FAMILY OFFICE MONTHLYOctober 2014

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Qualified Family Offices

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Welcome to another edition of Family Office Monthly, an in-side look at the family office

world from the Family Offices Group association. We enjoyed seeing many ofyou at our recent Family Office Super Summit in Miami, where 325+ attendees listened to more than 50 speakers, multiple panels, and took advantage of plenty of networking opportunities throughout the 3-day conference.

In this month’s edition, we will first un-cover several myths in the family office industry. Starkey International will provide a detailed look at the cost of turnover in the private residences of high-net-worth families. As usual, we connect you with a number of free resources including the latest episode of the Family Office Podcast and access to our recent Family Office Q&A webinar. We sincerely hope that you enjoy this edition and please do not hesitate to contact our team via e-mail to Clients@FamilyOffices.com or speak with our client services specialists at (212) 729-5067.

4 Family Office Industry MythsIn this free article, I wanted to share a few myths in the family office industry that I’ve heard over the years. I hope you enjoy this piece and that it gives you more insight into how family offices operate. Page 2

Institutional Capital Changing the Tide for GPsI wanted to share a few comments af-ter meetings this week with a number of GPs in New York. One consistent

message that came across is that the large institutional investors are still the main draw for large funds but there is increasing pressure to provide preferred terms. Page 5

The Real Cost of Turnover in a Private ResidenceWhen there is Staff turnover in a private residence more may be lost than just time and energy to rehire for that position. There is substantial Financial and Emotional loss for the Principals and family. Page 7

More 2015 Conferences to be Announced Shortly

The Single Family Offi ce

You can read more articles like these in The Single Family Offi ce by Richard C. Wilson. You can grab your copy of this Single Family Offi ce book soon on Amazon.com

If you want to listen to one of the interviews included in this book, visit SingleFamilyOffi c-es.com/audio2 to download a free mp3 recording.

Looking to meet other sin-gle family offi ces in person? The Family Offi ces Group hosts many live conferences throughout the year in great locations like Manhattan, Sin-gapore, and Miami. At least once a year, we host an exclu-sive gathering for single family offi ces and affl uent families to meet, share experiences, and build relationships.

If you would like to be con-sidered for membership (free to single family offi ces) please contact us:

E-Mail: Clients@FamilyOffices.comTelephone: (212) 729-5067.

4 Family Offi ce Industry Myths

In this free article, I wanted to share a few myths in the family offi ce industry that I’ve heard over the years. I hope you enjoy this piece and that it gives you more insight into how family offi ces operate.

1) Th ere is no family offi ce industry.

The truth, that the family offi ce industry is thriving and serves hun-dreds of thousands of high-net-worth families, is becoming harder to

dispute, but every once in a while I hear a professional bring this up.

The main reason that people question the legitimacy of the industry is that most family offi ces operate discreetly and do not solicit their services public-ly, unlike mutual funds, RIAs, or fi rms in other investment industries that are more public. If you have attended one of our Family Offi ces Group confer-ences, visited a single or multi-family offi ce in person, or even just scrolled through the more public family offi c-es’ websites, you will fi nd plenty of evidence to show that family offi ces exist and there are thousands of family offi ces operating in the U.S. alone, not to mention many more globally.

2) Tax effi ciency is king.

Tax effi ciency is certainly an important consideration in family offi ce wealth management but it is not the only aspect family offi ces care about. Family offi ces manage hundreds of millions and even billions of dollars so tax con-sequences have to be considered, but the popular perception of tax effi ciency dictating every investing decision has not been the case in my experience. Other areas of importance for family offi ces include capital preservation,

diversifi cation, transparency, consistent (even if moderate) returns, and hedges against macro trends. Tax effi ciency plays a part in most family offi ces’ in-vesting strategy but it is not the moti-vating factor behind every family offi ce allocation decision.

3) Th ere are 3,000 family offi cesglobally.

