Pepper International October Presented By: Carol Pepper Columbia Business School October 7, 2008

Transcription

1 The Global Family Office Presented By: Carol Pepper Columbia Business School October 7, 2008

2 Overview Introduction to Pepper International Overview of Family Office Types Matching the Family to the Right Type of Office Three Step Process for Family Office Creation Setting up the Single Family Office 2

3 Pepper International s Expertise Global Experience Pepper International is a family office for wealthy families Pepper International helps families around the world to create and manage single and multi-family il offices 3

4 Carol Pepper s Experience Multi-Disciplinary Background Top Private Banking experience with JP Morgan, Credit Suisse and Citibank Portfolio Management Experience for three billionaire families with Rockefeller ee e & Co. Private Wealth Management Technology experience with Instinet t and Morgan Stanley 4 Pepper International November 2006

5 Pepper International works only for families Objective Client Advocacy Pepper International does not take fees for recommending product or service providers and is only paid by the family to represent their interests. Pepper International is free from conflicts of interest 5 Pepper International November 2006

6 Managing Wealth Today Costs Complexity Time 6 Pricing is Products P d are Managing not clear hard to wealth understand takes a Costs are hidden and complicated Products and services are expensive Risks k are difficult to manage Performance f is hard to assess great deal of time

7 Why have family offices become popular? The Financial Services World There are strong conflicts of interest in the business models of many wealth management businesses, so families want one advisor who only represents them. Managing wealth correctly is highly time consuming and families prefer to delegate this task. Families cannot get what they need from existing providers so are creating their own solutions 7

8 The Client Without Asset A Family Office Managers Other Family Members Client Partnership Managers Client must juggle many contacts Specialists are uncontrolled Costs are not well controlled Client involved in every matter No clear picture of assets No control of over time and money Other Experts Legal & Accounting Advisors 8

9 What are the benefits of working with a Family Office? Costs Complexity Clarity 9 Costs are controlled Costs are known Costs are reduced Pepper International November 2006 Complex issues are well managed The office created is appropriate for the family The vision of the family is realized The family s wealth is well understood

10 The Family Office Asset Managers Other family members Client Reporting System 10 Client has one point of contact Specialists are managed Costs are controlled Client chooses level of involvement Reporting system gives a clear picture of assets Client has control of time and money Other Experts Legal & Accounting Advisors

11 Services Offered by a Family Office can be Comprehensive Family Office Investment Services Tax & Planning Other Services 11 Manager Review Asset Allocation Manager Selection Risk Monitoring Single Stock Positions Consolidated Reporting Monitor Accountants Monitor Tax Planning Review Estate Planning Oversee Trusts Organize Philanthropy Banking Concierge Education Legal Matters Security

12 Issues from the Family s Perspective Control of the family s privacy, investments, risk, legacy, etc. We want to define our own destiny and we will not be controlled by others. Conflicts of Interest within the financial world work against the family s goals. We want all referral deals, retrocession payments, etc. to be disclosed to us. We want real advice, not to be steered to someone who is paying you a fee, or to be invested in a product because it pays you a higher commission. Customization of information, analysis and servicing our family members is important. We have our own way of doing things We don t want a cookie cutter approach to our money. Cost minimization. We are willing to pay for what we need, but we don t want to be overcharged just because we are wealthy. 12 Pepper International November 2006

13 Choosing the Office for the Family: Family Issues Amount and Complexity of Family Members The size of the family, The number of generations, The number of nationalities within the family Diversity of ffamily members Family Governance Rule by patriarch or matriarch Rule by elected council of family members Rule by Trustees Rule by consensus of informal committees 13

14 Choosing the Office for the Family: Wealth Issues Number and Complexity of Family Assets Amount of wealth, Variety of Assets Publicly traded versus privately held assets Location of Assets (number of countries) Sharia Investment Requirements Ownership of Assets Owned by individuals Owned by corporations Owned by trusts or foundations Offshore or onshore ownership 14

15 Types of Family Offices Type Single Definition - Dedicated to one family - Has a physical office - Internal staffing for most functions - Focus on tailoring services for family Virtual -Multiple families - No physical location - Virtual teams of outside experts - All services outsourced - Focus on best of breed providers combined with tailored services 15

16 Types of Family Offices Type Multi-Family Definition - Serves needs of founding family and other select families - Large staffs and offices - Focus on defraying costs - Mix of internal/external management Corporate - Limited/no family involvement - Often division of a larger corporation - Large staff and multiple offices - Mix in-house/external management - Focus on bringing institutional opportunities to wealthy clients 16 Pepper International November 2006

17 Main Issues Across All Models Governance should drive firm development and match family s strategy; the office needs to recognize and manage conflicts of interest Privacy and Security need to be managed as top priorities Personnel needs to fit the organization and the family Service Levels need to be selected and drive business design Investment Management structure of business requires many decisions: in-house versus outsourced, fees, access, asset allocation, reporting, analysis tools, consolidation Technology costs and decisions are a major driver in the way the business model is shaped 17 Pepper International November 2006

