The Investment Scientist

Multi-family Office: The High Cost of Exclusivity

Posted on: June 18, 2013

suit pocketThe other day, I was invited to visit a multi-family office that only serve super-wealthy families that have $10mm and above.

I was curious what set them apart from my firm, which mostly serves folks in the $1mm to $5mm wealth range.

I came away with one word: exclusivity.

The name

What they do is no different from wealth management, but they call themselves “multi-family office.” Just in case you don’t know what family offices are, they are offices billionaire families set up to manage their own complex financial affairs. A family office serves only one family. By adding “multi-” to “family office,” a wealth management firm can make their millionaire clients feel like they are billionaires.

The floor and the desk

The floor is marble, and all the furniture is made of oak. The decor of the conference room shouts “luxurious.”

The advisor

The head advisor came in and introduced himself. Apparently he served in the Ford administration, then the Reagan administration, and the first Bush administration. Imagine you have him as your advisor. That surely is some bragging rights in cocktail parties.

The investment

Then we moved on to talk about investments. They showed me their sample investment – half of the asset allocation is in various hedge funds: global macro, event driven, long/short, managed futures, etc. These are investments not available to us mere mortals.

But these are also investments that are not regulated, extremely opaque, and in many cases, the managers make off with most of the gains if there are any.

Simon Lack, in the book “The Hedge Funds Mirage”, shows us the statistics he has meticulously collected: Between 1998 to 2010, hedge fund (and fund of hedge funds) managers make a total of $440 billion, investors in those funds? 9 billion, a mere 2% of all gains. Hedge fund statistics are self-reported, those hedge funds that have failed and lost all of investors’ money will likely not included in the statistics. So the real picture might be a lot worse. No wonder David Swensen, head of Yale  Endowment, called hedge funds, the cancer of the financial industry.

After the visit, I now know how I can up my game in the business:

  • I will change my firm name to “MZ Family Office.”
  • I will replace my IKEA furniture with oak wood.
  • I will hire my college roommate who is in the federal government and rebrand him as working for three presidents: Clinton, Bush and Obama.

But I still can’t, in good conscience, put my clients’ money in hedge funds. It would be like giving them cancer.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

5 Responses to "Multi-family Office: The High Cost of Exclusivity"

I believe they call it “Gravitas”. Maybe they are grooming you Michael, us mere mortals usually don’t get to see inside the ivory tower. This only adds to my theory that the wealthy will never pay the higher tax rates government demands. They have “people”. Those people earn handsome livings growing and tax deferring wealth. If the rates get too high, they just refine their strategy.

Mortals, earning W-2, 1099, and Schedule C incomes do not have people or opportunities for the big game.

Ron, I have no problem with the working rich, or even the inherited rich. But I have a problem with the stealing rich, such as getting rich putting clients into a risky hedge funds that promise to kick back 25% of the exorbitant fees they charge.

In addition to the dubious privilege of higher fees and resulting loss of capital, don’t these clients lose out on some SEC protections due to being high net worth individuals? Or is that automatic after a certain point?

They can invest in unregulated hedge funds. To avoid SEC oversight, the fund must have less than 35 investors, and all qualified investors.

Michael- While what you say may be true in some instances, I have also worked closely with numerous multi-family offices which provide highly customized investing, reporting and risk management services which many of these large families need. And, as I am certain that you are aware, all multi-family offices are required to be registered with the SEC and are subject to audit just like any other wealth advisor. Corrupt advisors are found in all types of firms, both large and small and it seems that it would take more than simply one visit with one MFO for you to slander the entire industry.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

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