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The pitfalls and rewards of setting up a family office

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The pitfalls and rewards of setting up a family office

For ultra-high net worth individuals, setting up a dedicated family office may be tempting, but it is not an easy undertaking.

‘The biggest challenge for anyone starting a family office is the sheer volume and complexity of all that you have to do,’ said Christian Armbruester, whose family launched Blue Family Office in 2010.

He added that the desire to launch an office of their own emerged when the family became disappointed at how their money was being managed by others.

‘I was asked to take over the management of the family wealth in late 2009 and we took a real close look at how the money was being managed and decided very quickly that we were paying too much and that there wasn’t a coordinated risk system across our assets,’ he explained.

‘We decided to close all our accounts and see what we could do with it. It made a lot of sense for us to do it ourselves, it wasn’t just arrogance.’

Although Armbruester’s family’s roots are in manufacturing and metal trading, his experience has been in investment and business management, which is an advantage not all ultra-high net worth families have.

‘When it comes to formulating an investment strategy, there are huge risks and consequences depending on what one chooses to do. It’s
not just about the resulting performance, but
also all the admin, operation, people and resources you require to execute the chosen strategy,’ Armbruester said.

‘If one doesn’t have the knowledge and confidence to discern good from bad advice, it can be very expensive, frustrating and ultimately inefficient. I am fairly certain that I would not have set up our own family office, if I hadn’t come in with significant prior experience and that skill set.’

Hiring in help

In the case of Sparrows Capital for example, the family behind it needed to enlist the help of an outsider, Yariv Haim (pictured), to manage its wealth.

The firm started off as a single family office in 2006 for the entrepreneurial Israeli-based Eliashar family. Haim had worked with the family for nearly 20 years and was asked to take over the management of their personal wealth.

The business opened up to external investors in 2014, but he highlights one of the challenges as a lack of uniformity in the sector.

‘The lack of standardisation makes it difficult to define best-in-class standards, and also makes continuity more challenging. In many cases a patriarch appoints a trusted counsel, but then his children wish to appoint their own advisers, as they feel their interests differ,’ Haim said.

He added that there is also an evolutionary process in the sector as different generations face different challenges.

And who better to highlight generational challenges than a family business that has, in one form or another, been in existence for over two centuries?

J Stern & Co has a long legacy of dealing with numerous challenges impacting the family office. It all started in 1805 in Frankfurt when Jacob S H Stern converted a wine merchant business into a bank.

‘For generations, our banks were passed from one branch of the family tree to the other. Did this happen in a straight line? No, definitely not,’ noted Jérôme Stern, co-founder (pictured).

‘In some instances, our family was exceedingly lucky to have passed on some of the banks to entrepreneurial and highly competent family members. Sometimes, it was the opposite. The family also had its fair share of members who were not interested in the banking business but rather focused on industry or on the arts.’

After two world wars and several generations later, in 1988 the family sold its banking business.

‘And at that very moment we were in the situation that many of the families with whom we work today are facing.’

While there was much disagreement in the family at the time, he said they could agree on one thing: the investment strategy.

‘For us it was clear that there was an opportunity as our family had specific requirements that the market was not interested in providing. We were convinced at the time that other like-minded families would experience similar distress at the lack of service and at the opacity of the investments they are presented with. Today, we see the living proof of it on a daily basis.’ 

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