised me most, is
that family offices turn out to be private
investment offices,” says Amit. “The
soft responsibilities, like coordinating
the education of the next generation, are
not as important as the financial wealth
management issues.”
Stacy M. Dutton, former president
and chief investment officer of the
Manhattan-based Park Agency, the successor
company to the SFO Joseph P.
Kennedy Enterprises, says family offices
are trending toward more emphasis on
managing money than managing the
family compound.
“There is a divergence between
new family offices being established
today — with their greater focus on
investments — and more established
family offices which continue to provide
more traditional services to the
founding families,” says Dutton, who
this year became managing partner
of Brandywine Global Investment
Management in Philadelphia.
The Wharton research is based on
a study conducted by Amit, academic
director of the Wharton Global Family
Alliance (GFA), Heinrich Liechtenstein
and Julia Prats from the IESE Business
School in Spain, and Todd Millay and
Laird P. Pendleton of CCC Alliance.
GFA is a collaboration of faculty at
Wharton, IESE, SDA Bocconi in Italy,
Singapore Management University,
and family businesses that support
the center. The SFO study, titled
“Single Family Offices: Private Wealth
Management in the Family Context,”
is based on a survey with 138 responses
and 40 in-person interviews.
Amit says a family needs at least $100
million in assets to make it worthwhile
to establish an SFO, which typically
costs about $3 million a year to operate.
Individuals and other groups of families
often form similar entities known as multifamily
offices (MFOs) which, according to
Amit, number in the thousands.
Trans-generational Wealth
Family investment offices trace their
lineage back to the Roman major domus (head of the house) and the
Medieval major-domo (chief steward).
Today’s SFO began to emerge in the
mid-19th century with the creation
of private banks and trust companies
for families that made fortunes in the
Industrial Revolution. According to the
survey, SFOs these days are also operated
for entrepreneurial families.
Among GFA survey participants,
58% remain involved in operating
businesses and 77% indicated that they
are majority stakeholders in holding
companies they founded. The level of
involvement in the family business,
however, varies widely by geography.
Only 40% of American families in
the sample are involved in the family
business, compared to 70% of the
Europeans and 89% of those from
other parts of the world.
The average SFO in the Wharton
sample serves 13 households within
the same family group, covering 40
family members and two to three generations.
The median SFO serves four
households and eight family members,
according to the survey. The most important
objective for the SFO, according
to 57% of the survey respondents, is
trans-generational wealth management.
The second, selected by 39% of the respondents,
is to consolidate accounting,
tax, and estate planning services.
From interviews, the GFA research
found that other common reasons for
having an SFO include freedom of
career choice for family members; cost
effective money management; stable,
controlled, and scalable asset management;
development of trustworthy and
loyal employees; and cheaper document
administration.
Stuart J. Rabin, co-founder, president,
and chief executive of Jacobson Family Investments (JFI), manages the
investment portfolio of the Jacobson
family, which founded a major industrial
tools and supplies distribution
company, MSC Industrial Supply Co.,
of Long Island. He also runs a similar
company, Nine Thirty Capital, that
manages investment portfolios for another
group of families.
JFI and Nine Thirty Capital are solely
focused on investments, and Rabin
says more SFOs seem to be moving in
that direction. Family-run investment
firms can protect against conflicts of
interest and assure that the interests of
the family come first, he says. An outside
investment advisor “may have other
interests. It might be a fee-generating
business or a large institution that is
interested in selling its own products.
[The family] may worry, ‘Do they have
my best interests at heart?’ If the family
builds its own investment company,
the family is the only client. There’s no
conflict. The family is doing whatever is
best for itself.”
The report shows SFOs do not
typically manage family funds directly,
Amit adds. Instead, they set the strategy
and work alongside banks and other
investment managers to safeguard
and grow the family portfolio. “SFOs complement banks because much of what has to be done is outsourced to
the banks. The banks are partners as
opposed to competitors.”
According to Dutton, partnering
with private banks is a positive trend
among SFOs. The most important
benefit is better access to information
technology. “It is problematic for standalone
family offices to continuously
invest in the IT infrastructure needed to
generate the investment, tax, and budget
reports on a sufficiently timely and comprehensive basis to make optimal decisions,” she says.
On average, the study found that
European SFOs are inclined to outsource
fewer activities related to wealth
management, especially investmentrelated
activities. In Europe, 63% of
SFOs perform asset allocation in-house
vs. 47% of SFOs in the Americas. In
European SFOs, 70% of financial
administration is done in-house while
41% is done in-house in the Americas.
Many SFOs also offer so-called concierge
services, such as managing
homes, boats and planes, hiring staff,
managing payments, and guiding philanthropy.
