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Getting Family Office Clients A Bigger Slice Of Investment Pie

Tom Burroughes

8 January 2020

Market trends come and go but one fairly constant theme is investors' failure to capture maximum returns leaving too much ending up in advisors’ and intermediaries’ pockets. Consider, for example, the massive flow into index-tracking funds in recent years - much of this has happened because clients became fed up with fees for benchmark-hugging active managers. There are plenty of other gripes out there.

One person who has a bee in his bonnet about this is family office industry figure Jean-Bernard Tanqueray, who founded and is chief executive of the European business , a digital platform built by family office and institutional asset management experts. 

In his outline of what Finlight.com is and does, Tanqueray talks a lot about the misalignment of interests in the investment management space. 

“The key underlying point is that intermediaries’ profits are maximised out of end-investors’ money. To maximise his or her profit, intermediaries fight against capital owners’ profit, however big and growing is the cake. What an intermediary gets is mathematically written off against what the final investor ends up with. By all means, everyone’s work deserves to be paid. But where should the balance be? Virtue is the median point between two evils!” he told this publication in an interview. 

“And this is quite tempting in a financial sector whose structural raison-d’etre is the notion of information asymmetry. As such, it presumes someone needs someone else who supposedly knows better than she or he does. How true is it? How motivated is one to share his or her knowledge with me? What’s the incentive to share it all with me as she or he could thus feel threatened in her or his position? How to then manage the subsequent agency risks?” Tanqueray continued. 

“A typical example is the gap between the net return the investors receive in comparison to the gross returns that an investment yields. Another example is the incentives many private banks have to have one’s account to churn investments: not because it adds value but because it generates commissions,” he said.

Tanqueray wants to put a bigger dent in the family offices and investment universe. And he wants to champion transparency about how investments are managed, how well they perform and what their risks are. 

He describes Finlight.com as a “portfolio management productivity tool”, reducing some of the operational hurdles that family offices and other actors face relating to such areas as consolidated multi-asset reporting, portfolio controls and risk analytics. The result, hopefully, is that users will cut costs and boost productivity.

To date, most Finlight.com clients are European – including those based in the UK – with a number also in the US and Gulf Co-operation Council (GCC) jurisdictions of the Middle East.

The wealth management industry is full of organisations providing reporting/analytics services, in some cases to the family offices area, and knowing how to differentiate them is tough. For example, – with which this publication has an exclusive media relationship – has pointed out, the 1,000 European single family offices on its list collectively oversee about €1.52 trillion ($1.7 trillion) of assets. Obtaining accurate metrics on what they are doing is a big prize for tech vendors. (Of course, all such statistics ought to come with a bright-light health warning, given reporting uncertainties and market shifts.)

Background
Tanqueray brings plenty of experience to the scene. He started out in the institutional management space before moving into the family office area in 2007. At that point he worked for a Middle-East-rooted but London-based multi-family office. “I was quite taken aback not so much by the sophistication gap between these two worlds but by the lack of tools adequacy. Many were enterprise-based ones built for bigger banks and intermediaries whose operational models are more demanding than family offices,” he said.

After a few years as an independent consultant, Tanqueray moved back as a full-time employee for a single family office where, a few years later, he saw the same issues crop up: “inadequate products, dependencies on bank reporting which, despite the vast range of quality, are backward (past performance based) looking”. 

“What I basically learnt is that family offices are technologically poorly served unless they spend mad amounts of money into systems geared for others. In this current context, whether they do something or not, they are faced by massive operational costs and poorly managed risks that can only frustrate their ability to fulfil their missions. Especially in this low-yield environment where everyone is piling onto alternative and illiquid assets again,” he said.   


The alternative route
This publication asked Tanqueray about the trend of family offices being encouraged from different sides to go into areas such as alternative investments (hedge funds, private equity, venture, infrastructure, real estate). This can raise challenges in terms of performance reporting, as well as objectively comparing results. What is his approach?

“This is typically what we are solving from a limited partner perspective by leveraging on the community aspects with our portfolio lab. By enabling users to anonymously share underlying investment data in return for such metrics. We are also working with traditional accounting aggregators to feed us with data. And by scraping the web, to retrieve such data and clean it by crossing it with multiple sources,” he said. 

This news service also asked Tanqueray if family offices should outsource more of their investment functions.

“As the Dutch proverb says, `measuring is to know’. This the first thing you need to secure and be able to do before any such decision. Otherwise, it is driving blind and intoxicated: you have given yourself up to uncontrollable fate,” he said.  

“This being said, most family offices do not have the budget, the size or the leadership skills to manage, scale and recoup the cost of big teams. So outsourcing is something most of them need to do. So, they need to have strict selection and monitoring plans that are robust and responsive to avoid being caught in fire when it is too late, as many were in 2007 (money markets), 2008 (Lehman) and 2009 (Madoff). By the same token, they need to use their network and help negotiate better terms with punitive compensation plan when their providers fail to adhere to agreed key performance indicators set forth in sound service level agreements. For as long as family offices work on their own, they undermine their bargaining power,” Tanqueray continued. 

“By the same token, asset owners should have such service level agreements in places too as I have come across too many players who are too complacent with the lack of robustness their monitoring processes exhibit (such as manual, low quantifications…),” he said. 

The family office world shares with many mid-sized pension funds the habit of relying on third parties to fulfil their fiduciary duties on their behalf, he added.

Tanqueray agrees with the suggestion that the term “family office” is used too loosely these days, which hampers effective benchmarking of performance and costs.

“Many so-called family offices are in fact family-sponsored fund distribution businesses. Like initially though for pension fund consultants, family offices are here to protect and take care of what family members are unwilling or not skilled enough to perform by themselves. It is a business per se. As soon as it has something else to sell, there is a vested interest of the same nature as the one the UK’s CMA pointed out when reviewing pension fund consultants,” he said. 

Takeaways
As the year gets under way, Tanqueray set out a few points he thinks wealth industry practitioners and clients should take on board: 

-- Chasing returns is costly. One will end up competing with the flow makers aka the big banks who spend hundreds of millions to know anything ahead of everyone else by now millisecond standards. Anyone else will lose. The best approach is instead to think strategically; 

-- Being wealthy is a business per se. Only those who handle their wealth as rigorously, productively and impactfully as they handled their business, have the highest chances to avert the Buddenbrooks curse (referring to the Thomas Mann story of a German family that lost its fortune over generations); 

-- Socially adverse things happen because we all collectively let them happen, regardless of where we stand on the ladder. Our indifference is our worst enemy; 

-- It is time for all asset allocators to realise that investing is an information business. It is not a matter of being awash with plenty of information but rather how we process it. And be prepared to share it; and 

-- As we never know what we actually do know or do not know. Anything else is heuristics and cognitive-biases prone. Quite an issue when we are in charge of growing or preserving capital for the next generations.