Transcript Single Family Office

Presented by Carol Pepper
The Annual Eisner Amper Private Wealth and Family Office Summit
New York
November 9, 2010
Overview
 Introduction to Pepper International
 Overview of family office types
 Review of the Single Family Office Study
 Best Practices in Forming a Single Family Office
 Pitfalls to Avoid in Forming a Single Family Office
 Converting a Single Family Office to a Multi-Family Office
 Conclusions
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Introducing Pepper International
Global Experience
 Pepper International is a family office for ultra high-net-worth
families
 Pepper International helps families around the world create single
and multi-family offices
 Pepper International acts as an external CIO for single family offices
 Pepper International was listed by Barron’s as one of the top family
offices in the United States in November 2009
 Carol Pepper is a member of the Forbes Intelligent Investing Team
 Carol Pepper writes a column on Forbes.com called
“High Net Words”
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Managing Wealth Today
Costs
Pricing is not clear
Costs are hidden and complicated
Products and services are expensive
Complexity
Products are hard to understand
Risks are difficult to manage
Performance is hard to assess
Time
Managing wealth takes a great
deal of time
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Why have Family Offices become Popular?
The Financial Services World
 There are strong conflicts of interest in the business models of
many wealth management businesses, so families want one advisor
who only represents them
 Managing wealth correctly is highly time consuming, and families
prefer to delegate this task
 Families cannot get what they need from existing providers—so
they are creating their own solutions
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The Client Without a Family Office
 Client must juggle many contacts
 Specialists are uncontrolled
 Costs are not well controlled
Asset
Managers
 Client involved in every matter
 No clear picture of assets
Partnership
Managers
 No control of over time and money
Client
Other Family
Members
Legal &
Accounting
Advisors
Other
Experts
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What are the Benefits of Working
with a Family Office?
Costs
Costs are controlled
Costs are known
Costs are reduced
Complexity
Complex issues are well managed
The office created is appropriate for the family
Clarity
The vision of the family is realized
The family’s wealth is well understood
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The Family Office
Asset
Managers
Other Family
Members
Reporting
System
Client
Other
Experts
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Legal &
Accounting
Advisors
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Services Offered by a Family Office
can be Comprehensive
Family Office
Investment Services
Tax & Planning
Other Services
Manager review
Monitor accountants
Banking services
Asset allocation
Monitor tax planning
Mortgages
Manager selection
Review estate planning
Education
Risk monitoring
Oversee trusts
Legal matters
Single stock positions
Organize philanthropy
Security
Consolidated reporting
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Issues from the Family’s Perspective
Control of the family’s privacy, investments, risk, legacy, etc.
“We want to define our own destiny and we will not be controlled by others.”
Conflicts of interest within the financial world work against the
family’s goals. “We want all referral deals, retrocession payments, etc.
to be disclosed to us. We want real advice, not to be steered to someone
who is paying you a fee, or to be invested in a product because it pays you
a higher commission.”
Customization of information analysis and servicing our family
members is important. “We have our own way of doing things…
We don’t want a cookie cutter approach to our money.”
Cost minimization
“We are willing to pay for what we need, but we don’t want
to be overcharged just because we are wealthy.”
