RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: Rich kids turn to financial nannies  Sat Oct 04, 2008 11:41 pm | |
| They made a fortune for themselves and handle the wealth of others, but super-rich men and women need to rest some time. Simon Hoyle reports.
When wealthy families - really wealthy families - need their financial affairs managed, they often set up a "family office". This is an organisation that manages a single family's wealth. It's like a privately owned financial services firm and often its brief is broader than managing money. It could also encompass legal and accounting issues, provide property management services, and sometimes book the annual family holiday.
Needless to say running a family office is costly, so large sums of money are needed to justify doing it. Sometimes families that are quite wealthy, but frustratingly not quite wealthy enough, pool their resources and establish a family office to share between them. These are called multi-family offices (MFOs), as opposed to single-family offices (SFOs).
One interesting characteristic of SFOs and MFOs is that they can outlive the families that set them up. Some fund management firms operating today began as family offices, even though the families involved initially have long since disappeared or frittered away their wealth to merely mortal levels.
And now the family office concept is moving, well, downmarket, as it were, into the so-called "high-net-worth individuals" (HNWI) market. The Asia Pacific Wealth Report 2008, published last month by Capgemini and Merrill Lynch, says HNWIs are those with "at least $US1 million [$1.3 million] in financial assets, excluding collectibles, consumables, consumer durables and primary residences".
Switched-on financial services companies are structuring services to mimic those offered by the traditional family office but making them available to a far wider range of clients.
A US research and analysis group, Celent, says that five years ago a family could justify setting up a family office if they had "only" $US100 million of assets. Today the figure needs to be closer to $US250 million. It costs about $US3 million a year, and 10 full-time employees, to run a decent family office.
Clearly, that is a specialised market, but the concept can still be applied to the broader HNWI market if it is structured in a smart way.
It might be a surprise to learn how many HNWIs there are in Australia, and why there's such a demand for these quasi-family office arrangements. The Wealth Report says that at the end of last year there were about 2.8 million in the region, and Australia accounted for about 7 per cent of the total, or about 196,000 individuals. Between them, HNWIs in the region had assets of about $US550 billion ($700 billion).
Australian HNWIs, on average, had investable assets of $US3.2 million each - that's below the regional average of $US3.6 billion, and below the global average of $US4 billion.
Nevertheless, the recent sharemarket meltdown notwithstanding, HNWIs represent a lucrative market and a natural target for high-quality, tailored financial services.
David Haintz, managing director of Haintz Financial Services in Melbourne, says the concept of outsourcing management of the family's wealth and financial affairs is established in the US, and is likely to catch on in Australia, particularly for senior executives with big earnings but little time for families.
Haintz describes the service as the "Family CFO", or chief financial officer.
A report published by Celent last week concludes that the approach of a family office differs from traditional financial planning or wealth management services in three main ways:
â– Ensuring that wealth is available to support the economic and philanthropic aspirations of the ongoing generations, not just those of the immediate family of the wealth creator;
â– Supporting an abiding interest in non-financial aspects of wealth, including philanthropy and social policy; and,
â– Understanding and directing the entirety of the wealth, not just the investments but also the real estate, yachts, planes and other non-liquid trappings of a top-tier lifestyle.
Celent says there are between 500 and 1000 SFOs in the US and 2500 to 3000 MFOs. It also believes those figures will grow as the services evolve to cater to a broader market.
Haintz's Family CFO model is similar in concept to a service called myCFO, launched in the US by Harris Financial Corp, and reportedly the brainchild of Jim Clark, a co-founder of the internet browser company Netscape. (In Clark's case CFO stands for "comprehensive family office", and the business was originally aimed at the families of Silicon Valley millionaires.)
Haintz says the Family CFO service is aimed at clients with either assets of $US3 million or more, or income of more than $US300,000 a year, or a portfolio valued at $US500,000 or more, or who need income in retirement of more than $US15,000 a month.
"The concept [of the Family CFO] is similar [to the family office], though I think the fundamental difference might be that a 'family office' would be a designated team of people, either in-house or outsourced, that would work specifically on that family's affairs - typically, as you say, the very or ultra affluent," Haintz says.
"A Private CFO or Family CFO, on the other hand, is more of an outsourced relationship that would look after multiple families, typically in the range of, say, 20 to 50 per adviser - as opposed to, say, the 200 to 250 clients the average Australian adviser might look after. This clearly enables a deeper and more dedicated relationship.
"Both would assist these highly successful people to make smart decisions about money, which by default would mean stopping them from making stupid mistakes or, as we say, 'stupidity prevention'."
Haintz says the Family CFO or Private CFO is a concept his firm implemented "based on US visits, and we took the opportunity to register the business name myCFO in Australia if it took off".
"Whilst there are a very select few other advisers that would refer to the concept, we would be able to lay claim to developing it as much as anyone.
"The concept was developed around the busy executive, who would spend the day creating wealth for shareholders, who would go home each night after a long day at work working on business and shareholder wealth creation, and when they get home they [have] two choices.
"When they get home from work after a long day, they can go left into the study and spend time on their own affairs and paperwork, having spent all day on other people's - read shareholders' - wealth creation; or go down the hallway to spend some precious time with their family that they rarely see - which is why they are working so hard in the first place - and outsource the Family CFO role to us.
"These businesspeople and executives understand the concept of a CFO, as they are either one themselves, or work with one every day in their business.
"They also appreciate that a CFO does more than arrange the balance sheet and profit and loss [accounts]. They are involved in multiple facets of the business. Similarly, the Family CFO is involved in multiple facets of their clients' financial lives.
"The typical client has many advisers, but rarely is there one adviser overseeing and co-ordinating the other advisers, so that the strategies being implemented all gel and fit together.
"Finally - and just like in a business - the CFO would put recommendations to the CEO and board, while the Family CFO provides advice and recommendations to the family CEO - that is, the client - but the client makes the decisions."
Haintz says busy executives might be highly competent and skilled at their day jobs, but often they do not apply the same level of insight and commitment to the finances of their families.
"An example might be a senior executive of a listed company who has significant wealth in options and shares of the company they work for.
"They spend their life working long hours, creating wealth for shareholders, of which they are one, but have no plan as to how and when to tax-efficiently extract wealth over a period of time, to move from a concentrated or riskier position to a diversified or less risky position to underpin their family's financial health forever.
"We have seen examples over the last 10 years where executives have made hundreds of millions of dollars in company script - options and shares - in the right company at the right time of a boom cycle, but who are bankrupt today.
"[Or] they might be directors of publicly listed companies that don't want to send the wrong signal to the market by selling down shares.
"Some executives with listed options or shares are not aware there are choices to be made around how and when their options may be taxed - section 139E elections - there can be substantial savings for the right person if you know where to look.
"So, the issue is more around complexity and value add, as opposed to level of income or assets, but the two quite often go hand in hand."
http://business.smh.com.au/business/rich-kids-turn-to-financial-nannies-20081003-4tib.html?page=fullpage#contentSwap1 |
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