In the world of wealth, the ultimate accessory item is a private investment office, which brings status and order to family’s financial affairs.
“There is cachet in setting up your own family office,” says Cara Williams, global leader for family offices and financial intermediaries at Mercer, the world’s largest investment consultant.
Families are extremely personality-based. You might get one branch of the family gung-ho on something, but the rest looking to do something very different
“Families want to use them to take control. They are moving away from relying on a single bank. They also want better insight into how to invest their assets.”
By creating a single-family office, employing a team of professionals, wealthy individuals find it easier to map out ways in which their financial affairs can be pooled more effectively, with the help of governance and investment targets. They learn to pay more attention to outgoings.
Williams says: “We have the ability to charge reasonable fees given the scale of our business. This can save money. A lot of families don’t necessarily know how much they pay their own advisers.”
There is always room for improvement. “The vast majority of family offices are not organised in the way they invest their money,” says Williams. “Their holdings aren’t coherent. They have a ‘magpie’ style of investing, when they find something interesting.”
Drawbacks with a magpie approach emerge more clearly as soon as family offices, and their advisers, start to keep a detailed ledger of gains, losses and portfolio attribution. Even where sums are dedicated to different beneficiaries, family offices make it easier to employ a common investment approach.
Or, says Williams: “Families can structure their investments around a core which is available to an entire family, with satellites available to different branches of it.”
Investments are often skewed towards a business, or property. “Where family offices ask for our advice, they want to take better control of their assets,” says Williams.
“Often portfolios may be somewhat disparate – or have a disproportionate amount of money locked into one asset – and therefore require a more holistic view, to get a better sense of investments which exist outside this area.”
Families frequently collect a high share of profits from their businesses, and find it hard to understand why they can’t expect the same from a diverse portfolio.
Williams says: “If you decrease volatility, that potentially reduces returns. If you want greater returns, that could potentially increase your volatility. Which is central to the world of consulting. We advise on $11.5 trillion of assets, and there are trade-offs you need to make.”
Williams learned from her own career experience, starting as a civilian with Nato in 1993 then taking on endless wealth and client advice with Merrill Lynch, and others, prior to joining Mercer in 2005. It helps to be organised – and a people person.
She says: “Families are extremely personality-based. You might get one branch of the family gung-ho on something, but the rest looking to do something very different.” When change is required it is vital to get everyone in the room.
Families can outsource their investment decisions to Mercer through fiduciary arrangements, which draw on its experience with core institutional investors. Through the service, Mercer may take on investment decisions for plain vanilla portfolios, complex transactions or entire strategies.
Its cloud-based MercerInsight service offers details on 6,000 managers and 32,000 strategies, commonly accessed by family office chief investment officers. It is a powerful calling card, which helps Mercer in its battle for its share of the family office wallet with rival consultant Cambridge Associates.
Family offices are currently keen on debt strategies, real estate and private equity. Williams says: “Many continue to invest as if markets won’t turn. We have had a decent run but there is still assuredness out there. Mercer is more cautious than optimistic. It’s about diversification, and being prepared.”
She said families remain keen to invest in business deals direct, or via a co-investment structure where Mercer can play a valuable role in vetting proposals. Mercer is also in contact with independent sponsors who source opportunities for family offices through tight networks so that investors get a slice of a deal, rather than a tranche of a pooled deal.
Williams knows the value of a good deal, but sounds a note of caution: “Everything goes back to those golf-course conversations where clients hear of things that are interesting and exciting, but have very little transparency, insight or validity. Our operational due diligence plays an important role. It is our job to make sure the investment is appropriate – and legitimate.
“Unfortunately, a good deal of private investments are based on the attractiveness of the story and gut feel, but lack the insight which would make a solid investment. You need to understand that people can get carried away by enthusiasm.”
She regrets a decline of interest in funds as people scour the world for their next big deal: “We know this is not always a popular view, but we often suggest people use a fund structure, where you can get the fees down and benefit from teams of staff carrying out investment and supervision.”
Williams also points out that a deal-by-deal approach can mean you miss insights into how other investment strategies could improve, and diversify portfolios. She notes that Asian family offices often get around this by earmarking funds for “play” money. Western families can be less disciplined.
That said, Mercer is tooled up to seek out deals for its clients. Williams points out that Mercer retains 200 researchers across all asset classes: “They look at funds, and we offer funds of funds, but there is also a focus on deals. We keep our ear to the ground, and we are global. A lot of opportunities come from private equity firms. But our researchers know a lot of people. We often expect to get first call on an opportunity.”
Mercer can also offer clients M&A due diligence through a different division, plus insurance services for everything from yachts to businesses through its parent Marsh McLennan.
Its grasp of green issues – a growing preoccupation among institutions – has helped it find, and vet, investments which make a sustainable impact: “The new generation do not necessarily want the annual 7% income their parents demanded,” says Williams.
“They might be happy with as little as 100 basis points – provided they are also happy with the good they are doing.”