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Choosing the Office for the Family:
Family Issues
Number and Complexity of Family Members
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The size of the family
The number of generations
The range of nationalities within the family
Diversity of family members
Family Governance
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Rule
Rule
Rule
Rule
by patriarch or matriarch
by elected council of family members
by Trustees
by consensus of informal committees
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Choosing the Office for the Family:
Wealth Issues
Number and Complexity of Family Assets
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Amount of wealth
Variety of assets
Publicly traded versus privately held assets
Location of assets (number of countries)
Specialized investment requirements
Ownership of Assets
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Owned by individuals
Owned by corporations
Owned by trusts or foundations
Offshore or onshore ownership
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Types of Family Offices
Single Family Office
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Dedicated to one family
Has a physical office
Internal staffing for most functions
Focus on tailoring services for family
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Types of Family Offices
Multi-Family Office
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Serves needs of more than one family
May have a founding family as the key investor
Outsources a portion of required services
Started with an eye to eventual sale/merger
May be very small or quite large
Corporate Multi-Family Office
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Limited/no family involvement
Often division of a larger corporation
Large staff and multiple offices
Mix in-house/external management
Focus on bringing institutional opportunities
to wealthy clients
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Main Issues across All Models
 Governance should drive firm development and match family’s
strategy; the office needs to recognize and manage conflicts
of interest
 Privacy and Security need to be managed as top priorities
 Personnel needs to fit the organization and the family
 Service Levels need to be selected and drive business design
 Investment Management structure of business requires many
decisions: in-house versus outsourced, fees, access, asset
allocation, reporting, analysis tools, consolidation
 Technology costs and decisions are a major driver
in the way the business model is shaped
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The Single Family Office Study
Comprehensive Analysis of Single Family Offices
• Conducted by Wharton Business School (University of
Pennsylvania) and IESE Business School (University of
Navarra)
• Interviewed 167 families in the summer and fall of 2008
• 50% in Europe, 44% in the Americas and 5% elsewhere
• 40% AUM greater than $1 billion
• 49% in Americas have a family business
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SFO Study Looks at Performance
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs have an investment return of over 6% per
annum over a five year period (2003-2008)
 Low Performing SFOs have an investment return of less than 6%
per annum over the last five year period (2003-2008)
 What distinguishes high performing SFOs from low performing
SFOs?
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In-House Versus Outsourcing
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs control Asset Allocation, Manager Selection
and Monitoring, and Investing with more in-house resources than
low performing SFOs.
 High performers have a high quality operation. They pay close
attention to the following:
 Governance
 Documentation
 Investment Management Processes
 Communication
 Human Resources
 Education and Succession Planning
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Governance, Guidance and
Communication
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs are very process oriented. They create and
stick to formalized processes to manage investments. They tend
to have many committees:
 Investment Committee
 Management Committee
 Audit Committee
 Education Committee
 Contract Committee
 Client relationship committee
 They provide guidance to the committees
 They get involved with due diligence, accounting , etc.
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Education of Family Members
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs are very education oriented. They provide
family members with numerous substantial financial education
opportunities:
 In-house seminars facilitated by professionals
 In-house seminar facilitated by family members
 Formal courses at educational institutions
 Courses offered by vendors
 Internships in family controlled businesses
 University tuition
 Social or recreational activities
 Low performers focused mostly on social activities
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Entrepreneurial Compensation Schemes
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs give their managers a chance to earn higher
compensation through performance-based incentives:
 Cash bonus for good performance
 Carried interest in principal investments
 Co-investment opportunities
 The SFOs with the highest five year performance had the most
incentive compensation schemes
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Entrepreneurial Asset Allocation
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs tended to have a higher allocation to
principal investing where they have control over the fate of the
investment
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Sense of Purpose and Moral Responsibility
Study Focuses on the Drivers of Investment Performance
 High Performing SFOs invest heavily in:
 Good governance
 Communicating family values through education and frequent
communication programs
 Educating the next generation
 These steps lead to higher respect and greater happiness
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The Single Family Office
Portfolio
Managers
Family
Members
Family
Office
Legal &
Accounting
Advisors
Other
Experts
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The Three-Step Process for
a Single Family Office
STEP 1
STRATEGIC PLAN
3-6 Months
STEP 2
OPERATIONALPLAN
6-9 Months
STEP 3
FAMILY OFFICE
6 Months – 1 Year
Assess family needs
Create detailed budgets
Hire staff
Assess assets
Decide in-house versus
outsourced functions
Invest money
Assess budget