Many industry reports and surveys sug-gest there are only 3,000 or so family offi ces operating in the world. That fi gure seems very, very low and anyone who has worked in the family offi ce industry knows that there are thousands of family offi ces that either do not self-identify as a family offi ce or prefer not to participate in surveys or public activities. In such a private industry it makes sense that so few family offi ces would want to come forward and attract scrutiny from the public, for fear of the effect any publicity might have on their family clients. Time and time again I see family offi ces take sometimes extreme precautions to preserve their anonymity.

As I suggested above, some family offi ces simply don’t think of them-selves as family offi ces. For example, I spoke with an executive at a fi rm that manages the wealth for a successful entrepreneur who is on the Forbes List and they consider their fi rm a venture capital fi rm despite the fact that it only invests the founder’s capital, allocates across different stages and asset classes, and manages other services for the principal including coordinating the

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FAMILY OFFICE

TRAININGDid you know that you can

access great family office inter-views and other training resourc-

es with your enrollment in the Qualified Family Office Profes-

sional (QFOP) program.

The QFOP is the only family office training program designed for family office professionals, by

family office professionals.

Our goal is to provide as much education and resources on the

family office industry as possible and the QFOP is the most com-prehensive family office training

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Visit FamilyOfficescom for interviews, insights, introductions, & more resources| 3

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founder’s daily activities, finances, and taxes. Based on conversations with the team, it seems that venture capital is only a very small part of the firm’s activities and primarily the purpose of the business is to serve as a private wealth management firm for the founder and his family. To me and most people, that fits the definition of a single family office but for whatever reason, this firm considered itself a private venture capital firm. There are thousands of other business founders, executives, families, and ultra-wealthy individuals who operate quasi-single family of-fices, virtual family offices, or simply use a division of their business as a separate private wealth management division.

4) Single family offices must have$500M in AUM minimum.

I have met thousands of family offic-es in the last few years and I’m sure you would be surprised by the range in services, structure, and assets un-der management.

We allow qualified single family offic-es to attend our conferences for free and we have to vet many inquiries from supposed single family offices that are really just a wealthy service provider with less than $1M in AUM. Of course, we can’t all be million-aires but single family offices serve a specific segment of the investor community, those with substantial net worth in the millions of dollars. When you are managing in the $1-100M range as a single family office, many families find that the costs of managing a full-service platform and full-time staff are too great to justify. These families typically opt for what

may be a more cost-effective wealth management solution such as a multi-family office, private bank, or a virtual family office.

Based on my personal experience, I would estimate that the majority of single family offices have at least $100 million in AUM and the typical single family office manages at or around $1 billion. I have met several impressive single family offices that manage less than $1 billion but allocate substantial capital to direct investments, run an aggressive port-folio, and provide a diverse range of services for the family. There is less margin for error when operating a lean single family office of just $100 million or $200 million in AUM, but it can be done, and many have done so successfully for years.

There remains a perception in the industry that single family offices are reserved only for those with $500M and that no one can successfully op-erate much below that level. My ex-perience has led me to believe that is far from the case and talented teams lead single family offices of $100-500M to provide comparable services to their larger $500M+ peers.

We hope that this article helps clarify a few of the common myths in the industry and leads to greater under-standing of family offices and their clients.

Richard Wilson presented at a private equity conference in Kuala Lumpur, Malaysia this month. Richard reported a number of trends that he observed after meeting with local families and investment firms:

• Many Asian family offices are heavily weighted toward hard assets includinggold, real estate, and direct equity stakes in businesses.

• To the extreme, some local HNW families have up to 20% invested in gold, almostcompletely allocated to real estate only, or capital is locked up in illiquid directequity investments in businesses.

• There is a lack of high-quality deal flow in Asia, according to many of the Asia-based family offices we spoke with.

• There is a dilemma of preferring to only deals within the family’s inner circle, while coping with poor deal flowavailable to these very private families.

• There is slow, but marked movement toward investing in funds. Many families seek co-investment opportunities butare too private to do so effectively.

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Location Matters for Family Offices

Greetings from Kuala Lumpur

As we have noted elsewhere in this edition of Family Office Monthly, we are hosting our end-of-year Summit in Miami. Why Miami? Well, to be frank, it's where the family offices are, at least many more of them than other potential locations that we considered for our final conference this year.

