The Single Family Investment Office Today: A Primer On Structuring An .
Industry AgendaThe Single Family InvestmentOffice Today: A primer onstructuring an investmentoffice to achieve familyobjectives and societal valuePrepared in collaboration with J.P. MorganAugust 2016
Contents3Introductory Letter from the WorldEconomic Forum and J.P. Morgan4Executive Summary of Themes5Chapter 1: Introduction &Methodology7Chapter 2: Structuring, Objectivesand Services of a Single FamilyInvestment Office14 Chapter 3: Investment Approach18 Chapter 4: Talent and Alignment ofInterests25 Chapter 5: Next Generation29 Chapter 6: Social Impact andPhilanthropy33 Chapter 7: Conclusion34 Appendix 1: Glossary of Terms35 Appendix 2: Authors, WorkingGroup, AcknowledgementsIntroductory letter from the WorldEconomic Forum & J.P. MorganThe World Economic Forum and J.P. Morgan are pleased to present The SingleFamily Investment Office Today: A primer on structuring an investment office toachieve family objectives and societal value.This study is part of the World Economic Forum’s decade-long effort to illustratehow investors with a long-term outlook can make meaningful change ineconomies and societies. Family offices are an important stakeholder group inthis space, as they are often driven by the values and outlook of their foundingfamilies.Because many of the families we work with have expressed an immense interestin all aspects of family offices, the World Economic Forum and J.P. Morgan offerthis detailed analysis of their structure, objectives and status today. It reflects oneof the largest and most diverse studies conducted on single family offices to date.Our two institutions have long been partners in bringing thought leadership to ourclients and communities, and we believe our respective expertise and experienceallow us to bring you fresh and useful insight on this important topic.We would like to thank the many World Economic Forum community membersand J.P. Morgan clients who participated in this effort. We appreciate your trustand the relationships we have built together. Additionally, we are grateful to allsubject-matter experts and our internal teams who have opened their doors,shared their perspectives and collaborated on this important topic.36 Appendix 3: Bibliography & FurtherReadingWe hope you enjoy this report.37 Appendix 4: About the WorldEconomic Forum and J.P. MorganKind regards,38 Appendix 5: Legal DisclaimersMichael DrexlerHead of Investors IndustriesMember of the Executive Committee,World Economic Forum USA WORLD ECONOMIC FORUM, 2016 – All rights reserved.No part of this publication may be reproduced ortransmitted in any form or by any means, includingphotocopying and recording, or by any informationstorage and retrieval system.REF 220716Case: 00020760Andrew L. CohenChief Executive Officer,J.P. Morgan Private Bank, Asia
IntroductionIn an increasingly complex, interconnected world shaped by the Fourth Industrial Revolution, longterm investors are crucially important – and the World Economic Forum has for many years beencommitted to working on the ecosystem affecting their choices. Family offices, private companies thatserve as investment and trust managers for high-net worth families, play an important role as theycollectively control more than 2 trillion in assets. In addition, they are less constrained in their choicesthan other types of investors, giving them a unique role in shaping the world with a long-term view.The role of the family office goes beyond asset management. Family offices can serve multiplefunctions, from helping to preserve and build wealth, to securing a legacy and promoting the family’svalues. They can also leverage their resources for impact by investing in new, less proven assetclasses.Given the many functions they serve, designing the correct strategy and set-up for a family office iscritical to ensure that long-term value is created for families, local economies and society at large. Thisreport, The Single Family Investment Office Today, explores the important role that family offices play insociety through the investment choices they make and how this is informed by their underlying values.The report forms part of a multi-year effort at the World Economic Forum, helping to understand andengage vital sources of long-term capital.Over the past year, the World Economic Forum, in collaboration with J.P. Morgan, has conductedextensive research on family offices, interviewing and polling our global networks of high-net-worthfamilies. This report is one of the most comprehensive and in-depth explorations of this topic, drawingon a unique and globally diverse set of contributors.The goal of this insight report is to help families ask the right questions as they contemplate setting upa family office, and to provide examples of how peers have structured their own vehicles. This includesinsights on how they have dealt with talent