Managing mega-wealth, family style

Family offices to manage fortunes are on the upswing, requiring deep pockets, experts -- and honesty.

By Dian Vujovich
Special to the Daily News

Oprah's got one. Bill Gates, Mayor Michael Bloomberg and George Soros reportedly have them, too. Live in an oceanfront estate in town and you've probably got one as well: not Bentleys but family offices.

"Defining a family office is complicated," says Michael J. Bracci managing director of Northern Trust. "The term means so many different things and comes in a variety of structures. But, at its core, a family office is a financial operation that handles a family's wealth."

With more ultra-high-net-worth individuals than ever, including 480 billionaires in the United States and 28 of the Forbes 400 in Palm Beach, the number of family offices is growing.

But getting details about a family office, whether it's overseen by a wealth management institution, independently or as a multi-family office, isn't easy.

Family office boom

Although estimates put the number of family offices in the United States at 3,000, there probably are more -- and that figure is likely to swell in the years ahead as individual fortunes rise.

Regardless, you can bank on two things: no two are exactly alike and there's more to a family office than a surname.

The notion of working with a fiduciary was spawned centuries ago when wealthy merchants hired advisers to control their wealth while they traveled. More recently, the Rockefeller name is credited with creating the family office more than 100 years ago. Families such as the Morgans and Phippses followed, and this exclusive wealth-management style caught on.

These ultra-high net worth individuals found they needed a way to manage their family fortunes and secure the future of their wealth. To do so, they hired full-time employees such as investment professionals, accountants and attorneys. The same strategies are basically followed today.

Originally, the first family offices did just that -- represented the needs of one family. Today, the family office comes in two basic formats: the single-family office, or SFO, and multi-family office, MFO.

No matter the structure, the family's needs come first. Issues addressed include financial, tax, estate and succession planning, trust management, legal, educational, and philanthropic services. Or it can simply be bill paying, handholding and decision-making advice about whether the family needs a mega-yacht or a Gulfstream G550.

No chump change will do in this arena. In fact, those with less than $25 million in investable assets -- that's not total net assets but investable ones -- had best look elsewhere for their high-end money-management needs.

Family styles

Once the decision is made to create a family office, be it a SFO or MFO, its success begins with family honesty.

Helen Bernstein, Palm Beach resident and author, has had a single-family office for years. "One of the reasons I have a family office is I don't know anything about business, mathematics or anything like that," she says. "So I'm not good at any of that stuff and the older I get, I'm less good."

Bernstein -- whose new book, My Journey From Palm Beach Journalist to Oprah with Stops Along the Way, will be available later this month -- has always had her son manage the office.

As in most single-family offices, the investment and administrative work requires more than one employee. Bernstein's office has three.

A study by the Wharton School of the University of Pennsylvania found that the average single-family office employed eight people, with 43 percent headed by a family member. Operating costs can run from hundreds of thousands of dollars a year into the millions. According to Bracci, single-family offices are sometimes formed as corporations, LLCs or S corporations.

Enter the MFO

"Usually, it doesn't make financial sense for a family with liquid wealth less than $75 million to start and staff a single family office as it is a huge investment both in time and money," says Michael Montgomery, managing director at CTC Consulting, Harris myCFO.

Christopher Kelly, founder and managing director of Barclay Breland Family Office, agrees: "Typically, someone who wants their own single-family office wants total control over everything, from their name on the door to working 40 hours a week."

But they're expensive and time-consuming to run, Kelly says.

Hence, the growing appeal of the multi-family office.

Bessemer Trust began as a private family office for the Phipps family in 1907. It has grown into a large multi-family office serving 220 families with significant wealth.

Brandon Reid, managing and regional director of Bessemer Trust, sees the benefits of a multi-family office for the wealthy like this: "What's the alternative? You create a multi-family office or you try to provide all the services to yourself."

It makes sense, he says.

"In addition to the brokerage, planning and investment management pieces, if you have $100 million, have children and grandchildren, and you'd like to oversee everything from the multiple houses you own in Palm Beach, The Hamptons and Europe, have an airplane, etc., family offices in general take care of the overall management of these things."

Fees

Those with family offices face a variety of annual fees and expenses. These depend upon the firm they're working with, their total assets, product choices they've invested in, and the services they require.

Fees and expenses also can be confusing and aren't always transparent, particularly on proprietary products, mutual funds and tax preparation.

"One of the biggest problems that we've seen in the industry is that people don't understand all of the fees they are being charged for their family office," Kelly says. "We do an extensive forensic fee analysis on every one of our clients so that they know exactly how much they are paying."

At Bessemer Trust, fees are predicated on assets under management. "It's around 1 percent, " says Reid. "But it could be a little bit less or a bit more, depending upon the scale of the client. As they have more capital with us, the fees go progressively lower."

Relationships and family

Deciding whether to create a family office boils down to this question: How much time, money and control do you want?

Choose to be a part of a multi-family office and you'll likely be entering into a long-term personal relationship thatprobably will see your family from one generation into the next and beyond.

"Because this will be a long-term relationship, potentially lifelong, it is imperative that we take as much time as we need to ensure this is a good fit for the client and for us," says Montgomery. "It's also very beneficial for us to understand the complex emotional underpinnings of the families."

That said, once a relationship is established, it's not unusual for professional relationships to turn personal.

"At the end of the day, you get to be friends with the people (you're working with) as the years go by, " says Reid. "I've got clients who go back 30 years. We vacation together. They stay at my house. I stay at theirs. What really makes it are the relationships you build."