The Family Office Advantage

In today’s world, there is a myriad of sources from which one can individually acquire knowledge and assistance in pursuit of better investing performance. Whether it’s online brokers, trading platforms, and investor education sites; or the proliferation of big data – especially the hugely popular “alternative data” trend – and the much greater accessibility we now have to insightful information about companies; or even the likes of automated investment services – when it comes to investing, there is now a massive pool of support on hand to help you achieve your goals should you decide to “go it alone”.

Yet despite having access to these abundant resources, many ultra-high-net-worth Americans still prefer seeking out the formal guidance and services that a team of professionals at a family office can provide. Indeed, for the affluent segment of investors, the family office continues to be the comprehensive wealth management solution-of-choice, and by some distance. Even the most experienced, sophisticated investors still choose to outsource their wealth management requirements to these highly experienced, capable teams. 

Why is this the case? Truth be told, there are several crucial reasons:

INVESTMENTS

An objective partner for your investing journey

Are we always rational, objective or even reasonable when it comes to the financial decisions we take? In life we are almost continuously being influenced by factors, both external and within ourselves, that do not always lead us to adopt the absolute optimal strategy. And the same is true  for investing. 

Externally, those factors might include the influence of friends and family, advertising, self-proclaimed market “gurus” whose investment recommendations may not always align with yours, or even social media sentiment around a company that may not truly reflect its current and/or  likely future performance.

Internally, meanwhile, we are always vulnerable to any number of cognitive and emotional biases that tend to skew our view of the world in one way or another.

If you’re familiar with such terms as confirmation bias, the bandwagon effect, status quo bias, loss aversion and many other behavioral biases that have long been recognized by psychologists and economists as each having a hugely significant impact on our ability to objectively perceive, then you might also be aware of the insidious nature of those biases, and in particular, how they can surreptitiously creep into our investment decision-making process. 

Might a financial professional also be vulnerable to such factors? Perhaps. But given the experience and the expertise they have invariably acquired, not to mention the formalized frameworks they have in place to ensure assets are being optimally allocated when constructing a portfolio, you can be assured that the investing process is designed to be as objective, dispassionate and methodical as is reasonably possible. 

For example, the team can formally conduct asset allocation planning and internally manage investments across a broad range of asset classes and sub-asset classes, including those to which you may not have previously had much exposure, but which offer key benefits to the long-term performance of your portfolio. They can also conduct meticulously detailed due diligence, which is a hugely important aspect of investment management investments (and is a topic we will delve into more closely later in this post).

Indeed, working with a family office team equips you with a financial partner who not only understands your financial goals and risk preferences, but one that can identify strategies and execute solutions based on those preferences in a considerably more formalized and objective manner. 

INSIGHT

A robust framework for making decisions

Investing takes time. In fact, it normally takes a lot of time. A less experienced investor may assume that it simply requires creating a suitably diversified portfolio and leaving it alone for months, or even years. But the reality is more complex – investing requires the need to consistently make decisions. Whether that be the need to change allocations within a portfolio, or deciding which news is important and which is not in terms of its likely impact on one’s portfolio, or what strategy to adopt if/when market conditions change significantly. 

Realistically, are you able to set aside enough time in the day to consider such matters? And even if you are, can you be wholly confident that the final decision you take in each and every scenario will always be the optimal one? Researching different potential investment targets, evaluating one’s options and executing the right decision all eats up precious time that you could be using on more important aspects of your life – and indeed, more enjoyable ones.

Seasoned family office professionals, on the other hand, have the necessary financial frameworks in place to confidently make the best decisions time after time, including sophisticated risk models, powerful IT infrastructure, a back office, access to legal and compliance professionals and unhindered access to a wide range of markets. These economies of scale can thus enable the team to achieve significant advantages over an individual retail investor when it comes to attaining specific investment targets. 

What is also perhaps a somewhat under appreciated benefit of the family office is that it typically serves a more limited client base, in terms of numbers, than other client segments of investment management. This lower ratio greatly enhances the time and energy that a family office team can devote to each client. In turn, the ability to glean more useful investment insights for each client, and the ability to be proactive in terms of decision-making, can not be underestimated.

