EVOLVING THE FAMILY OFFICE

Transcription

1 EVOLVING THE FAMILY OFFICE 1

2 MICHAEL BLACK, CFA Michael Black is Vice President, Relationship Management and Investment Director for Fidelity Family Office Services ( FFOS ). He is responsible for managing a select few large and complex single-family office relationships, and for developing and maintaining investment-focused relationships with FFOS largest and most sophisticated single and multi-family office clients and prospects. CHAPTER 4 Managing a Family Office Investment Program for the Future Prior to joining FFOS, Michael was a Consultant at NEPC, LLC where he was responsible for providing asset allocation, portfolio construction, manager selection and idea sourcing advice to Family Office, University Endowment and Foundation clients. Michael earned his Master of Business Administration and Master of Science in Finance from Boston College, and his Bachelor of Arts in Philosophy & Economics, with Distinction, from Boston University, Michael is a CFA charterholder

3 What Do We Consider Success? Given the idiosyncratic nature of the single-family office ( SFO ) market, it is extremely difficult to answer the question: What does a successful investment program look like? However, while there may not be a right answer, in this chapter we outline a few common approaches and challenges that we have identified through our work with many of the largest and most successful SFOs in the United States. Given our exclusive focus on the ultra high net worth (UHNW) market, we are uniquely positioned to partner with SFOs to help define success, drive down costs and enable them to strive toward their goals in a resource-constrained world. 3

4 Success is in the Eyes of the Beholder Measuring Success How do SFOs define investment program success? SFO investment programs tend to be a direct reflection of the wealth creator s unique goals, objectives, explicit/implicit biases, liquidity needs, investment edge, risk tolerance, tax considerations and time horizons. Multi-generational SFOs will likely incorporate the next generation s views into the investment program as well. As of Summer 2018, we are in the midst of one of the longest economic recoveries of the past generation, and as such it may be a good time to reflect on your investment program to ensure that it is positioned for your intended success. Success can be a nebulous term. Some investment programs define success purely through quantitative metrics (e.g., 10% absolute return over a market cycle or return relative to an index), while others are more qualitatively driven (e.g., solve world hunger). In a 2017 survey 1 of our SFO clients, we found that these offices were divided between absolute return and relative return as their primary quantitative metric. Additionally, a decent portion (19%) of offices fell into the qualitatively driven group as they did not have a quantifiable metric of investment success. We have found that many successful investment programs focus on a dual mandate: (1) ensuring the family is happy, and (2) meeting quantitative/qualitative metrics agreed upon with the family and investment staff. 38% 23% 19% Absolute return target Track in relative terms (i.e. beating an index) No specific target Who is the primary investment decision-maker in 34% 25% 23% 18% Principal Wealth Creator (PWC) your single family office? Investment Committee Family Office Executive Descendant/ family member of the PWC Source: 2017 Fidelity Family Office Investment Survey 1 4

5 Facing Unique Challenges According to our 2017 survey 1, SFO investment professionals face a number of challenges. Asset allocation differs greatly across the SFO spectrum (bars = 1 standard deviation) Benchmarking Can Be Difficult There is no SFO Model Portfolio, which makes benchmarking difficult. Average asset allocation numbers may be deceptive, as SFO investment programs tend to be built from the bottom-up based on the unique personality of the family. As the chart on the right illustrates, there is a wide variance for different asset classes, rendering the average less informative. US Public 25.3% Int'l Public 8.3% EM Public 4.4% Priv EQ 9.1% VC 3.3% Muni FI 7.5% Taxable FI 3.4% 2.7% 0.2% High Yield Int'l FI Real Assets 12.0% Hedge Funds 8.3% Cash 13.3% Source: 2017 Fidelity Family Office Investment Survey 1 5

6 Customization Increases Complexity Each SFO has its own unique identity, which must be factored into the investment program. The investment team should fully understand this complexity and ensure they are adequately staffed to manage it. However, through our investment study, we found that resources tend to be stretched. For example, 41% of respondents to our survey believe their investment team is understaffed, and 44% of SFOs have just one dedicated investment manager in-house (see page 9). We have recognized that successful SFOs tend to strategically partner with a select few firms in order to leverage their scale and increase efficiency to compensate for having fewer internal resources. Common Traits of Successful SFOs It is impossible to be overly prescriptive about how to run a successful long-term investment program. But in our experience, we have noticed three common traits exhibited by successful SFOs: HAVE A CLEARLY IDENTIFIED EDGE UNDERSTAND THEIR STRENGTHS AND WEAKNESSES HIRE AN APPROPRIATE INVESTMENT TEAM 6

