10/6/16, 5(38 PM

This copy is for your personal, non-commercial use only. Reproductions and
distribution of this news story are strictly prohibited.
View reprint options Order a reprint article now Print

N.A. Family Oces: Enhanced Returns In Muted Environment

JUNE 8, 2016 CHARLIE BUCKLEY

At UBS, we spend a considerable amount of time studying global wealth trends and themes.
For the last several years, one trend has been clear: there has been incredible growth in the
ranks of the ultra-high net worth (UHNW), particularly in North America and Asia. In fact, in
China alone, a new person attained billionaire status every week during the rst quarter of
2015 .
As a result of this momentous growth, we have seen a rise in the creation of both single and
multi-family oces in North America and around the world . At a high level, the growth of
single family oces logically follows trends in wealth creation: the institution is ideally suited
to families with $150 million or more in private wealth. As a familys assets grow, it becomes
prudent and cost-eective to establish a bespoke organization, governance structure and
investment strategy. The evolution of multi-family oces where oces manage or oversee
investments of three or more families is a newer trend, made attractive as member
families can spread administrative costs over a larger pool of assets and may be able to
pursue investment options jointly that no one family could on its own.
An oshoot of the wealth-creation trend, intergenerational wealth transfer is another
signicant driver of family oce growth. This is a core purpose for family oces regardless
of size, strategy, family business ownership, family complexity or geography. And it may
become even more central to the business as, over the next 30 years, the global UHNW
population is expected to transfer $16 trillion in assets to future generations .
UBS, in partnership with Campden Wealth Research, recently conducted the largest research
study of family oces in history to better understand how client families are being served
today as well as the trends shaping family oces for the future. The 2015 Global Family
Oce Report delivers our ndings from studying 224 family oces around the world, 34% of
which were based in North America.
SPOTLIGHT ON NORTH AMERICA
For the North American region, we identied three major trends:
Family oces are taking on more risk, with oces searching for greater investment returns;
http://www.fa-mag.com/news/n-a--family-offices--enhanced-returns-in-muted-environment-27359.html?print

Page 1 of 5

10/6/16, 5(38 PM

Family oces are keeping it local, continuing to invest their portfolios primarily in domestic
markets; and
Family oce costs are rising relative to prior years, which is attributable in large part to the
hiring of additional sta to focus on new, specialized investment strategies.
Compared to the rest of the world, North American family oces typically manage a larger
pool of assets: the 2015 Global Family Oce Report found that average assets under
management (AUM) were $926 million in North America versus $806 million globally. These
assets tend to be invested more for wealth accumulation than preservation, in part because
family oces in this region tend to be led by an entrepreneurial patriarch or matriarch, with
a growth mindset. Accordingly, North American family oces portfolio mixes tend to dier
somewhat from global peers, as described further below.
Historically, North American family oces have had a strong culture of charity, and that
orientation continues today. To wit, three quarters of family oces in the region are actively
engaged in philanthropy, a much higher proportion than those in Europe (the least likely to
involve themselves in charity), Emerging Markets (Latin America, Africa and the Middle East)
or Asia-Pacic. Those involved in philanthropy also give a higher percentage of their annual
AUM to charity relative to global peers, amounting to approximately $36 million each year.
But it doesnt stop there North American family oces care deeply about their charitable
contributions creating a demonstrable impact, so we have seen an increased desire for
measurement tools designed to track social impact.
PORTFOLIO STRUCTURE AND PERFORMANCE
As a result of diering investment objectives, North American family oce portfolios do not
look like those in other regions they have a higher allocation to hedge funds (12% versus
9% globally), a much lower xed income component (11% versus 14% globally), and
signicantly greater allocations to equities (29% versus 26% globally).
The average North American family oce also typically holds 45% of their portfolio in illiquid
assets, such as private equity, hedge funds and real estate, a much greater proportion than
in the portfolios of high net worth individuals, due to the promising nature of alternative
investment returns. Given the greater use of alternatives, North American family oces
portfolios generally contain more outsourced investments than other regions.
Despite somewhat more aggressive allocations, out of all of the regions surveyed in the 2015
Global Family Oce Report, North American family oces experienced the most signicant
decline in annual investment performance between 2013 and 2014, dropping from a 9.9%
average total return to under 6%. Interestingly, family oces in Emerging Markets were the
only group to see an improvement in investment performance last year, up to 4.9% versus
4.1% the year prior, beating the performance of developed market family oces in North
America, Europe and Asia-Pacic.

http://www.fa-mag.com/news/n-a--family-offices--enhanced-returns-in-muted-environment-27359.html?print

