World’s wealthiest ditch private money managers

EDINBURGH — With the world's financial intermediaries failing en masse to manage their clients' assets to better returns than market averages, it has been inevitable that the world's wealthiest would ditch them. The Economist magazine points to the rise of the family office. There is some concern that this trend will just facilitate a wider divide between the world's wealthiest and the poor masses. But, for now, those who have the most to fear are in the large, overpaid financial services army dedicated to rolling out the red carpet for high net worth individuals. – Jackie Cameron.By Thulasizwe Sithole.The image of the upper echelons of the money-management business operating out of fusty private banks in Geneva or London's Mayfair, with marble lobbies and fake country-house meeting-rooms, is out of date, says The Economist. "A more accurate one would feature hundreds of glassy private offices in California and Singapore that invest in Canadian bonds, European property and Chinese startups — and whose gilded patrons are sleepwalking into a political storm.".___STEADY_PAYWALL___.Global finance is being transformed as billionaires get richer and cut out the middlemen by creating their own "family offices", says the influential business publication.."Largely unnoticed, family offices have become a force in investing, with up to $4trn of assets — more than hedge funds and equivalent to 6% of the value of the world's stock markets. As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality.."The concept is hardly new; John D. Rockefeller set up his family office in 1882. But the number has exploded this century. Somewhere between 5,000 and 10,000 are based in America and Europe and in Asian hubs such as Singapore and Hong Kong. Though their main task is to manage financial assets, the biggest offices, some with hundreds of staff, undertake all sorts of other chores, from tax and legal work to acting as high-powered butlers who book jets and pamper pets," it says..The costs of bringing such expertise in-mansion means that they generally make sense only for those worth over $100m, the top 0.001% of the global pile, remarks The Economist. "Asian tycoons such as Jack Ma of Alibaba have created their own fiefs. The largest Western family offices, such as the one set up by George Soros, an investor and philanthropist, oversee tens of billions and are as muscular as Wall Street firms, competing with banks and private-equity groups to buy whole companies.".Every investment boom reflects the society that spawned it, comments The Economist. It points out that:.The humble mutual fund came of age in the 1970s after two decades of middle-class prosperity in America;The rise of family offices reflects soaring inequality. Since 1980 the share of the world's wealth owned by the top 0.01% has risen from 3% to 8%.."As the founders of family firms receive dividends or the proceeds of initial public offerings, they usually redeploy the cash. But since the financial crisis there has been a loss of faith in external money managers. Rich clients have taken a closer look at private banks' high fees and murky incentives, and balked..These trends are unlikely to fade, with the number of billionaires still growing..There are a number of concerns about the development of family offices, firstly that they could endanger the stability of the financial system. "Combining very rich people, opacity and markets can be explosive. ltcm, a $100bn hedge fund backed by the super-rich, blew up in 1998, almost bringing down Wall Street. Scores of wealthy people fell for a Ponzi scheme run by Bernie Madoff that collapsed in 2008," points out The Economist.."Still, as things stand family offices do not look like the next disaster waiting to happen. They have debt equivalent to 17% of their assets, making them among the least leveraged participants in global markets. On balance, they may even be a stabilising influence. Their funds are usually deployed for decades, making them far less vulnerable to panics than banks and many hedge funds.".The second worry, says The Economist, is that family offices could magnify the power of the wealthy over the economy.."This is possible: were Bill Gates to invest exclusively in Turkey, he would own 65% of its stock market. But the aim is usually to diversify risk, not concentrate power, by taking capital from the original family business and putting it into a widely spread portfolio. The family-office industry is less concentrated than mainstream asset management, which a few firms such as BlackRock dominate. Compared with most fund managers, family offices have welcome habits, including a longer-term horizon and an appetite for startups.".It is the third danger that is the biggest worry of all: that family offices might have privileged access to information, deals and tax schemes, allowing them to outperform ordinary investors. "So far there is little evidence for this. The average family office returned 16% in 2017 and 7% in 2016, according to Campden Wealth, a research firm, slightly lagging behind world stock markets. Nonetheless, tycoons are well connected.".Most regulators, treasuries and tax authorities are beginners when it comes to dealing with family offices, but they need to ensure that rules on insider trading, the equal servicing of clients by dealers and parity of tax treatment are observed, continues The Economist. "And they should prod family offices with assets of over, say, $10bn to publish accounts detailing their workings. In a world that is suspicious of privilege, big family offices have an interest in boosting transparency. In return, they should be free to operate unmolested. They may even have something to teach hordes of flailing asset managers who serve ordinary investors, many of whom may look at their monthly fees and wish that they, too, could ditch the middlemen," adds the financial magazine.

World’s wealthiest ditch private money managers

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