7 1. Have a Clearly Identified Edge Families have done something unique with an extraordinary amount of skill and passion in order to create enough wealth to necessitate forming an SFO. We define this skill and passion as their investment edge, and note that the SFOs considered successful clearly identify where the family s expertise and passions lie. Some offices choose to make the family s edge the focus of the investment program, while others do not. For instance, if the family created wealth through owning and operating hotels, the core of the investment program may be heavily skewed towards real estate. This is reflected in the experience of one investment respondent in the Fidelity Family Office Investment 2017 Survey 1 : We spent the last six months reconstituting ourselves to have a less diversified asset allocation model and much more concentrated in what we know our primary business is in real estate. Everything else is alternatives. 2. Understand Their Strengths and Weaknesses We have identified a few general constructs that have been implemented successfully in various forms. While no SFO fits neatly into any of these frameworks (see the following page), we believe they provide a good starting point for comparison. Importantly, we note that SFO investment professionals deemed successful avoid straying from their agreed-upon framework unless there is a clearly identifiable structural change in the office and/or the market. Likewise, these investment professionals are willing to respectfully push back against the family if they want to change the framework without just cause. This two-way partnership appears to be critical to success. 7

8 Investment Frameworks: Framework Key Considerations Endowment Model Replication of typical institutional investment program; strong focus on alternatives (e.g., hedge funds, private equity funds) Generally lower adoption by SFOs Extremely time-intensive Likely the most expensive framework Lower degree of control/flexibility of underlying investments Potentially least tax-aware SCT Model Simple, cheap, tax-efficient implementation of traditional investments (e.g., stocks, bonds, cash); select focus on alternatives/directs Generally high adoption by newer SFOs Much less time-intensive Likely least expensive framework Greater degree of control/flexibility of underlying investments Potentially most tax-aware Tend to concentrate liquid investments with few partners drive scale and efficiency Direct Investment Focused Heavy emphasis on directs Generally high adoption by SFOs with active, entrepreneurial families Time-intensive, focused on finding the right direct investment which directly aligns with SFO s edge Highest degree of control/flexibility of underlying investments Many SFOs aspire to this model, few implement successfully over the long term 8

9 3. Hire an Appropriate Investment Team There is a constant battle for talent due to competition with public and private investment firms. To illustrate this, the chart below shows that SFOs employ fewer than three investment professionals, despite the substantial pools of capital they oversee. Without the appropriate investment team in place, even the most well-designed investment programs may fail over time. A Resourcing Battle Approximately, how many full time equivalent ( FTE ) staff does your office employ? Of those FTEs, how many are dedicated to investing? 18% 17% 14% 1% 1% % 44% 19% 38% 40% Average 1 : 9.9 Median 1 : 5 Source: 2017 Fidelity Family Office Investment Survey 1 Average 1 : 2.9 Median 1 : 2 9

10 Questions to Consider Generally, some of the most successful SFO investment professionals continuously evaluate the following questions: How does the family define success? What is our edge? How do I keep investment costs as low as possible without sacrificing potential returns? How do I accomplish more with fewer dedicated resources? Am I aligned with the right strategic partners to help in my day-to-day management of the portfolio? Which strategies should we insource vs. outsource? How do I network with the right families? Am I engaging the next generation appropriately? How should we take advantage of potentially disruptive technologies within the investment program (e.g., robo-advice, artificial intelligence, blockchain)? How should I plan for the next market downturn? While these questions are difficult to answer, they are absolutely critical to an SFO s success Fidelity Family Office Services Investment Study. This study surveyed a group of 343 families and family offices. The study was a mix of qualitative and quantitative research conducted between 9/28/17 10/16/17 and consisted of single-family offices (SFOs), multi-family offices (MFOs) and wealthy families, with the majority being SFOs. 10

11 Explore Other Chapters GO.FIDELITY.COM/EVOLVEFAMILYOFFICE AN INTRODUCTION MISSION TALENT INVESTMENTS RISK TECHNOLOGY SECURITY FROM ALL ANGLES WORKING TOGETHER AS A FAMILY DEVELOPING THE RISING GENERATION GENERATIONAL TRANSITION Provide Feedback: Click to take a short survey 11

12 For additional insights and resources, please contact your Fidelity Relationship Manager - call , or visit familyoffice.fidelity.com. For investment professional or institutional investor use only. Not authorized for distribution to the public as sales material in any form. The securities mentioned are not necessarily holdings invested in by FMR LLC. References to specific companies should not be construed as a recommendation or investment advice. The statements and opinions are subject to change at any time, based on marketing and other conditions. The content provided herein is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve as the primary or sole basis for your decisions as there may be other factors you should consider. Fidelity Clearing & Custody Solutions does not provide financial or investment advice. You should conduct your own due diligence and analysis based on your specific needs. This communication is provided for informational and educational purposes only. Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with any investment or transaction described herein. Fiduciaries are solely responsible for exercising independent judgment in evaluating any transaction(s) and are assumed to be capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Fidelity has a financial interest in any transaction(s) that fiduciaries, and if applicable, their clients, may enter into involving Fidelity s products or services. Fidelity Family Office Services is a division of Fidelity Brokerage Services LLC. Fidelity Clearing & Custody Solutions provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC FMR LLC. All rights reserved