Interview with James Fleming
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In this interview Mr. Fleming talks about how a single family office transforms into a multi family one, the importance of understanding a client’s psychology, and keys to achieving top performance.
This interview was conducted by Peter Preller.
Sandaire regards itself as the first pioneering UK-based MFO. What’s the history there?
James Fleming: Sandaire was founded in the mid 1990s by the Scott family, who for the better part of 100 years were involved in the insurance and banking industries. They eventually sold that insurance business, and, like a lot of families, were faced with the challenge of having monetized their main asset. What to do next?
Now this was a family with a legacy of running a family business, so initially they set up a structure for themselves. As that developed, they at some point felt that structure could be appropriate for one or two other families to use, both to gain the economies of scale as well as to share ideas and to bring a few families together.
Was the idea to form something akin to an investment club or was it the idea to build a profitable new business?
JF: I wouldn’t say at any stage it was as informal as an investment club, no. I think once the idea took root to develop a multi family office, and therefore a business offering family office services, by definition as a business, there was a need to make a profit, because quite simply, as we all know, none of us are in business to make a loss. And neither is it a charitable enterprise either. So there’s not a sort of philanthropic element to the structure as such.
The MFO at this point has been alive and well for just over 20 years, managing capital for the underlying 35 families. With each family, there is a need to understand, obviously, the structure of that family, the needs, the circumstances, the requirements, the time horizons, and also the sense of the family dynamics, the structure, how many generations, etc. So a complete thorough knowledge, but also due diligence on the family concerns in order to be able to create an investment plan that matches those factors, those dynamics in each particular family.
How does this differ from a traditional investment office, such as offered by banks?
JF: So I think the first point of differentiation from a traditional investment business is that we are dealing with substantial family wealth in each and every situation. Furthermore, within each family there are multiple persons, multiple personnel, multiple members of the family. So there is a need to create structures, maybe foundations or trust structures, that are creative with a view toward the long term.
Are the members of the Scott family active in the MFO, or is the family just a client and owner?
JF: That’s a good question, because if you take the case of Alex Scott personally, so Alex was founder, chairman and chief executive at the outset, some three to four years ago, he stepped back from being Chief Executive and remained as founder and chairman and now today Alex is founder. We have an independent chairman and we have myself as chief executive.
So what I’m describing there is not just a positional change, but an evolution of the business. The aim being today and for the next five years, let’s say, to develop a momentum in the business that is almost independent of the core family but very inclusive of the core family.
What skills allowed the founder to make the switch from operating business to family office?
JF: Alex spent the early part of his career within the insurance company and the family’s bank, and so gained a good foundation and grounding in financial services with a particular expertise, which was insurance. When he then transitioned into the family office world, and therefore that of investments, clearly there was a need for him to gain a greater understanding of how the investment world works and runs itself.
But that’s where you then bring individuals into the business who can bring that technical expertise. The core skill that Alex had throughout this process was that of leadership. And translating that leadership from being in charge of the insurance company to being in charge of the multi family office.
Is there an established body of rules to govern things like whether and how the next generation can entire into the business?
JF: I don’t believe there’s a written down script that says at a certain age members of the family will join the business. I don’t believe that is the case. I think the family owns Sandaire through structures, and Sandaire is now a stand-alone family office. It just happens to be that the core family, the core clients, are the Scott family.
But I think whilst Alex and other senior members of the family may encourage younger members to come towards the MFO, I think that would be on a as-in-when-required basis for the company and as opportunities present themselves.
During the process and getting to know your clients, how do you try to establish their risk thresholds?
JF: I think generally you do see client behaviors and attitudes change as markets evolve and change. By that I mean that when the market is rising, you might typically find clients are very ebullient towards the market and want to take great levels of risk, thinking that the market only ever goes up.
There are risks to that sort of simplistic client perspective that markets always go up. They may initially want to take x degree of risk because it will pay off in the end. And then when they wake up and find that it’s dropped 10%, they start to panic and then it’s “Why did you put me in this and how did we get here?”
Can you address those concerns at that late stage, or if you’re having that conversation is it already too late?
The lessons that the industry has learned over the years, the investment industry, is to have VERY detailed conversations with clients at the outset and to ask quite simplistically: “What are their need circumstances and requirements?” And also to push for a far more detailed understanding of what is their attitude toward risk.
So things such as behavioral finance had gained ever-increasing importance in recent years in the discussion. Questions such as “If you woke up this morning and were down 20%, how would you feel? Do you have the appetite to see through market difficulties market volatility? etc.”
And getting an understanding of the client’s attitudes through their answers to these questions is a very, very important process. But also, I think, going through history and pointing through various market cycles what levels of returns can be achieved.
And while back testing is only a guide to what happened in the past, it’s no guide to what might happen in the future, as much information as you can impart to the client at the outset in this process of formulating an investment plan is very important and will pay you back when markets hit difficult times.
Some family officers say performance is overstated as a criterion. How do you see this topic?
JF: I think it would be foolish to say that performance is not important. It’s very true to say that it’s one component of an overall service, but it is an important component. If you were my client and you came to see me each quarter, and we never achieved any growth and never achieved the benchmark, etc.—how long do you think you would stay, however nice a cup of coffee I might give you?
If you’re here and losing your money, you’re not going to stay. So performance is a key component. But I think as important as delivering that performance is understanding the client in the first instance. So, in the management of risk, for example, it would be a very foolish family office that invested in high risk instruments when the client has clearly set out that they have a long-term preservation goal in mind.
So understanding the client and creating a portfolio plan and structure for them in the first place is very, very important. And then managing according to that plan is the second most important thing. And if you do those two things correctly, you should get the performance you need.