The rise of family offices
Companies that handle the money of relatives with large assets also offer a variety of other unusual services
The term "family office" used to mean the ultra-discreet investment managers who ran portfolios for the likes of the Oppenheimers and the Ruperts. The term is now being used by some businesses that are prepared to offer a similar service to those with "just" R100m in spare change.
The first business in SA to brand itself as a family office was Stonehage Fleming. It was formed by the merger of Stonehage, which focused primarily on helping South Africans manage their overseas assets, and the family office interests of the UK’s Fleming family. The best-known member was Ian Fleming, creator of James Bond.
The family sold its merchant bank and unit trust business Robert Fleming to Chase Manhattan (later acquired by JPMorgan) in 2000.
Being a Scottish family, it was determined to ensure that the proceeds were managed prudently.
It is unlikely that Stonehage Fleming will ever acquire a client as complex as the Fleming family itself: almost 250 family members are serviced by the firm. For most of us this is a challenge experienced only in novels by Leo Tolstoy or Harold Robbins.
The closest we came to family offices previously was in the heyday of the large trust companies Syfrets and BOE, which also offered concierge services to clients, such as walking their dogs.
Cheryl Howard, MD of the new Maitland Family Office, says she once helped a client choose the colour of her Bentley and, more seriously, has designed trusts so that an addict son would not squander the capital. She has also hired a marriage counsellor to try to patch up a serious family rift.
Johan van Zyl, head of Stonehage Fleming in SA, says wealth managers and private client investment managers can offer many of the same services as family offices, but not with the same breadth and depth. "Wealth managers typically earn about 95% of their revenue from investment-based fees, while we earn about 50% from trustee fees, tax planning and other time-based fees or retainers." This might include drafting family charters and mission statements.
Van Zyl says the group has learnt many lessons from the complex needs of the Fleming family that can also be applied to much less complex cases.
Maitland Family Office takes this a step further, as instead of the usual model of wealth management plus some frills, its trustee, tax and accounting service is the core of the offering.
Maitland has a small, almost off-the-radar multimanagement business that needs to expand. Howard says good skills in professional and fiduciary services are hard to find, while investment is increasingly a commodity.
She says R100m is a realistic base for a family office client as, if the money is well managed, it can last for two or even three generations. "But SA is unusual, as it’s quite common [here] for families to set up a trust with just R20m. Yet there are a few trusts set up by Europeans or Americans with just a million US dollars."
Howard says a family office executive acts as the conductor of an orchestra.
A family can often afford to take a very long-term view of investments so it can be an ideal client for illiquid assets such as private equity, direct property and more exotic fixed income such as corporate credit.
Howard says it is absolutely essential to be able to service clients as global citizens, especially in SA, where the pressure to externalise wealth never stops. Maitland certainly has an interesting global network, mainly in exotic tax havens such as the Isle of Man, Guernsey, Mauritius and Monaco.
Family offices are in danger of becoming too touchy-feely when, at the end of the day, their primary function is preserving and increasing wealth, and to do that more effectively than investing through vanilla mutual funds.
Stonehage Fleming, for example, treats financial capital as only one of its pillars. The other 75% of the job is nurturing cultural capital, or developing a value system; intellectual capital, or helping the family make use of its skills, knowledge and experience; and social capital, or working with the outside world and making the right philanthropic contribution.
Van Zyl says everyone in the team is focused on their area of expertise, whether it’s legal, accounting or investments. He believes the performance of the global equity fund under Gerrit Smit indicates it has not taken its eye off the ball — over five years its return is 10 percentage points ahead of the MSCI all country index.
He says the Stonehage team — mainly SA-born with Afrikaans or Jewish backgrounds — might seem to have little in common with the blue-blooded Flemings, but both teams prefer an understated, long-term approach. Quite a contrast with the megaphone style of, say, Investec Wealth.
SA’s largest wealth manager, Citadel, doesn’t have a separate, legally constituted family office. But MD Andrew Möller says the ultra high net worth offering, run out of Sandton, is a de facto family office.
"We have an in-house local fiduciary capability and access to Channel Islands-based Stenham Trustees in our group."
Möller says Citadel has developed a house view that is suitable for most of its mass affluent clients, who have R5m-R20m in investable assets, "but in a family office the client view becomes the house view. It can be entirely open architecture and we are very happy to conduct a due diligence if a client wants to make an investment in private equity, or even a share. And it will arbitrate in family disputes when necessary."
Möller says the business model is the reverse of that of family offices, which charge for everything. "If you have R40m invested with us we will waive the trustee fees and absorb the costs of many other extra services."
These activities are cross-subsidised by the annuity-based investment fees it earns.
The family office, including Citadel, operates on a vertically integrated model, buying in as few outside specialist services as possible.
Andrew Duvenage, head of financial adviser NFB Johannesburg, says the firm’s model as a wealth manager is often fairer to the clients. "We can select our banking, trust and tax partners objectively with no corporate pressures. We won’t be judge, jury and executioner."
He says the in-house solutions at the family offices aren’t necessarily cheaper, and that they lose flexibility when choosing providers such as investment platforms.