Page 2 of 5

10/6/16, 5(38 PM

The lower returns of North American family oces in 2014 were due, in large part, to weaker
performance in equity markets compared to previous years.
APPETITE FOR RISK IS GROWING, BUT FAMILY OFFICES ARE STICKING TO DOMESTIC
INVESTMENTS
The 2015 Global Family Oce Report also revealed an overall increase in risk tolerance
across family oces globally. In North America, specically, family oces appear to be taking
slightly more risk, with cash balances dropping a percentage point between 2013 and 2014.
Two areas where family oces are not taking additional global risk, however are in real
estate and equity allocations. Family oces continue to stay on their home turf in both. The
average North American family oce allocates 11% of their total investment portfolio
(typically more than $100 million) to real estate direct investment and tends to invest locally
and sometime nationally as investments are typically managed in-house. Foreign real estate
investments come with signicant added costs and risks including lack of market
familiarity.
Within equity portfolios, North American family oces tend to allocate a greater share of
assets to developed markets over emerging markets. North American oces have the
highest allocation to developed market equities of any region (23% versus a global average
of 19% and allocations as low as 8% in Emerging Markets-based family oces). They have
the second-lowest allocation to developing markets equities as well, with a 6% allocation
versus a 7% global average and 13% among Asia-Pacic-based family oces.
RISING COSTS ARE CREATING A HEAVIER BURDEN
Though operating costs are rising for family oces globally, in large part as a result of added
administrative expenses, North American family oces are markedly more ecient relative
to their counterparts in other regions of the world. North American family oces paid an
average of 74 basis points (bps) of AUM to cover operating costs in 2014, excluding
investment manager fees, compared to other global oces that average 99 bps of AUM.
This organization and eciency is both smart and necessary as we heard from one single
family oce in the region, tax policy and regulation in the United States are becoming
increasingly complicated, requiring additional sta, resources and costs to understand the
rules and ensure compliance. In terms of investment costs, North American family oces
are roughly on par with foreign family oces, averaging 43 bps of AUM versus 44 bps
globally despite their higher use of outside managers. North American family oces spend
the most on external manager performance fees (22 bps), however.
Recruiting and retaining the right leadership and talent is critical for single and multi-family
oces to succeed, and North American family oces put signicant funds towards making
sure they have it. These regional family oce CEOs are paid the highest on average,
$446,000 annually, compared to $294,000 in Europe or $150,000 in Emerging Markets, and

http://www.fa-mag.com/news/n-a--family-offices--enhanced-returns-in-muted-environment-27359.html?print

Page 3 of 5

10/6/16, 5(38 PM

have an average tenure of nearly 10 years greater than CEOs in the Asia-Pacic region, but
less than in Europe and Emerging Markets.
Stang and its related costs will become more critical to family oces as the founding
principals of North American family oces age. They typically become more conscientious,
relative to their counterparts in other regions, about preparing sta and family oce
structures for the day when they eventually need to transfer authority to either their
relatives or non-family executives. This professionalism is particularly true of more
established family oces that already have been around for multiple generations, compared
to younger (newer) family oces.
North American oces also tend to tie CEO compensation more closely to investment
performance than other oces do. One compensation concern for family oces is
balancing retention with market pay rates. Some family oce CEOs we spoke with
expressed concerns about pay ination for family oce sta as concerns about losing
valuable sta members rise.
WHAT IT ALL MEANS AND WHAT TO DO ABOUT IT
Looking ahead, North American family oces have a lot to think about when it comes to
eectively managing continually rising costs, risk and return expectations.
In terms of risk management, there have been mixed reviews of the potential for currently
high performing asset classes, such as real estate and private equity, to continue their run.
Family oces should be careful to judge future expectations based on past performance and
beware of cyclicality. In addition, as some families expand, they have a tendency to transition
the focus of their investment strategy from riskier growth to less risky wealth preservation.
While this makes sense for some, its important to consider the implications of such a shift,
including the fact that taking lower risk generally yields lower returns, resulting in a smaller
pool of wealth for families that may still be growing.
On cost, because we do not expect cost pressures to go away anytime soon, it is important
for family oces to constantly monitor asset and manager allocations, question the benets
of services provided, and evaluate the eciency of insourcing versus outsourcing various
tasks. In addition, family oce CEOs should ensure their costs are aligned with the familys
or families nancial management needs and that they are getting the best value for what
they are paying.
As wealthy families grow with each generation, nancial regulations evolve and global
markets experience peaks and valleys, family oces will have to become smarter and more
ecient to keep up with the times and accommodate changes in size. Putting the right
organization, structure, people and plan in place now and periodically re-evaluating it will
put them on the path to success.

http://www.fa-mag.com/news/n-a--family-offices--enhanced-returns-in-muted-environment-27359.html?print

Page 4 of 5

10/6/16, 5(38 PM

Charlie Buckley is Americas head of global family oce coverage at UBS.

This copy is for your personal, non-commercial use only. Reproductions and distribution of this news story are strictly prohibited.

View reprint options Order a reprint article now Print

http://www.fa-mag.com/news/n-a--family-offices--enhanced-returns-in-muted-environment-27359.html?print

Page 5 of 5