Create detailed procedures
Offer other services
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Strategic Business Plan for
a Single Family Office
 The strategic plan is the basis for the detailed operating
business plan
 After the strategic planning phase the family can assess
whether it really wants to go forward or whether the
family should join an existing multi-family office
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The Importance of a Written Strategic
Plan in Clarifying Family Issues
 Writing a strategic plan helps families decide together what is
most important and helps to clarify the tradeoffs that everyone
is willing to make
 A written plan allows all family members to get involved and
have a say in deciding what type of office to have
 A plan is an efficient way to communicate with potential
employees, service providers and partners
 A plan with a budget helps the family understand how
much they are going to have to pay to have the
services they want
 A strategic plan helps the family assess whether the
family office structure the are considering will
meet their needs
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Sample Table of Contents
for SFO Strategic Plan
 Executive Summary
 Family mission statement
 Governance of the office, including boards
 Description of office structure
 Staff functions and with organizational charts
 Description of services
 Real Estate and fixtures
 Technology and back office functions
 Compliance and legal considerations
 Estimated budget
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Consult with all Family Members
 If possible, a group meeting or an individual meeting with
each family member who may participate in the family
office, including the representatives for minors, is a good
way to start
 The first assessment is to get a feel for the type of
services, return expectation, cash flow requirements
and risk tolerance of family members
 Existing advisors should be consulted as well to help
fill in the portrait of the family
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Review the Family’s Assets
 Asset allocation is reviewed at the individual level, the
entity level and the family level
 Need to understand the mix of liquid assets, real estate,
operating businesses
 Evaluate the overall risk of the portfolio of assets relative
to the risk the family wishes to assume
 Consider the time horizon of current holdings versus the
time horizon the family uses to consider investments
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Consider the Budget Available
for the Family Office
 An initial document can be prepared describing the
services to be provided and the estimated cost of providing
these services on an in-house versus outsourced basis
 The strategic plan should be circulated among all family
members and discussed as a group
 The family needs to decide at this point whether it wishes
to go forward to create a detailed operating plan with full
cost estimates
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Major Costs of a Family Office
The Biggest Budget Items
 If investment management is outsourced the biggest
budget items are: staff, real estate and fixtures and
technology
 If the investment function is performed in-house, this is
usually the largest expense
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Chief Executive Compensation for
Single Family Offices, 2007
Compensation
High
Low*
Salary
$1,000,000
0
$308,314
Bonus
$800,000
0
$122,000
Deferred Compensation
$200,000
0
$82,500
$1,400,000
0
$338,000
Total Compensation
Mean
* Usually family member taking no salary
Source: Family Wealth Alliance 6th Annual MFO study of 32 single
family offices published in October 2009 www.fwalliance.com.
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Who Should Run the Investment Function
of the Family Office?
Investment Responsibility
 Choices: Family member versus professional, in-house versus
outsourced, Family Office CEO versus a separate Chief Investment
Office Function
 The direct investment experience of family members drives this
decision in many cases
 Oversight above the CIO: family board, external board, external
performance measurement and reporting
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Responsibility of Family
Regarding Investments
Education is the Best Defense
 Designating family members to be educated in investments
 Basic training in reading statements for all family members
 Creating an open culture where all can speak up
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Investment Policies and Procedures
Investment Controls are Vital
 Investment management policies and procedures should be in
written form
 Clear responsibility for investment functions should be assigned
 External audits should be periodically performed to assure that
procedures are followed and records are being kept properly
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Biggest Challenges
for Single Family Offices
Challenge
Weighted Score
Sustainability/Succession/Keeping the family together
53
Markets/Investment Returns/Managing Assets
38
Human Capital
20
Interacting with family members/conflicts/demands
18
Charging for Services/Justifying costs and value added
12
Educating/Preparing Next Generation
8
Cash Management/Liquidity
8
Source: Family Wealth Alliance 6th Annual MFO study of 32 single family offices
published in October 2009 www.fwalliance.com.
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Pitfalls to Avoid
Create Processes from the beginning or face chaos
 All procedures should be in written form
 Clear responsibility for all functions should be assigned
 External audits should be periodically performed to assure that
procedures are followed and records are being kept properly
 All employees should understand their functions and how their
performance is measured
 Problems should be addressed as soon as they arise
 Financial and managerial controls are vital
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Summary
Family
The office needs to be tailored to the needs of the family
Strategy
The strategy needs to be clear and measurable
Investment
The investment process needs to fit the
family and provide adequate controls
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To Contact Pepper International
Website:
www.pepperinternational.com
Email:
[email protected]
Mailing
Address:
Carol Pepper, CEO & Founder
Pepper International
311 East 72nd Street, Suite 11H
New York, NY 10021
Telephone:
212-472-7596
Cell Phone:
917-923-6053
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