18 Issues for the Single Family Office Governance of office needs to be decided, including decision making processes, rights of various generations, ownership stakes Recruiting, paying and holding top talent is challenging while keeping down costs Access to good investment opportunities and having clout with providers is more difficult while remaining i a single family office unless the office is of significant size Costs of running single family office can outpace the service expectation of family members, especially for technology Security of family wealth within the office is critical, and fraud prevention is paramount Worries associated with running a small business (HR, Real Estate, Tax, etc.) can compete with a desire to focus on family, personal interests, etc. 18

19 Issues for the Virtual Family Office Technology budget is small compared to technology requirements Expansion of the business needs to be balanced against the need to remain virtual and low on overhead. Trust in outsourced experts needs to be balanced against the need for control by the virtual family office head as the person with ultimate responsibility for the family s wealth plan. Team Building is more challenging when team members are located in different firms around the globe. 19

20 Issues for the Multi-Family Office Governance among family clients can be tricky; balancing the needs of the founding family with the needs of the new families can be challenging Growth is needed to cover costs costs often outpace client acquisition; marketing the organization can be expensive and results of marketing dollars spent may not be seen immediately Size of Organization issues start to occur; there is difficulty in being medium sized - high costs to run operation, yet can only afford to offer limited services Outsourcing decisions become critical to cost control Regulatory oversight occurs and compliance is a new expense Pepper International November

21 Issues for Corporate Family Offices Governance of business internally can be affected by dependence on a corporate parent or investor Perception of being a Private Bank with another label by clients can be a negative Profitability is affected by internal cost allocation decisions made by the parent organization and by the push to offer open architecture and third party investment products Conflicts of Interest with product areas of the parent firm can arise Respect is hard to come by internally; often a small division within a large organization can find it hard to command resources Pepper International November

22 The Single Family Office Portfolio Managers Family Family Office Legal & Accounting Advisors 22 There is one point of contact Specialists are managed Costs are controlled Conflicts of interest are managed A clear picture of assets emerges The family has control of their time and money Experts

23 The Three Step Process for the Single Family Office Strategic Operational Family Plan Plan Office 23 Three to Six Months Assess family needs Assess assets Assess budget Six to Nine Months Create detailed budgets Decide inhouse versus outsourced functions Create detailed procedures Six months to one year Hire staff Open office Invest money Offer other services

24 Strategic Business Plan for a Single Family Office The strategic plan is the basis for the detailed operating business plan After the strategic planning phase the family can assess whether it really wants to go forward or whether the family should join an existing multi family office 24

25 The Importance of a Written Strategic Plan in clarifying family issues Writing a strategic plan helps families decide together what is most important t and helps to clarify the tradeoffs that t everyone is willing to make A written plan allows all family members to get involved and have a say in deciding what type of office to have A plan is an efficient way to communicate with potential employees, service providers and partners A plan with a budget helps the family understand how much they are going gto have to pay to have the services they want A strategic plan helps the family assess whether the family office structure the are considering will meet their needs 25 Pepper International November 2006

26 Sample Table of Contents for SFO Strategic Plan Executive Summary Family mission statement Governance of the office including boards Description of office structure Staff functions and with organizational charts Description of services Real Estate and fixtures Technology & back office functions Compliance & legal considerations Eti Estimated td budget 26

27 Consult with all family members If possible, a group meeting or an individual meeting with each family member who may participate i in the family office, including the representatives for minors, is a good way to start The first assessment is to get a feel for the type of services, return expectation, cash flow requirements and risk tolerance of family members Existing advisors should be consulted as well to help fill in the portrait of the family 27

28 Review the family s assets Asset allocation is reviewed at the individual level, the entity level and the family level Need to understand the mix of liquid assets, real estate, operating businesses The overall risk of the portfolio of assets relative to the risk the family wishes to assume The time horizon of current holdings versus the time horizon the family uses to consider investments 28

29 Consider the Budget Available for the family office An initial document can be prepared describing the services to be provided and the estimated cost of providing these services on an in-house versus outsourced basis The strategic t plan should be circulated ltd among all family members and discussed as a group The family needs to decide whether it wishes to go forward at this point to create a detailed operating plan with full cost estimates 29

30 Operational Business Plan Create a Detailed Blueprint The next step is creating a detailed understanding of the costs and resources required to build out the family office Decisions made include services to be in-house versus outsourced At this point detailed cost estimates can be created 30

31 Plan Implementation Build the Business At this point the office is actually built Staff is hired and the location is built out Technology is purchased and software is customized Staff is trained and operations are opened 31

32 Major Costs of a Family Office The Biggest Budget Items If investment management is outsourced the biggest budget items are: staff, real estate & fixtures and technology If the investment function is performed in house this is usually the largest expense 32

33 Who should run the investment function of the family office? Investment Responsibility Choices: Family member vs. Professional, In-house versus outsourced, Family Office CEO versus a separate Chief Investment Office Function The direct investment experience of family members drives this decision in many cases Oversight above the CIO: family board, external board, external performance measurement and reporting 33

