May 25, 2023: Ron Geffner on family offices’ investing preferences

Bob.Allen
May 24, 2023
10 months ago
Ron Geffner
Credit: KRISTINA RUOTOLO

Ron Geffner, an authority in the security industries, holds a prominent role as a founding member of the executive committee at Sadis & Goldberg LLP. He assumes oversight responsibilities for the financial services group, providing legal services to  hundreds of hedge funds, private equity funds and venture capital funds. Geffner’s expertise extends to both domestic and international entities.

Why do families have so much cash on the side?

During the bull market, when volatility started kicking in, families were holding on to cash, either based on cash flow experiences or the sale of or harvesting of theirGeffner_small investments. The valuation deals increased, thereby causing some family offices to pull back. And as interest rates have climbed and deal flow has slowed down — along with the market turmoil and the war in Ukraine and inflation — all of those variables have caused people to sort of hesitate and to look at investment opportunities with greater scrutiny.

Where are they putting their money?

According to a recent FINRX study and based also on our conversations with our clients on the family office side, about 90% of family offices expect to increase their investments in illiquid assets in the next two years. That’s a really high number. It’s hard to generalize because allocations from family offices run the spectrum from some with a high concentration in real estate investments to others who have had a liquidity event and are now seeking to diversify their wealth. But overall, there’s definitely a strong interest in real estate.

We just got hired to launch a product that’s investing in public REITs, we’re getting calls for hard money lending funds and for hardcore dirt [undeveloped land]. And those calls are coming from both investors inside and outside the U.S. for investment in the American real estate market. All kinds of different ways of investing in real estate, though I haven’t heard that much recently about qualified opportunity zones.

Why is real estate so hot?

Given where we are in history — we’re in an inflationary period, there’s market volatility and the tax advantages in connection with investment in real estate, while producing current cash flow — it makes sense. 

Some of our family office clients are also making investments in various technology-related businesses or other startups, where the pendulum is swinging back to normal when it comes to valuations and salaries. It still seems pretty consistent, the deal flow that they were doing in tech. 

And debt — I just got a call 48 hours ago from a group that has family offices in the U.S. about investing in distressed debt in Europe. 

This is a busy time because when money gets tighter, people look at how they’re spending it. 

Are there standard practices for compensation, or does it vary from office to office?

Like everything else, if you’ve seen one family office, you’ve seen one family office. It varies across the board. And they get competitive. Obviously, to hire the best people, you have to be more generous.

We’ve been dealing with issues with certain families as they make investments, about how to compensate their teams — especially the team that’s not part of the family but is employed by the family.

How do you see investment activity changing in the next few months?

We’re having a reality check right now. And who’s to say where the bottom is? And when the bottom hits, there will be more attractive investment opportunities. That investment isn’t just about writing a check to a portfolio company, but it’s also into human talent.

Interview conducted by Marcus Baram

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Determining the right price — a wealth management cost framework for families

This is an excerpt of a white paper by Cambridge Associates' Charlie Grace, managing director of family enterprise solutions.

Families of wealth are always curious about wealth management costs and often want to benchmark those expenses against their peers. Costs are an important consideration when devising an overall wealth management strategy. What is the right price, and how is it determined?

In some cases, a lower-cost approach may not be sufficient to do the job of wealth management well. Indeed, a family may have good reason for paying a higher price, including superior service and better results. Two of the most notable factors that can increase wealth management costs are the use of sophisticated wealth structuring strategies — often as part of tax efficiency and estate planning — and the execution of alternative investment strategies like private equity and hedge funds. In all instances, cost should be commensurate to the value delivered to the family.

This paper presents a framework that families with substantial diversified portfolio investments can use to evaluate the costs of managing their wealth. The analysis is broken into four parts: evaluation of costs, factors that can cause costs to fluctuate, key questions to ask when evaluating wealth management costs, and best practices. While the paper presents a range of cost estimates drawn from real-world examples, each family’s wealth management cost formula is different. The focus here is to provide families with insights and tools for determining how to meet their unique service requirements and goals at a reasonable cost.

Evaluation of Costs

Families addressing the issue of cost should start by evaluating their total wealth management expenses. Two high-level inputs — investment costs and noninvestment costs — make up total wealth management expenses (Figure 1).

In accordance with a family’s service requirements and goals, investment and noninvestment costs may be linked to a family office, if there is one, or incurred through third-party service providers.

Costs also consist of a wide range of more granular line items, including asset management, next-gen education, financial reporting, tax compliance, trustee fees, record-keeping, property management and family retreats, among others. Often families require broader and more varied services than they initially expect. Figure 2 inventories the wealth management services that families should consider as part of a cost analysis. In many cases, a family office will also serve as a gatekeeper and coordinator of all wealth management activities.

Both a family office or third-party provider can be used to perform designated investment and noninvestment functions. The notion of “build or buy” comes into play when families consider whether to construct their own wealth management capabilities and individualized services inside a family office or to outsource some or all of these tasks to a third-party provider. Some of these costs may also be shared. For example, there may be some accounting services performed by the family office and other accounting services performed by a third party. In this scenario, the two cost buckets should be allocated accordingly.

Figure 3 illustrates typical ranges for annualized investment and noninvestment costs and their allocation between a family office and third-party service providers. Total cost is usually more than 100 basis points (bps) (1.00%) of investable assets, and in Figure 3, the range is between 115 bps and 175 bps. For wealth owners with substantial assets, there can be a wide range of cost levels that fluctuate in relation to individual family circumstances, and a good number will be outside the ranges above. Measuring cost in terms of basis points compared with investable assets — not total net worth — is common practice.