There are many factors that lead family offices to open an office, headquarters, or relocate as a family to Florida including tax-friendly environment, good business conditions, and, of course, the climate. Florida is unique in many respects, but it is one of several attractive destinations for family offices. Family offices and their ultra-wealthy clients are keenly aware of the tax environment, access to talent, attractiveness of the destination, and other important factors that distinguish one city, state, or even country from another.

In years past, we've seen a number of global locations rise in popularity among the HNW community for different reasons, such as Switzerland with its secure and discreet private banking, Singapore and its strong governance and agreeable tax structure, and Brazil largely due to its access to Latin American markets and high-growth economy. In recent years, we've seen here in the U.S. a move toward Texas and Florida by family offices for the same type of reasons families move their office or completely relocate to Monaco or other wealth-friendly locales. In our own business, we have considered opening an office in Florida because of the business-friendly attitude and the strong community of family offices there. Like many businesses and family offices, however, it is hard to not have at least some presence in New York, San Francisco, London, Chicago, and other top finance capitals. Unfortunately, these cities are both essential business locations and punishing tax environments, presenting a challenge for many family offices.

We are closely monitoring the migration of family offices to more attractive locations, and away from the more popular finance and wealth management cities. It will be interesting to see how families adapt to changes in laws, taxes, and business regulation going forward.

INSTITUTIONAL CAPITAL CHANGING THE TIDE FOR GP'S

I wanted to share a few comments after meetings this week with a number of GPs in New York. One consistent message that came across is that the large institutional investors are still the main draw for large funds but there is increasing pressure to provide preferred terms. Large private equity shops and hedge funds are being asked to

outperform their smaller competitors and acquiesce to ILPA-like requests for lower fees, better transparency, and other demands that have risen in recent years.

Inflows of institutional capital, especially from non-U.S. investors including pensions, sovereign wealth funds, single family offices, quasi-governmental investors, and other institutional capital sources, have helped offset some of the anticipated drawdowns for the larger

fund managers. Based mostly on anecdotal evidence and discussions of capital raises and fund closings, I have found that many of the $1B+ alternative funds have found “sticky” capital from outside the U.S. that has helped soften the blows from investors looking to invest in other managers, other asset classes, or manage capital in-house.

Inflows from new capital sources are especially important given the headwinds facing the leading asset managers raising capital and maintaining investor commitments, particularly hedge funds. I’m sure many of you caught the recent stories on shifts in pension fund allocations away from hedge funds and other alternative asset classes (1). This wasn’t shocking to anyone who has been speaking with LPs and GPs in recent years but it is telling that the biggest pensions like CalPERS are rapidly reducing their exposure to hedge funds going forward. Many institutional investors have sought to emulate the sophisticated CalPERS portfolio management system and the California pension’s decision marked an important moment for GPs, particularly hedge fund managers, that has already been followed by similar allocation shifts at other pensions (2).

In some ways, this shift means that family offices, HNW individuals, and smaller institutional investors will be more important for funds seeking capital; but the wealth being created in Asia and elsewhere overseas appears to be a bigger focus for the biggest funds in the U.S. The

growing sophistication of many investment teams at pensions, sovereign wealth funds, endowments, and family offices around the world has made many investors more comfortable allocating in alternatives, rather than parking their money with traditional asset managers or managing money in-house through bonds, equities, and foreign exchange. For now, it seems that many funds have been able to shift capital raising efforts abroad and avoid the harshest effects of changing investor demands. Another way that private equity and hedge fund managers have been able to cope with diminishing interest from public pensions and U.S. institutional investors has been to tap into HNW individuals and smaller investor accounts. An article in DealBook yesterday showed how private equity funds like Carlyle and Blackstone are lowering minimums and increasing access to the asset class for smaller accredited investors (3). Whether it is by attracting more individuals or working with investment banks to bring in feeder funds, alternative funds are rapidly adapting to the shifting sands beneath their feet.

The shifting preferences of the largest institutional allocators have certainly had an impact on the private equity and hedge fund business models in recent years.

