Interview with Christoph Zapp
Open image in new window
This interview touches on questions of founding or joining a family office, challenges during the founding phase and thereafter, strategies for staffing the family office and the importance of family governance.
This interview was conducted by Christoph Weber.
Mr. Zapp, you have first-hand experience in the establishment and operation of a single family office, as well as in consulting on large private real estate portfolios for client families. What moves a family to found their own family office instead of becoming a client in a multi family office?
Christopher Zapp: A sense of control and self-determination are the primary driving forces, as well as a perpetual mistrust on the part of ultra high net worth private investors toward third parties such as banks and wealth managers. When it comes to family-owned businesses, you’re typically dealing with people who have been deeply involved in the company and built up their own fortune, or whose fathers did so. Eventually their wealth achieved a critical mass too large for them to handle on their own. At that point, a wealthy individual must decide whether to hand over the money to a third party or to build up internal structures that he or she can influence directly. This latter case is often preferred when dealing with accumulated wealth of over 150 mn. euros. Third parties are then only commissioned in situations where a strong bond of trust already exists, such as when recommended or after a long period of mutual familiarization.
Based on your experience, what is the difference between the services offered by bank-bound and by bank-independent family office structures?
CZ: Bank-bound structures are tied to banks, and so are inherently product-driven in one way or another. What I mean is that such organizations face pressure to present the bank’s products (funds, etc.) to the customer. Many bank-bound providers of family office services may protest otherwise, claiming their services are completely independent from the parent firm, but I just don’t see that as being the case. The chance to cross sell is just too tempting for the bank not try to emphasize its own services and products to the clients via the family office structure. In many ways this is completely understandable, but the portfolio owner always needs to keep this in the back of his mind. Bank-agnostic family office structures, by contrast, are completely free to compare between different investment products and are more likely to select what they see as the best prospects for their clients. A clear plus for me.
What special challenges do families face during the founding phase of a single family office?
CZ: Many, unfortunately. One of the big issues: highly divergent interests within the family, not least due to the age differences inherent to the various generations. To accommodate for this, it’s essential that a fundamental strategy be defined from the start for the family office: continued growth of the wealth (greater risk) vs. pure wealth conservation (hedging and securing). The selection of managers is also a crucial aspect: The internal managers for the family office must be identified first, followed by the various external managers, wealth managers and investment partners for the various asset classes. That search for internal managers can be particularly long and difficult. A long-term commitment is usually needed. In fact, if the chemistry isn’t strong between the family and the family officer, the situation is probably destined to fail. Constantly rotating personnel in the family office is detrimental to both the family and the family officer.
What are the biggest mistakes that you can make during the founding phase and how can they be avoided?
CZ: You have to give yourself time in the early phases to think through the problems I just mentioned. A clear structure for the family office must be in place from the start, and the core strategies must be defined and approved. Only then should investments be made. People often make the mistake of getting right into investments, instead of first establishing structures to manage those investments. This typically leads to poor decisions and lost money. There are various negative examples of newly founded family offices that even years later are still trying to recover from those initial errors.
Are there different requirements when recruiting personnel for a single family office as opposed to a multi family office? Are special social skills required for a single family office?
CZ: You’re touching on a really tricky aspect, as I already briefly mentioned. In a single family office, the social fit between family officer and the family must be very strong. The goal here is to build ties that will endure for years, even decades. There must be an ability to weather changing moods. The family officer in particular has to be prepared to stand up front in a big room at times, exposed to the temperaments of the principals. With that said, the employees at multi family offices must also be selected carefully. They too need strong social skills and expert knowledge. But it’s ultimately simpler and easier to make personnel changes at a multi family office than at a single family office. What does apply to both structures: loyalty and a strong sense of ethics are a must.
What factors influence the personnel strategies for a single family office or a multi family office? What role does the size of the portfolio to be managed play, or the number of family (households) and asset classes to be managed?