and governance issues, as well as the influence andreflection of family values through generations. One of the most important insights is that successfuland long-lasting family offices are based on a clear set of family values and the belief that doing welland doing good are not mutually exclusive.It is with this in mind that we offer this report as a resource for families to begin conversations and tocraft their own models so that they can instil family values and future focused legacy into their assetmanagement ethos. This is by no means a one-size-fits-all recommendation, as each family office isas unique as its family. Rather, we hope to contribute to helping families achieve success that benefitssociety – and equally, for other stakeholders to understand an increasingly important investor groupthat can help improve the state of the world.Cheryl MartinHead of Centre of Global IndustriesMember of the Managing Board,World Economic ForumThe Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value3
Executive SummaryFamily offices play an important role in society. There arenow approximately 3,000 single family offices worldwide,which collectively control over 2 trillion in assets. Thisamount of wealth, and the unconstrained choices familiescan make with their investments, makes family officesincreasingly important across the investment landscape.Going beyond asset management– by designIn addition to preserving and building wealth, a family officecan secure and nurture legacy and values. The correctstructure ensures that long-term value is created for familiesas well as society at large.This report describes the state of family offices and howthey have been set up to fulfil a family’s objectives. Ourfindings are based on in-person interviews and a survey of81 families, 76% of which are in the 1 billion bracket and51% are located outside the United States and Canada.We discovered that private investment firms (as familyoffices are often referred to) are as widely diverse as theneeds of the families they serve, although several commonthemes emerged.Wealth management is primary. More than 90% of thesingle family offices surveyed cited wealth management asthe top objective, even though family offices today can servemany purposes.Expect evolution. As families grow in size and complexity,so does the need for auxiliary services such as legaladvisory, concierge services and philanthropic advice andplanning.Investment approaches vary widely. Almost 60% of familyoffices surveyed relied on at least two different models forevaluating and managing investments.Investment governance is a family matter. Decisionmaking almost always involves family members, even whenthere is a formal investment committee.Trust is as valued as talent. Families often struggle torecruit and retain highly experienced professionals, seekingout trustworthiness and alignment of values, in addition torelevant and deep professional experience.Next-Generation risks are clear. Matriarchs and patriarchstake active steps to minimize their concerns, includingengaging the next generation with seed investments orprofessional/philanthropic benchmarks.Social impact is a given. Philanthropy and impact investingare powerful, cohesive forces within families.4The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value
Chapter 1: Introduction & Methodology3CEO/CIO vs. family-driven investment committee: and“Once you’ve seen one family office,you’ve seen one family office.”The saying goes “once you’ve seen one family office,you’ve seen one family office.” This alludes to the uniqueimprint families have on the structures of their family offices(FOs). While there are profound differences between FOs, adetailed examination indicates a range of common modelsemployed that reflect a family’s objectives and values.These commonalities reflect the focus families have ondealing with the complexity of managing wealth, whichhas grown due to increased regulation, evolving financialinstruments and globalizing economies. The estimatethat 60% of families lose their wealth by the end of thesecond generation and 90% by the third generation1 furtherhighlights the need for a professional set-up, a soundstrategy and proper controls.Today, approximately 3,000 FOs globally manage anestimated 2 trillion of assets. Given their private nature,FOs are not well understood and benchmarking one FO’sapproach against another is challenging. This body ofresearch attempts to partially fill this void. It serves as aprimer on five topics of interest:1. Purpose of a single fawhat services do theythese services?2. Investment approachStructure &purpose!organizing their invesbe involved in decisio3. Talent. How do familieinterests between fam4. Social impact and phand philanthropy, andthrough the capital the1. Purpose of a single family investment office. Why dofamilies set up FOs, and what services do they provide?How are they