Instead of scrambling to capture and keep a roster of high net-worth clients, as most financial advisors, asset managers and private bankers must do, imagine landing one client big enough that you could kiss all the others goodbye.

The merely well-off make a good target market for much of the financial services industry. But the massively wealthy tend to assemble their own mini-firms solely to serve their investment needs.

There’s little known about this rarified market segment. But some pioneering research into these so-called “single family offices” (SFOs) by the Wharton Global Family Alliance — a collaboration of the Philadelphia-based Wharton School at the University of Pennsylvania and CCC Alliance LLC, a Boston-based group of family offices — provides a glimpse of this secretive world.

Thanks to their connections in the world of the super wealthy, researchers were able to survey 138 SFOs and complete about 40 in-person interviews, gaining some insight into the offices maintained by very rich families.

About half the families in the survey have at least US$1 billion in investible assets. According to the study’s lead author, Raphael Amit, a professor at Wharton and academic director of the Wharton GFA, the minimum for an SFO is about US$100 million. Below that level, he says, an SFO probably isn’t cost-effective.

The survey divides the globe into the Americas (including the U.S., Canada and central and South America), Europe and the rest of the world. The results aren’t sliced more finely than that, Amit explains, in part to preserve the anonymity of its respondents, and partly because it can be difficult to classify these very cosmopolitan families as belonging to one region or another. A rich Canadian family may well have its family office in New York, or a wealthy Middle Eastern dynasty could base its investment team in London, he points out.

Nevertheless, the survey reveals that slightly more than half the families it polled in Europe have at least US$1 billion in assets. By contrast, in the Americas, half the respondents fall into the $100-million to $500-million range. The rest of the world is almost evenly distributed between the $100-million to $500-million, $500-million to $1-billion, and more than $1-billion categories.

The research found that the majority (almost 60%) of the families surveyed are involved with running businesses. Over three-quarters of them are the majority shareholders in their family’s business. Almost half of these operations have annual revenue of at least $1 billion, and almost 20% have revenue in excess of $5 billion.

Given the prevalence of ongoing businesses among these rich families, the survey found, SFOs aren’t handling all their rich families’ wealth. On average, they manage about two-thirds of the families’ assets, with about a quarter accounted for by an operating family business; 8%-9% is managed outside the SFO, for example, speculative money that doesn’t fit with overall family investment objectives.

The average office in the survey serves 13 households and 40 family members, spanning two or three generations.

In Europe, where more than half the respondents are billionaires, the average SFO handles 20 households. In the Americas, on the other hand, the average office has just seven households to run. The European SFOs also tend to be bigger, with an average of 13 employees, compared with slightly less than nine employees, on average, for American offices.

In newer offices, serving less-fabulously wealthy families, it’s common for a family member to serve as head of the SFO. For millionaires, more than half of their offices are headed by a family member, whereas only about a quarter of billionaires do this.

The chief investment officer role is most commonly filled by someone with a background in asset management (23%), followed by investment banking and private banking (14% each), and other financial services (13%).

Beyond the CEO and CIO roles, these offices also include other investment professionals, lawyers, accountants and, in some cases, full-time, in-house traders and research analysts (along with the requisite administrative and support staff). Finding quality people to fill these roles is a challenge for SFOs, the research discovered.

While the survey reports that about 40% of SFO professionals cite above-market compensation as an important motivation, Amit indicates that’s not the most important consideration. An SFO investment professional is probably not making as much as he or she could at a bulge-bracket behemoth such as Goldman Sachs. What really attracts people, he says, is the lifestyle.

@page_break@Managing one family’s wealth for a living forgoes the marketing demands that many asset managers face, avoids the drudgery and office politics familiar to investment bankers, and provides a respite from the short-term tyranny of appeasing stockholders every quarter.

Moreover, Amit points out, it may also provide SFO employees with something that can be a key reward for them: the opportunity to invest alongside the family by accessing managers or investments that wouldn’t otherwise be available to them. Uncovering these superior investment options is central to the service that SFOs provide their families.

Overall, there is a great deal of variety from family to family in the services these offices provide. They range from wealth management and tax planning to advice on philanthropy and education — in some cases even handling mundane tasks such as arranging travel.

But the most important objective of the SFO, the families that were surveyed said, is wealth-management functions — including asset allocation, manager selection, monitoring and risk management — followed by the consolidation of the family’s accounting, tax and estate-planning needs.

It also found that the most important benefits these rich families report receiving from their SFOs are services that would be familiar to any retail investment business — wealth management, consolidation of financial affairs, independent advice, confidentiality and access to sophisticated investment products and services.

While SFOs may be the best way for the ultra-wealthy to reap these benefits, the mainstream financial services industry isn’t completely cut out of the loop by these arrangements. The survey found that a significant number of SFOs outsource some of these functions, or carry them out in cooperation with external suppliers. The survey also uncovered some regional differences in these practices, however. For example, European SFOs are less likely to outsource wealth-management duties, particularly when it comes to investment activities.

It also observed regional differences in the families’ investment objectives. In Europe, more than half of respondents say they want a balanced approach to investing, with 30% seeking growth and just 3% demanding aggressive growth. Conversely, 14% of American families want aggressive growth, 34% are seeking growth and 35% wanting balanced management.

Additionally, geography, size and age all affect how SFOs decide to allocate their assets, the survey found. For example, families in the Americas invest more in equities, whereas European families make more principal investments and larger real estate allocations. Principal investments and private-equity allocations are also larger for SFOs serving first generation wealth, it observed.

Given these objectives, the ethical investment constraints adopted by some families, the diversity of services provided by SFOs and their commitment to client confidentiality, it is exceptionally difficult to come up with meaningful cost or performance information, Amit estimates the average office costs about 2% of assets under management. As for performance, the researchers are working to develop benchmarks that will be published in a future report. IE

To access Wharton Global Family Alliance research, visit their Web
site: http://www.wgfa.wharton.upenn.edu