CZ: Each of these aspects plays a role in determining how big a staff is required. What I primarily look at, though, is the degree to which outsourcing will be used within a given family office. The original task of the family office is controlling, in the sense of its proper economic definition: definition of investment strategies – execution of investments – ongoing auditing of the investments. Everything else, such as tax and legal consultation and operative management of investments, can be outsourced. So to my mind, it’s not inconceivable that a family office with just three employees could manage and control assets totaling several hundreds of millions.
A single family office supports a family in its very specific needs and specific asset allocation. A multi family office, by contrast, is responsible for multiple families whose specific requirements profile may differ greatly in some cases. Do you see conflicts of interest between the client families?
CZ: Yes, this kind of conflict of interest can arise in a multi family office, but these situations can also be effectively managed. The magic word here is “transparency”: There must be open discussion on this point within the multi family office and with each client. At PAMERA, my real estate-focused multi family office, we sometimes identify a potential investment object that might fit two or three families equally well. When something like this occurs, we sit down around a table with the relevant families and talk it through. This of course only works if the pool of clients is not comprised of too many families, and if the multi family office doesn’t take on too many clients predisposed toward conflict. It falls to the managing director of the multi family office to act in a sensible manner, focused on the long term interests of her clients. That can be a much bigger obstacle for bank-dependent family office structures.
Let’s assume that a family has the type of asset volumes that lend themselves to the economical operation of a single family office. What criteria must be fulfilled before you would recommend founding a single family office, commissioning an independent multi family office or joining a bank-dependent single family office?
CZ: My opinion on this matter is unfortunately quite unyielding: I would always counsel for a single family office, with the possible exception of a small multi family office for families with pre-existing bonds and a desire to work together. For the reasons I’ve already discussed, I simply cannot recommend a bank-dependent family office. There is another potential option as well, one that combines the benefits of a single family office and a multi family office. It’s actually becoming more common. Here how it might work: A single family office manages the overall asset pool, but then works together with specialized multi family offices on specific asset classes, such as in the areas of real estate or private equity.
In your opinion, which services should a single family office always handle on its own? Which ones can or should be outsourced?
CZ: As I mentioned, the controlling of investments is the original task for a single family office and must be handled internally. This includes of course the selection of external managers and general asset reporting for the family. Topics such as tax accounting, legal counsel, insurance management etc. are better handled via professional external partners who can be replaced if their performance is not satisfactory.
What role do you feel family governance plays in the range of services for a family office?
CZ: One important soft factor, albeit one that each family office must decide on its own, is the level of detail it wishes to receive. The bigger the family, the more weight this aspect carries. If a single family office is handling dozens of clients within a family, then family governance structures must be in place, I feel. Those are often tightly related to a legacy business, if one still exists.
Should a family office retain its own experts for this, or commission this from third parties?
CZ: The family governance documents should be defined in cooperation with external professionals versed in best practice approaches. In my view, implementation and control should then be handled internally within the family. An internal audit should be conducted every few years by an external partner to ensure that the family governance guidelines are in fact being correctly implemented.
By your reckoning, what are the minimum requirements for IT structure (hardware and software) for a single family office?
CZ: In general, all that’s needed is the standard infrastructure for any normal office. The one place where the requirements get much stricter is in terms of IT security. Some family offices have been “hardening” themselves as targets by avoiding cloud-based IT solutions in particular. Due to various scandals (buzzword: “NSA”), many families are proceeding with great caution, and rightly so.
Which costs should be expected by the operator of a mid-sized single family office and/or multi family office? Is there a direct correlation between the costs and the size of the assets being managed?
CZ: To my mind, the costs are more closely related to the degree of outsourcing involved, not the size of the assets. A mid-sized single family office (10+ employees) or a multi family office will certainly quickly range into the low single digit millions. Single family offices generally work on the ‘cost center’ principle, while multi family offices should be set up as profit centers, albeit with reduced profit targets. Quality must come before quantity (profits).