staffed and structured to provide theseservices?2. Investment approach & governance. What models doFOs employ in organizing their investment activities?To what extent should family members be involved indecision-making?3. Talent. How do families hire and motivate talent, andhow do they align the interests between family principalsand their agents?4. Next Generation. How do families prepare the nextgeneration to inherit and manage wealth?5. Social impact and philanthropy. How do families thinkabout social impact and philanthropy, and what leverscan they pull in expressing their values through thecapital they deploy?On each topic, we identified a variety of approaches that families use, illustrating some with real-life examples. We are notpresenting them as best practices, but rather as a range of solutions that suit the specific needs of a given family and reflectthe most recent trends. We intend for this paper to inspire families setting up a FO, provide comparative information tofamilies looking to benchmark their FOs, and spark discussion and debate for all who are interested.Cochell, P.L. and Zeeb, R.C., “Beating the Midas Curse,” Heritage InstitutePress, 2005, p71The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value5
MethodologyFamily Office originsThe research consisted of more than 50 structuredThe modern notion of a family office (FO) dates back tointerviews with family members and/or their key FO staffthe 18th century, when merchants would hire a trustedFigure1- ‐1:1F- rimaryresidence(typically,CEOsandan anonymous surveyadviser to manage their wealth. At the time, family wealthcompletedby81familiesacrossthe world. FindingsMiddleEastMiddleEastwas illiquid, limited to local business ventures and real&NorthAthefricapresentedreportarebasedon survey responses&NinorthAfricaestate, and thus relatively uncomplicated to manage. Two5%5%receivedbetween9December2015and 25 April 2016. It7%7%developments rapidly changed this picture.is one of the largest and most diverse surveys of billionaireLa0neverfamiliesconducted, with 76% of families inthe 1La0nThe Industrial Revolution created an explosion of illion wealth bracketand 51% based49%outside the Unitedbusiness ventures that generated tremendous public49%States and Canada.and private economic value. In parallel, stock exchangesoffered a mechanism to capitalize those ventures forThis report is “from families, to families”; that is, taking thegrowth as well as allow founders to liquidate and diversifyperspective of families 20%as 20%much as possible. We address atheir wealth. New investment opportunities broughtvarietyoftopicsincludingobjectives, services, investments,Figure1- ‐1:Family'sprimaryresidenceEuropeEuropeincreased complexity, leading the world’s wealthiesttalent,nextgenerationandsocial impact, and keep legalfamilies to turn to dedicated advisers to manage ations and familyFigureassets.1- nceoutofscope.Figure1- ‐2:FamilywealthFigure1- ‐1:Family'sprimaryresidenceFigure1- ‐2:Familywealth7% 10B Figure1- ‐1:Family'sprimaryresidenceMiddleEast 10B Twoexamplesfrom this period include the family of the diversity among surveyMiddleEast5%Morgan,whoestablishedthe House of Morgan in 1838,La0n 5B– 10B&NorthAfrica 5B– rethan 200billionofCanada 0.5B– 1.0B4%5% 0.5B– 1.0B4%19%Americaand John D. Rockefeller, who5%established an office in7%7%aggregatewealth.49%16%24%188216%24%La0nthat continues to provide the family with a variety ofU.S.andCanadaservicesto this nada49%ndCanada49%49%19%19%20%EuropeFigure 1-1: Family's 20%primary residenceFigure 1-2: Family wealth20%20%EuropeFigure11amily's- ‐1:FFamily'spprimaryrresidenceFigure- ‐1:amily'srimaryesidenceFigure1- ‐1:Family'sprimaryresidenceFigure- ‐1:FFamily'srimaryesidenceFigure11- ‐1:pprimaryrresidenceEuropeEurope56%56% 1B– 5BFigure1- ‐2:Familywealth 1B– 5B 10B aFigure1- ‐2:&&FNamilyealth5% 5B– 10BorthAwfrica5%5%5% 10B 0.5B– 1.0B7%5%Figure1- ‐3:1GeneraBonsservedby4%FbO7%7%7%Figure1- ‐2:FamilywealthFigure- ‐3:GeneraBonsservedyFOFigure1- ‐2:Familywealth7% 10B 10B 16%24%OneOnegen.gen. 5B– 10BLa0n 0.5B– dCanada19% 5B– a 5B– 10B19%AmericaU.S.andCanada 0.5B– 1.0B10%16%19% 0.5B– 20%20%Threeormoore49%Threermore49%gens.gens.56% 1B– 5B20%EuropeEuropeEuropeEuropeEurope56% 1B– 5BFigure11amily- ‐2:FFamilywealthFigure- ‐2:amilywwealthFigure1 1B– 5B- ‐2:Fwamilyealth56%Figure1- ‐2:Fealth 10B 56%Figure1- ‐2:Familywealth 10B 10B 10B 1B– 5BOnegen. 0.5B– 1.0B 0.5B– 1.0B 0.5B– 1.0B 0.5B– 1.0B 0.5B– 1.0B 5B– 10B4%4%4%Figure1- ‐3:1G- hreermore 1B– 5Bgens.56%56%41%56%56%gens. 1B– 5B 1B– 5B 1B– 5B56%41%41% 1B– 5BTwogens.TwoTwogens.gens.Figure- ‐3:GsservedbbyFFOFigure- ‐3:GeneraBonseneraBonservedyOFigure1- ‐3:GeneraBonssbervedbyFOFigure- ‐3:GG11eneraBonseneraBonservedOFigure11- en.Figure1- ‐4:HouseholdsservedbytheFO10%10%10%10%Figure1- ‐4:1H- ns.gens.Figure1- ‐3:GeneraBonsservedbyFO 10B 5B– 10B 5B– 10BFigure1-3: 5B– 10BGenerationsby FO 5B– 10BFigure1- ‐3:GeneraBonsservedbservedyFO4%41%41%Figure 1-4: Households served by the FOFigure1- ‐4:1HouseholdsservedbytbheOFOFigure- nTwogens.29%29%45%45%TwoTwotofivetofiveFigure1- .gens.gens.29%41%gens.6The Single Family Investment Office Today: A primer on41%structuringan investment office to achieve family objectives and societal Twoens.Twogens.Twogens.45%
