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tosfo

To SFO or not to SFO? That is the question.

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Michael Maslinki responds to the key charges made by Geoffroy Dedieu on the relationship between SFOs and professional wealth managers.

 

Charge 1: That MFOs and PBs tend to sub-contract investment work.

The question is what is involved in asset allocation, how this can add value and therefore why should you pay for it. Asset allocation is a dynamic process, and where you have families with complex situations you need to look at this continually.

Asset allocation represents a substantial part of investment performance, so it’s worth investing the time to make sure you get it as right as you can. But in fairness I do see situations where people are charging for asset allocation when they are just using a standardised asset allocation model which does not add much value.

Equally, manager and product selection and monitoring can be very straightforward or formidably complex depending on the underlying assets and the strategies of the managers you employ. You must ensure the team is adequately resourced to provide this ongoing appraisal and in the recent financial crisis, many family offices found they had insufficient understanding of the products and investment strategies in which they had invested.

Charge 2: Wealth Management players are wrong to say UHNW families should not try to handle their own wealth as it is too expensive.

The implication is that people are telling customers not to run SFOs, but that is not what is happening in my experience. Of course, someone has to manage the investments and undertake the many other responsibilities of a family office. If it’s the single family office then you need to be clear you have a team fully-equipped for the job. You also have to ask yourself, ‘why are they working for you?’ Especially if you do not have critical mass and are unable to offer attractive career progression.

Many bright people are more attracted by working for a business, rather than the office of a family. I am sure there are exceptions, but I would say that the MFOs has a stronger position for competing in the marketplace for the best staff. If for example the family wealth is $50m then the SFO is going to be limited in the number and excellence of the people they can hire. Then it’s much more likely that the work will be done in conjunction with asset managers, who are responsible for looking at the overall picture and making sure it acceptably blends with the family’s wealth.

Even where you do find the right staff to begin with there is a danger, that over time, the head of SFO can become a ‘family retainer’’ type, rather than a professional wealth manager. The trend in my experience is that a lot of SFOs find themselves tested by the volume of stuff they have to deal with and how they maintain and strengthen the experience they require to remain on top of it. This is not just investments, it’s also structuring, managing the family business, succession planning, tax planning, political risks, litigation etc. There are just too many variables that require a degree of expertise and inevitably you have to employ expensive outsiders to work out how to deal with them. An MFO will see these things regularly, and the research and development work is much more easily amortised across a number of families. The experience of dealing with a number of families often facing similar issues can be a considerable benefit.

Charge 3: The largest cost pool at a PB/MFO dedicated to “hunters” (CRMs). Thus the main cost driver is the front office, not research or the back-office, and clients simply paying for marketing and associated bonuses.

I fully accept the assertion that in most banks costs are too high, and that there are too many people trying to have a bite at the cherry. There are plenty of people adding less value than they are being paid. And because many bank staff are grossly overpaid they are continually trying to sell to cover their excessive costs. But this does not necessarily apply to a boutique MFO, where they tend not to be overpaid. The kind of staff who usually gravitate to these MFOs genuinely want a more client-focused environment. Having said all of that, in my experience one of the biggest costs centres in MFOs is client service, not marketing per se, but the general point on costs and value is a fair one.

Charge 4: Most MFO’s and private banks have horrendous IT platforms.

It is certainly true that some investment managers have appalling IT platforms.

Charge 5: The current merger wave does not serve UHNW clients, and it is taking place to serve the banks/MFOs themselves.

I agree that mergers and the assumed economies of scale can be overstated. Indeed, if these did bring massive efficiencies then banks would have done better than they have. I agree that smaller organisations can deliver service better than commentators suggest, because they know their business and they know their clients. They don’t need to have complex processes in place to understand what is going on with their clients. But to say the wave of mergers is not in the client’s best interests is an overgeneralisation. You have to take each one individually and each is governed by a different rationale. Of course they are driven by the business; in some cases this is in turn driven by client benefits. For example, one of the recent high-profile acquisitions was motivated by the need to provide for the retirement of the principals, which is surely in the clients’ interest.

MFOs who serve global families with global needs find having a larger organisation can be very beneficial because of the extensive contacts that this brings; the broader international perspective and access to a wider base of expertise.

Charge 6: Generally speaking, SFOs can do it better and cheaper!

I think it’s a mistake to see this as an “us or them” scenario. Most MFOs have excellent working relationships with SFOs.

There is no doubt that some SFOs can run the whole operation effectively but it is increasingly demanding and it can be difficult to difficult to hire the people you need unless you have a significant scale. And even if you do, you lose out on the benefits of experience that people gain from handling other families. Experience-sharing and passing on wisdom is an important benefit.