Experience in planning for market downturns

Planning. It’s arguably the most important aspect of any investment strategy. We all invariably plan our investments around reaching goals tied to achieving strong financial returns. But how many of us plan for less favorable market conditions, such as a market downturn or a deep recession? And of those that do plan for such outcomes, how many apportion a sufficient margin of safety to ensure long-term survival? Very few, if we’re being completely honest. 

With sound experience in risk management, a family office will have the necessary expertise and existing frameworks with which to work to make sure your investment strategy leaves enough “room” for when things do not go according to plan. The stock market may well be a relatively easy arena for short-term investor participation, for example, but surviving over the long-term requires sound diversification of one’s portfolio across asset classes. A family office team can ensure such diversification will allow your portfolio to survive when the stock market takes a tumble. 

INGENUITY

Expertise in due diligence

Of course, a major component of planning – perhaps even the most important – is the research that must be carried out on every single potential investment target that’s under consideration. As far as the equity market is concerned, the research methodology for public companies is often fairly well-established and standardized. 

But what about other asset classes that are just as important for inclusion in a portfolio, but that are not quite as well established as equities or bonds? Alternative investments, for example, are viewed with increasing favorability for not only providing portfolio diversification and offsetting the volatility of public markets, but for also offering stellar returns in their own right. And given the non-standard nature of many types of investment opportunities that fall under this asset class, the due diligence that is required prior to investing can often be rather voluminous, not the easiest to access and even less straightforward to interpret.   

Taking real estate as just one example of an alternative investment, this increasingly popular asset class requires a considerable amount of due diligence to be undertaken before investing, including conducting thorough examinations of the physical attributes of the property, ensuring the previous owner’s tax obligations are up-to-date, verifying issues relating to land ownership, title and appraisal of the property, and many more responsibilities.

Again, through sheer experience and expertise, the professionals of a family office can simplify this seemingly intimidating process. They can drastically reduce the time and expense needed to investigate the necessary documentation and are thus in an ideal position to make the most suitable recommendations for investing. 

Indeed, the ingenuity of the family office means that such a team can construct much more customized solutions for each client, based on their preferences and goals, than would otherwise be possible. They can simplify potentially complex matters – such as due diligence as well as many more challenges (discussed below) – and deliver creative, outside-the-box solutions.

EFFICIENCY

The family office provides a single point of contact for all your financial needs.

Indeed, those aforementioned “complex matters” can be frequent and seriously challenging. There are a whole host of additional issues pertaining to one’s investment of which investors must be aware, including taxation planning, estate planning and wealth transfers, income-related matters budgeting, education savings, charitable giving and insurance. 

Many of these ancillary activities take considerable time and resources to not only conduct, but to fully comprehend. An experienced family office team, however, will be well-versed in tackling all of these challenges in an efficient, logical and coordinated manner. It will typically offer a comprehensive service that takes care of all of these activities, such that it easily outperforms the single standalone service offered by the more conventional financial advisory relationship. 

It will also have the infrastructure in place to keep meticulous records of such matters, and organize them in a way to prevent you from forgetting about them and potentially making costly errors through negligence. It should come as no surprise, then, that the family office is often considered the quarterback of a solid financial team. 

And if you have significant wealth that requires distinctly customized solutions, then you will be only too aware of the complexities surrounding managing it in an effective and comprehensive manner. But by choosing to manage your affairs by yourself, it could end up being a full-time job to simply keep your affairs in order, whether they be the accompanying legal and taxation matters, the charitable ventures undertaken or the administrative tasks required.

And of course, let’s not forget the investment management side of things, which in today’s world is typically characterized by uncertainty, highly volatile markets, low interest rates and significantly impactful geopolitical events. Achieving optimal returns is not the most straightforward of goals these days, and thus tend to require more complex and sophisticated investment strategies than is capable of a single investor.

A family office team will have the necessary skills and acumen to ensure those complex requirements are consistently met, with particular attention paid to maximizing convenience, trust and cost-effectiveness for the client. Ultimately, this will mean that you can spend more time on other activities, knowing full well that your wealth is being well looked after.

 

IMPORTANT DISCLOSURE:

The content contained within this post is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. All content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, loss of principle is possible.