34 Responsibility of family regarding investments Education is the best defense Designating family members to be educated in investments Basic training in reading statements for all family members Creating an open culture where all can speak up 34

35 Compensation of Chief Investment Officers Behavior follows compensation High cost of Chief Investment Officers Base salary versus incentive compensation, upside participation and co-investment Measuring performance of CIOs Spotting problems early and reacting quickly 35

36 Investment policies and procedures Investment controls are vital Investment management policies and procedures should be in written form Clear responsibility for investment functions should be assigned External audits should be periodically performed to assure that procedures are followed and records are being kept properly 36

37 Investment functions of the Family Office Investment Related Services Review current investment holdings of each account Analyze asset allocation and implement changes Select managers and brokers in all asset categories Monitor individual id trading accounts 37

38 Risk Management functions of the Family Office Risk Management Assess current investment risk Evaluate risk on the asset class level, sector level and individual security level Create a risk management plan Monitor all investment risk 38

39 The Multi Family Office Portfolio Managers Other Families Boards Founding Family Family Office Legal & Accounting Advisors 39 There is one point of contact Specialists are managed Costs are shared Conflicts of interest are managed Company is supervised Families have control of their time and money Regulators Experts

40 Three Step Process for conversion from SFO to MFO Strategic Operational Family Plan Plan Office 40 Three to Six Months Assess family needs Audit operations Create marketing position ii Assess budget Six to Nine Months Create detailed budgets Update d detailed procedures Six months to one year Decide inhouse versus outsourced functions Review staff Re- engineer Office Open MFO

41 Profit Margin by Firm Size Pretax Income as a % of Revenues Assets $5B+ 14.4% 16.0% $1B-<$5B $.5B<$1B$ <$.5B Source: Family Wealth Alliance 3 rd Annual MFO study of 68 multi-family il offices published in October

42 Biggest Challenges for MFOs Challenge Weighted Score Human Capital 47 Business Development 30 Managing Growth 23 Managing Service Menu 17 Client Service Quality 16 Technology 15 Profitability 10 Source: Family Wealth Alliance 3 rd Annual MFO study of 68 multi-family offices published in October com 42

43 Summary Family Strategy Investment The office The strategy The needs to be needs to be tailored to clear and the needs of measurable the family investment process needs to fit the family and provide adequate controls 43

44 Biography of Carol Pepper EDUCATION Carol earned a BA in Philosophy from Bryn Mawr College in 1984 and an MBA from Columbia University in EXPERIENCE Salomon Brothers Carol Pepper started her career in 1984 at Salomon Brothers, where she was a financial analyst in the Mergers and Acquisitions department and for the Corporate Finance division. JP Morgan She then joined JP Morgan in 1986 and became a Vice President in the Private Banking division, where she was a relationship manager for wealthy individuals and their privately owned companies. Carol provided credit facilities, Mergers and Acquisitions advice, and assisted in the Private Placement of securities for firms owned by her clients. She also advised clients on investment management and trust and estate issues. 44

45 Biography of Carol Pepper Credit Suisse She then joined Credit Suisse Private Banking, where as a Member of Senior Management she worked on repositioning the Private Banking business in the United States and managed client assets. Peregrine Acquisitions Carol left the firm to form an investment company called Peregrine Acquisitions, which successfully facilitated the sale of a $20 million luxury day spa company. Citibank Private Bank Carol then joined Citibank Private Bank, where she was a relationship manager for wealthy individuals with assets in excess of $50 million and their companies. 45

46 Biography of Carol Pepper Rockefeller & CO. Carol then joined Rockefeller & Company, where she was a Senior Relationship Manager and Portfolio Manager. Carol oversaw over $1 billion in client assets for three multi-billion dollar families. She managed liquid portfolios that included cash, bonds, US large and small cap stocks and international equities. She selected hedge fund and venture capital investments for these clients as well. She also made direct investments in start up companies and was deeply involved in the structuring of these new companies. She created asset allocation plans for her clients, worked with large groups of trustees and oversaw charitable giving programs. Instinet.com Carol then joined Instinet.com, a subsidiary of Reuters, as a Director, and was responsible for the creation of investment and educational website content for an online trading company. 46

47 Biography of Carol Pepper Morgan Stanley Prior to forming Pepper International, Carol was a Principal in the Private Wealth Management division of Morgan Stanley, where she was actively involved in the creation of a web-based b financial i portal for clients with assets in excess of $30 million. She was responsible for creating virtual family office services for the firm s global family office clients. Pepper International, LLC Carol formed Pepper International, LLC in February The firm provides virtual family office services to wealthy individuals. Carol also provides consulting services to families around the globe seeking to create an independent single or multi-family office. Carol lectures extensively around the globe. In 2007 she was named a Rising Star in Wealth Management by Institutional Investor News. In 2008 she was awarded a Global Leadership Award by the Family Wealth Alliance ( She is a member of the Forbes Investor Team and comments on the markets at Forbes.com 47

48 Contact Pepper International Website: ti l Address: Carol Pepper, President 311 East 72 nd Street, Suite 8B, NY, NY USA Telephone: Cell Phone: