The Family Office – An Insider’s View

Have you ever wondered what a family office is really like? Jonathan Galt, financial analyst for a multifamily office as well as the owner and main blogger at Save shared his insights with me in an email interview this week. Here is what I gleaned from his insider view of family office operations.

What’s a family office?

Family Offices, in case you aren’t aware, provide financial and other services to wealthy families. Single family offices are privately owned and serve one family. Multifamily offices serve several to many families. Services differ in different offices, depending on what the family or families desire as well as the mission of the office itself.

That said, Jonathan describes his work place differently:

“Really, we are just a private asset management firm. Personally, I think family office term is just a euphemism for an asset management firm that only works with absurdly rich people and a way of making rich people feel warm and fuzzy when they deal with us.”

How is Jonathan’s office structured?

Galt’s office is privately held and the president of the firm has been there over 20 years. Before that, the president’s father also ran the firm.

Because it is privately held, the firm is not required to act as custodian and does not have to comply with the various reporting regulations required of publicly held institutions. That doesn’t mean it doesn’t have to comply with laws and other regulations however.

For example, the partners must insure that FINRA regulations regarding accredited investors (who can hold certain types of investments) are followed.

Because this office serves clients who, according to Galt,“are managing directors, officers, CFOs and CEOs of Fortune 500 companies and major Wall Street investment banks” accreditation is not usually a problem.

This multifamily office serves around 150 clients and employs only 19 people. This includes three partners, five junior advisors, six analysts, three client service personnel, and two administrative assistants.

What services does a multifamily office provide?

Although this varies by family office, Galt indicated that his office provides a variety of services. The firm basically covers anything and everything related to money for their clients including:

Personal client services.

Things such as paying bills; dealing with credit card companies to reverse fees; responding to ad hoc requests; getting a new car leased for the family; contesting fees on a child’s cell phone plan; making sure life insurance premiums are paid; or even handling payment of alimony and child support in the event of a divorce in the family are all covered.

Investment services.

The firm has power of attorney and discretionary trading authority over every account. That means they can operate on the account without consulting the owner beforehand about particular transactions. These powers facilitate being able to provide absolute positive returns year over year on the money invested by the families. However, the firm is NOT the custodian over the accounts. Instead Pershing is responsible for all the public regulatory reporting and being the custodian.

Insurance Services.

Although the firm is a fee only firm, for investment purposes, they do receive a commission on life insurance policies sold to clients.

Estate planning services.

Using their network of lawyers, the firm helps families in the drafting of trusts and other legal documents dealing with transfer of their estate.

Business brokerage services.

The office (as broker and agent) helps families buy and sell businesses. A few of the client’s have grown their businesses to fortune 500 size companies and then sold them.

What do employees in a multifamily office do?

When asked what the functions of the various positions in his firm are, Jonathan responded as follows:

The administrative assistants take care of the phones and scheduling, keeping the kitchen stocked, and general administrative tasks.

The client service associates handle personal client requests, paying client invoices, bills, and all new account related paperwork and processing.

The junior advisors go to client meetings with the partners and serve as another point of contact for the client when their primary advisor (a partner) is not available.

The analysts take care of trading, rebalancing, personal financial plans that are done on an annual basis, ordering life insurance illustrations, handling client calls regarding portfolio related questions when partners aren’t in the office, and investment research.”

Jonathan is one of the firm’s 6 analyst. He described his own position in a bit more detail.

“As a financial analyst at a family office, we are expected to wear many hats and have in depth knowledge of a variety of financial instruments, insurance products, corporate finance, statistics, portfolio theory, equity valuation, macro and micro economics, fundamental analysis, and technical analysis.

Between the six analysts, I take care of most of the trading and portfolio rebalancing. Trading in itself can be a full time job since there are days that the partners will call and instruct me to sell 100% of a position five minutes before the market closes. Not only that, I have to reconcile the sale of, say, 1,342,444 shares of xyz I just sold and assign the sell orders to hundreds of different accounts.

Basically, everyone in the office is their to ensure that the people responsible for generating revenue and new business, the junior advisors and partners, never have to do any paperwork or busywork. The less administrative tasks the sales people do the more time they can spend out in the field prospecting or doing client events (usually done at one of the many local country clubs on the golf course).”

How doe these client’s use their wealth differently than us?

You can imagine that families using these services have a significant degree of wealth. There are ways these families use their wealth differently than most of us. Here are some of those differences, in Jonathan’s words.

“In terms of life insurance, most of our clients purchase universal second to die life insurance policies for estate purposes and use term insurance to insure the present value of their current earnings power pre-retirement.”

Note: Second to die policies insure both people in a couple. Nothing is paid out on the death of the first person, but when the second person dies, the death benefit is paid. These policies are often cheaper to use for estate planning purposes (premium wise) than buying separate insurance policies on each person. If the policy is owned by a trust, instead of being included in the deceased’s estate, it is not included in estate tax calculations. By purchasing such a policy in a trust, the wealthy couple provides liquid cash (the death benefit) to their heirs, at the time they typically inherit the estate (when the second party in the couple dies). This can be used to take care of estate taxes and other immediate estate needs without dipping into the deceased’s investments.

“Long term care and disability are rarely, if ever, sold to our clients since many of them are so wealthy they can self insure.

We also do a lot of SWAP agreements where clients would sell a large position that they have in a particular stock to a bank like BNY Mellon, Morgan Stanley, Merrill etc, for an upfront specified sum of cash and exposure to a certain percentage of any upside appreciation without any downside exposure. In exchange for the cash, the investment bank has the right to trade the stock on a daily basis, any gains from those trades the client is not entitled to. If, however, the stock is above a certain price at specified periods of time in the contract, the client receives x% of the gain, if it is below they receive nothing.”

Who in the office actually interacts with the ultra wealthy clients and what is it like?

“All of us have some level of interaction with the clients, at first it was very intimidating as the CFO of a company that most people would know would call and regularly asked about his account, or a board member of another Fortune 500 company would call me and ask me why we sold a certain stock and purchased puts on a particular index. You can’t say, “I don’t know” as an answer.

After awhile though, I began to realize that most of the clients we had are wealthy because not only did they make a crap load of money, they save an ever bigger crap load of it! The funny part is that they aren’t any savvier when it comes to knowledge of personal finance and investing than the average Joe. One guy I know is a managing director of the municipal bond trading desk for a large money center bank, he can talk all day long about anything under the sun when it comes to Munis, but knows next to nothing about risk management and personal finance.

Once I realized that most of the clients are just people who are extremely knowledgeable about one area of corporate finance I wasn’t so intimidated by them anymore when I spoke to them about personal finance or portfolio management.”

Do you have dreams of working in a family office? Then you may need some of the following qualifications:

  • Strong knowledge of and a degree in finance and investing.
  • A Series 7, Series 66, Series 33, and life accident health licenses.
  • Designations like the CFA and CFP are helpful.

Are the rich really that different from the rest of us?

In spite of the fact that Jonathan notes that many of the firm’s clients spend summers or winters in other countries, and that they can afford to pay an elite asset management firm to handle their kids cell phone charges, he concludes that:

As much as we think that the rich are different from us, they have the same exact fears and familial problems that we have, only, they are worth $50,000,000 and a $2,000,000 salary. They still get divorced, have problems with their children, they are still human and have human problems.

How does this picture of a multifamily office differ from your own financial management situation?