Northern Trust, the Chicago-based bank founded by the Smith family in 1889, is leveraging a hefty financial war chest for its global family office services division, which already counts 35% of the Forbes 400 list among its client base.
“Many of our Family Office clients are using technology advances to improve efficiency. We have made a deliberate decision to offer technology solutions through our platform. The buying power we have with vendors as a $800 billion multi-family office is going to be a lot greater than the average family offices that are out there,” David Fox Jr., president of Northern Trust’s global family and private investment office services, told Crain Currency. "We put solutions together for all aspects of family office management and include a service wrapper so our clients do not have to deal with multiple vendors on their own. Our services are not isolated to just the investment function."
Fox, who previously worked at JP Morgan for 30 years, joined Northern Trust in 2012 after his father, David W. Fox, served as the bank’s chairman and CEO in the 1990s. David H.B. Smith Jr., a great-great-grandson of founder Byron L. Smith, remains on the board of Northern Trust.
Now, Fox said, his average family office client at Northern Trust owns more than $1 billion in assets, with over 500 families served across 30 countries. Some of the family offices consist of 200 members, in which case Northern takes care of accounting, taxes, pooled investments, partnerships and other operations within the family. Fox said he sees $500 million in liquidity as the minimum threshold needed for a family to start a well-staffed family office.
“The size of the wealth to me is very important, or it’s just not cost-efficient,” Fox said. “If you have $500 million in liquidity, it usually generates enough excess income and cash flow to be able to afford to have your own staff and cultivate that staff and also keep them motivated.”
An appetite for risk, except crypto
“When we think about what we think will happen over the next 12 months, we have a preference right now for risk — which is a slight tilt toward equities over fixed income, with some expectations for near-term volatility,” said Trish Halper, chief investment officer at Northern Trust’s global family office practice. “We’re expecting 12% earnings growth next year in the S&P 500.”
Halper identified increased allocations toward strategic cash and alternatives as broad family office investment trends, as well as “regular conversation in the public markets around concentration, particularly in the U.S. equity market, and concerns around how concentrated that market has gotten,” she said.
Securities and Exchange Commission approval has led financial giants such as BlackRock, Fidelity, Franklin Templeton and Grayscale to launch exchange-traded funds for bitcoin and ethereum. But Northern Trust has taken a more apprehensive approach to its investment services around cryptocurrency.
“Risk-adjusted returns don’t support [crypto] to be its own asset class; it needs to be diversifying relative to other asset classes," Halper said. "That doesn’t mean we don’t have our finger on the pulse, and we don’t talk about it. We don’t have any strategies on our current platform that would be an ETF.
"Does that mean it won’t be eventually? Perhaps. But we don’t find value to that right now in its current structure.
Said Fox: “If the dollar had moved in value the way bitcoin has moved over the last two years, it wouldn’t make you feel too good. The underlying technology [blockchain] behind it is more interesting than the crypto itself. Understand it and be a part of it, but don’t make it a huge part of your portfolio unless you really could suffer a lot of that volatility.”
A hedge on family offices
Family offices face lighter government regulations than hedge funds, opening the door for some financial managers in recent years to set up “family offices” that in fact trade like hedge funds.
One notable example is Archegos Capital Management, the family office of Bill Hwang that collapsed in 2021 after being valued at $36 billion at its height. Hwang was recently found guilty of manipulating stocks and defrauding Archegos counterparties like Credit Suisse Group and UBS by lying to them about the firm’s trading activity and the level of risk in its portfolio.
“I think a lot of the conversations around family offices were brought to the forefront when a lot of these hedge fund managers decided to convert their hedge funds to family offices,” Fox said. “The reporting requirements are very different. You don’t necessarily have to disclose everything you’re doing, you don’t have to register with the SEC. It’s a vehicle that’s a great way to manage wealth; you can deduct the expenses of the office and things of that nature.
“It gave family offices a bad name, unfortunately,” said Fox, alluding to Archegos’ demise.
Northern Trust says that of its family office clients, 77% have a family foundation, 42% own an operating business, and 15% have a private trust company. In March, Northern Trust published Secrets of Enterprising Families, a 300-page book that covers wealth planning strategies and guidelines for communication, aligning on values and setting up a family’s next generation for success.
”Most of our clients, almost all of them, are single-family offices; and they were created for asset protection, pool investment expertise, estate planning taxes, reporting, control and messaging out to future generations of how to steward the wealth,” Fox said. “That’s really what they were formed for.”