(1) http://online.wsj.com/articles/pension-funds-eye-reducing-hedge-fund-investments-1413762698

(2) http://www.pionline.com/article/20140929/PRINT/309299998/too-complex-for-calpers

(3) http://dealbook.nytimes.com/2014/10/20/private-equity-titans-open-cloistered-world-to-smaller-investors/?_php=true&_type=blogs&_r=0

By Theodore O’Brien

5 fice Monthly

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Cyber Security: A Growing Concern

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For corporations around the world, cybersecurity is a major concern. Family offi ces are similarly worried about data breaches, attacks by hackers, and

accidental information leaks. Theodore O’Brien, Managing Director of the Family Offi ces Group, recently sat down with the head of family offi ce services at a top accounting fi rm and the executive noted that his clients are increasingly concerned about their exposure to cybersecurity attacks. Cybersecurity has certainly become a point of emphasis for private banking and family offi ce clients, especially

after high-profi le attacks on Home Depot, Target, and JPMorgan. As the graphic below shows, IBM Security Services found that there were 1.5 million monitored cyber attacks in the U.S. last year. Family offi ces are looking to protect sensitive information including tax fi lings, business records, internal family discussions, and other data that their clients need to keep private.

Family Offi ce Podcast: Large Family Offi ce Best Practices Presentation

Earlier this year, the Family Offi ces Group hosted a Family Offi ce CIO Summit in Los Angeles. At the event,

Richard C. Wilson presented on family offi ce best practices employed by large, successful family offices.

To hear Richard’s presentation simply visit our Family Office Podcasts and search for the most recent episode.

http://FamilyOffi ces.com/Podcast/

To learn more about single family offi ces, attend our upcoming family office conferences starting early next year.

Our next event is our Annual Single Family Office Summit in New York on February 9th, 2015.

Learn more at: http://WilsonConferences.com/

Be sure to check out the other 20+ Family Offi ce Podcast episodes for free: http://FamilyOffi ces.com/Podcast

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When there is Staff turnover in a private residence more may be lost than just time and energy to rehire for that position. There is substantial Financial and Emotional loss for the Principals and family. We will explore these areas below.

First of all, consider the overall knowledge the Staff employee may have of the Procedures in the home and on the Property or the Favorites of the family or guests that are rarely written down.

The majority, if not all, of this knowledge is at risk of being lost when the Staff employee walks out the front gate. Consistency of the day to day operations of the home, property and family schedules will be disrupted.

Relationships are created when there is Staff working in a private residence. Separation can be difficult for the family, particularly for children or elderly parents. Familiarity provided comfort and a new hire will be stressful until they are proven to be trustworthy.

It is very important to take the necessary time to write a real Position Description. Fluff will not serve the rehire process or your efforts in the process.

Consider if they have been trained in Private Service, and if their salary requirements are in line to as you sort through resumes. Higher end clients prefer to use an experienced Private Service recruiter or an Institute

such as Starkey as they should be expected to pick the high 2-3 candidates that actually fit your requirements and because the industry is unique and excellent Private Service professionals are rare.

Overall replacement of one staff person can take up to 30 days or more. Do not rush the process! Competent hiring practices for private staff are not the same as corporate practices.

When a Staff employee exits employment, be sure to change access codes, obtain keys, cell phones, other equipment and property, change passwords where required, notify security personnel, retrieve credit cards and other financial instruments in their position during the course of their employment. Also, if provided to the employee you will collect autos, facilitate vacating residential property, and processing the final pay. This can take from 2 days to 2 two months to complete determining on policies and agreements.

Now let’s explore the Financial costs with paying your Family Office Representative to complete the above work. The cost of the Representative’s salary could exceed $25,000 for their time during the process plus utilizing a placement agency paying up to $50,000 when hiring a higher end professional. This overall process of termination and hiring can easily exceed $100,000. False starts and bad hires can double this figure.

THE REAL COST OF TURNOVER IN A PRIVATE RESIDENCE

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There is no amount of monetary value that can be placed upon the Emotional loss of a trusted and valued primary Staff employee. Everyone in the family from the children, the principals, and the grandparents will experience the loss. Primary support is no longer there. With new support not privy to the not so obvious, the many special relationships and agreed to duties that had been developed to meet the needs of the family are lost.