1. Purpose of a single family investment office. Why do families set up FOs, andwhat services do they provide? How are they staffed and structured to providethese services?Structure &purpose!Chapter2: Structuring,2.Objectivesand Services of3.a4. Family OfficeInvestment approach & governance. What models do FOs employ inorganizing their investment activities? To what extent should family membersbe involved in decision-making?Talent. How do families hire and motivate talent, and how do they align theinterests between family principals and their agents?Social impact and philanthropy. How do families think about social impactand philanthropy, and what levers can they pull in expressing their valuesthrough the capital they deploy?Wealth management is key, andevolution is likely– Managing wealth and fosteringentrepreneurship were most oftenmentioned as key goals of the FO.– Structuring an FO is an ongoingprocess driven by the family’sevolving needs and objectives.FO structure is ongoing. Family offices often developorganically out of an operating business or investment1fund as family affairs become increasingly complex. Othermotivations for establishing an FO include various liquidityevents, such as inheritances, and preparing proactively forthe future. During interviews, families often mentioned thatthe FO structure continues to change along with their needs.At least one patriarch re-evaluates his office’s objectives andresulting services annually.– Many FOs add services andemployees as the family’s needsbecome more complex. Most officeswith one to five employees start withinvestment and accounting services;larger FOs usually also offer legal,philanthropy and concierge services.– The FO is central to the family andoften plays a key role in managingfamily risks.The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value7
Figure 2-1: Initialconsiderations in settingup an FODecision 1Need for a family office(e.g., operating business liquidity event, inheritance, substantial cashinflow, family proactively prepares for the future)Whom will the family office serve?What is my family’s profile?(e.g., how many households would be part of the FO? In whatjurisdictions would the office be active?)What governance should we have?Decision 2(e.g., who should participate in decision making? How should weformalize processes and procedures? What risk management andcontrols should we implement?)Decision 3ManagingfinancialassetsWhat are ourfamily’s needsand objectives?Wealthadvisory (e.g.,tax planning)EntrepreneurshipDecision eSocial impactWhat services dowe nthropyDecision 5Do we need a separateentity to provide them?NOYESModel 1: Rely on current family resources to meet objectivesfor operating business, foundation, external providers, etc.Model 2: Create an FO with a broad purview over appropriatefamily entities to provide needed servicesDecision 6Decision 7What are ourunmet talentneeds?No newneedsAssess FO’sservices vs.changing familyneedsOur family’s objectives & needsare met for the time being8The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal valueNewneedsOur family needs are more complex andthe FO should evolve
FOs are as different as the families they are set up toserve. The 50 families interviewed differ in their approach toFO structure, which touches on deeply held personal valuesand generation-long traditions; it often serves as a means ofbridging generations or leaving a legacy for the community,in addition to wealth management.Many principals referred to their FO as the central entitythat provides oversight over all the family’s activities.Strong interdependencies exist between the FO, the familyfoundation and the operating business. For example, 56%of families have operating business employees dedicatedto the FO, and 21% of survey respondents say an FOrepresentative serves on the family foundation’s board ofdirectors.Figure 2-2: Top family office objectives by responder statusFigure2- 5%Impactinves@ngandphilanthropyFigure2- eholdsneedservedstrategic alignment with FO staff.FamiliesfinancialassetsofthefamilyEnsuring that ManagingFO chiefexecutive officers (CEOs) and chiefadvisory80%Figure2- usmemberinvestment officers (CIOs) understandand act inFamilythe mily50%best interest is key. As Figure 2-2 shows, FO ee wealth advisory as oneof the top three family xtagdvisoryenera@on20%objectives.andpatriarchs,in contrast, tend eof the family, xormorehouseholdsThis disconnect suggests that families can improve strategic100%97%family office CEOs85%alignment with their staff to ates 73%and CIOs act in thefamily’sbest interest.Thisan37%33%opportunity for principalsto inform FO professionalsof other94%88%31%42%objectives seen 37%as equally important by the21%families.78%11%Figure 2-3: Top family office objectives by households servedFigure2- 1%18%Objectives evolve as families evolve. This trend can beattributed to the increasingly complex family structure oflarger families and the challenges that come with it. Forexample, family governance, cohesion and continuity offamily values are perceived as a top objective by 0% of onehousehold offices and by 42% of offices that cover six ormore households (Figure 2-3).The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value9