The SFO also helps keep
families together and moving toward
common objectives, says Amit, adding
that some offices provide psychologists.
Governance Practices to Ensure Accountability
SFOs reflect the families that fund
them through their governance structures.
According to the report, family
offices need explicit governance
practices that hold the professionals
accountable, such as pre-determined
benchmarks, regular evaluations based
on set criteria, and clear reporting of
outcomes. “Accountability plus objectivity
contribute to building trust, a
key underlying reason to have a family
office,” the report says. Members of
the extended family often participate
in family office governance in some
way, either informally or through established
governance committees, the
research found.
Dutton says the most important
trends in governance are mission
statements and operating agreements.
“These trends center on family members
proactively making genuine governance
commitments based on a shared
vision of why the family office exists.
What does the family want from its
family office, and what financial and
time commitments is it willing and
able to make to ensure the office operates
effectively?”
Nearly half of the survey respondents — 43% — chose a family member to
head its SFO, while 51% chose a professional
from outside. Based on a more detailed analysis, the research shows
that richer families were more likely to
hire outsiders to handle their money.
While 55% of the millionaire SFOs had
family members at the head of the family
office, only 27% of the billionaire
SFOs were run by family members.
During interviews, the GFA research
team learned that some families
chose professionals from the family
business to be the head of the SFO
since they were familiar with both the
family business and the family. At the
same time, other families specifically
avoided hiring from the family business
because they wanted to separate
the family money from the business.
“Governance is very important,” says
Amit. “Interestingly enough, when we
compared the Americas to Europe and
the rest of the world, U.S. offices have
the weakest governance.”
The study also revealed information
about the operation of SFOs. In
the Americas, the average size is 8.7
employees compared to 13.2 in Europe
and 11.8 elsewhere in the world. The
researchers contend that the larger size
of European offices is due to the maturity
of family wealth in Europe, where
there are more generations and family
members to handle.
The survey also states that investment
professionals are willing to work
at SFOs for less pay than they might
earn elsewhere in return for a more
relaxed and flexible work environment,
Amit notes.
Discretion Needed
According to Rabin, discretion is critical
for SFO employees managing the
fortunes of families whose wealth
might put them in the public eye. For
example, his company has no web site
and does not advertise. “But it really depends
on the nature of the business and
the family,” he notes, adding that some
high profile public families don’t care
as much about discretion, but most do.
Dutton agrees that discretion is a major
part of the job description at any SFO.
“It must always be top of mind when
working at a family office. “Normally,
this is quite straightforward. It becomes
challenging mainly when certain specific
assets, such as a privately held operating
business or real estate, are held
jointly by disparate family members.”
The GFA study concludes with recommendations
for families operating SFOs.
First, having a purpose seems to
enhance the performance of an SFO.
“Well-functioning SFOs tend to be
linked to families with a strong sense
of purpose where it comes to their
fortune. This is particularly true when
the family invests, not only its assets,
but also its enthusiasm in the pursuit
of something beyond mere wealth preservation.
This applies to a broad range of objectives, including involvement in
entrepreneurial activities and business,
worthy causes, philanthropic pursuits,
research foundations, patronage of the
arts, or taking on public responsibilities,”
the report notes.
Second, the study recommends that
families strive for excellence in all aspects
of their office. Nepotism has no
place in the family office, but the report
found that some families compromise
the professionalism of their SFOs as a
result of family politics or penny-pinching.
Separating functions appears to
improve performance, the study found.
“The highly paid hedge fund expert
should not be distracted by dealing with
the car fleet, let alone collecting the
dry-cleaning,” the report states.
A model that appears to work well
is to set up separate companies for the
different specialized areas of asset management
and concierge services, plus a
foundation for philanthropic activity.
Finally, the report calls on families
to simplify their corporate structures.
One SFO in the survey was dealing
with 200 non-active holding companies.
Few SFOs had less than 80. “This
can create problems for family members
wanting to supervise, let alone direct,
SFO decision-making properly,”
the report says. “Many simply do not
have the time, interest, or expertise
needed to find the devil in a huge
amount of company detail.”
Amit says the new research is just a
first step in gaining a better understanding
of how family wealth is managed.
GFA plans to continue its studies and
hopes to examine the financial performance
of families with SFOs against
the investment performance of private
banks or other investment professionals.
“The vast majority of businesses
around the world are indeed family
businesses, and there are a number of
distinguishing aspects that make family
firms unique, raising issues that we as
academics must look at, such as succession
and governance,” says Amit. “The
link between the family and the family
business deserves more interest.”
Read the story at knowledge.wharton.upenn.edu/
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