The remaining primary Staff employees, trusted vendors, and other support persons will also have to start over with communicating how their work is completed, the expectations, and the emotional value held by the Principals. This also takes time, which the Principal will be billed for. Starkey estimates this could cost your high net worth Employer an additional $50,000.

Security is at its weakest point when new primary Staff employees have to be replaced. These primary Staff employees may include the Household or Estate Manager, Executive Housekeeper, Private Chef, Nanny or Driver. Overall fi nancial cost is a minimum of $150,000. Hire well!

Written by:Paula FaulknerChief Financial Offi cer

Households without basic personnel policies further place themselves at risk. Specifics include:

• Use of Illegal and Legal Drugs and alcohol;remember marijuana is legal in Colorado andWashington

• Absentee policies• Dress codes• Theft policies• Sexual and other Harassment• Safety and use of equipment policies• If the private principal employs more than

15 staff employees, there are other federalguidelines that must be adhered to

• Confi dentially Agreements• Basic procedures including where to park,

which bathroom to utilize, which doors toenter and exit by, where to store their purses/bags and hang their coats and which roomswithin the home are off limits

However, if you write it, the policy must be carried out or you further place yourself at risk! In summary, hiring and terminating Staff employees is an expensive and time consuming and tedious process. Do it right and do it once!

Starkey International Institute, Inc.http://www.starkeyintl.com/

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By speaking at conferences and meeting with dealmakers and investors around the world, I have noticed a few key traits that set apart the most productive and exceptional investment

professionals from the

5Traits I See in Exceptional Investment Professionals

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1. They now their numbers:By this, I don’t mean that these individuals are mathematical geniuses necessarily, rather these professionals know by heart the most important statistics and information on a deal. You never find top investment professionals sifting through notes or struggling through “Ummms” and “Let me get back to you on that,” these pro’s prepare for tough questions and have a ready answer.

2. They are productive /7:It has become typical for advice articles to suggest that you take more time to nap, meditate, and stretch in the sun. But for top investment professionals, most of their waking hours are spent productively. They’re reading their most important e-mails during the commute to the office, they’re socializing with potential business partners, they’re reading or doing a conference call while they exercise. These investment professionals do not burn themselves out with poor work-life balance, but they do make the most of their spare time and maximize what they get out of each day.

3.They aren’t afraid of the spotlight:Whether it is speaking to an audience at an investment conference or taking the lead at an investment committee meeting, these investment professionals are usually front and center. It is hard to build relationships and keep up with your peers if you shy away from opportunities to connect and make yourself known.

4.They look for synergy:Of course, any good investment banker or investor has a keen eye for synergistic opportunities, like a great bolt-on addition to a portfolio company or an excellent acquisition target. Beyond dealmaking, many top investment professionals know how to make powerful introductions, even when there is no direct

personal benefit of the introduction. They can do this because they take the time to think through what the people in their network are seeking and then they pair accordingly. They never make introductions just for the sake of doing so, rather they look for real synergy between parties.

5. They know how to say “no”:It’s easy to say “yes”, even if it isn’t the right answer for you yourself, the other party is always hoping for an affirmative response and you get the instant gratification of knowing you’ve said what the other person wanted to hear.

But saying “no” takes conviction and courage, especially when the person asking is really hoping for a “yes.” In the investment world, there are many reasons that can push you to say “yes” even if you know you’re not interested.

Commissions depend on your answer, your firm might be under pressure to allocate capital, the research might suggest you should go for it, etc. But the exceptional investment professionals are confident in their ability to discern for themselves and always willing to say “no” if they believe it’s the right call.

Many times this means disappointing someone else, but it also means they might then wait for a better deal, or spend less time reviewing a deal they know isn’t a winner, or save their investors money churning through mediocre deals.

Note: These are only a few traits that I have found in the people I find to be truly exceptional investment professionals. This list is not exhaustive and I’d love to hear your suggestions for additions to the list, nor is this list an indication of investment success, it is only a few qualities that are possessed by people I admire in the investing world.