Figure 2-4: Top family office objectives by involvement in operating businessFigure2- ‐4:Topfamilyofficeobjec vesbyinvolvementinopera ngbusinessFamilycon nuestobeac veinopera ngbusinessthatissourceofwealthFamilyisnolongerac veinopera officeobjec ilycon nuestobeac veinopera ngbusinessthatissourceofwealthFamilyisnolongerac veinopera setsthefamilyinpfamilyofficeobjec vesbyoifnvolvement92%92%theirobjectives asFamilytheycon nuesbecomeremovedfrom the Familysourceoflongerwealth.who continuesinessFamilies shifttobmoreea60%c veinisnoac veThoseinopera ngWealthadvisory80%opera ealthbusinessthatissourceofwcontinuityealthto remain active in the py/impactinvesting(Figure2-4)moreoften.80%2- ‐5:FamilyfficeservicesbynumberofOnegenera onTwogenera 8%Threeormoregenera onsngtheentrepreneuriallegacyofthefamily42%genera Familyeduca?onandconnec?vityOnegenera on49%18%Figure 2-5: Family office servicesby number of bynumberoferved64%64%36%Twogenera onsThreeormoregenera negenera onTwogenera onservedAccoun?ng,taxesandrepor?ng88%88%Figure2- eholdTwotofivehouseholdsservices byOnenumberof households 97%64%36%20%20%95%Threeormoregenera s80%90%51%80%20%20%43%51%43%40%40%The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal holds45%45%64%58%64%64%58%64%94%94%94%94%
Fig 2-7Philanthropy increases as families grow. FOs coveringthree or more generations tend to be more active inphilanthropy. Those with six or more households are farmore likely to engage in philanthropy, family educationand legal services, such as the structuring of legal entities(Figures 2-5, 2-6)."I had always been engaged in causesthat support education and economicopportunity for the underprivileged.When my daughter expressedinterest in coordinating the family’sphilanthropic activities, I saw thisas an opportunity to formalize andcentre them in the family office.” – Anentrepreneur from the Middle EastFigure 2-7: Most common family office servicesNumber ofservicesprovided% of allresponsesTwo38%InvestmentsAccounting,taxes andreportingFour25%InvestmentsAccounting,taxes andreportingConciergeand ounting,taxes andreportingLegalservicesConciergeand lifestyleservicesMostcommonLeastcommonServices# ofemployeesin opy11 EmployeesExpect the FO to grow as services are added. As families grow in generations and households served, the complexity oftheir needs increases as well. Employees increase alongside the number of services added (Figure 2-7).Figure 2-8: Family office services by anada46%44%69%Services vary by geography. Attitudes differ by region particularly on family education and connectivity and the FOs’approaches to philanthropy (Figure 2-8).The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value11
lanthropy43%64%20%30%58%40%64%European families tend to keepmembers of the family without the FO’sfamily education and maintaining ofinvolvement.Figure2- icaU.S.andCanadafamilyvaluesfrom the s)In another instance, a VenezuelanIn one instance, a EuropeanInvestmentsfamily100%100%family explained that while theredescribed itsAccoun@ng,FO astaxesfocusedandrepor@ngmostly94%93%is connectivity between the familyon wealth ily50%40%54%foundation and the FO, these tworetreats (with educationalcomponents) 56%Legalservices60%46%entities are run and governed44%and ywere19%47%separately.69%the responsibility of theyoungestPhilanthropy50%13%Figure 2-9: Cybersecurity measures takenBlue shading indicates at least one measure taken (more than one can be selected)Figure2- satleastonemeasuretaken(morethanonecanbeselec
6 The Single Family Investment Office Today: A primer on structuring an investment office to achieve family objectives and societal value Family Office origins The modern notion of a family office (FO) dates back to the 18th century, when merchants would hire a trusted adviser to manage their wealth. At the time, family wealth
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A. Family Office Detailed Background Data B. Family Office Investment Objectives and Asset Management C. Family Office Risk and Return Measurements D. Family Office Governance E. Family Office Documentation F. Family Office Processes G. Family Office Communications H. Family Office Human Resources Practices I. Family Office Education and .
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