SPECIAL REPORT: Family Offices Offer Special Relationships

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SPECIAL REPORT: Family Offices Offer Special Relationships
Family Business Special Report.

A group of L.A. wealth managers gathers at the Peninsula Hotel in Beverly Hills on the third Thursday of every other month to network, share investment opportunities, and trade war stories.

But these aren’t your typical private equity directors or investment bankers, though a fair share of them have held those positions at one point during their careers. Instead, this cast of characters is populated by the leaders of family offices: personalized investment vehicles set up to manage the assets of the extraordinarily wealthy. Typically, family offices allow wealthy individuals to exercise a greater degree of control over their investments than they would if they handed their money to private equity firms or hedge funds.

While the Peninsula meetups are typically capped at a few dozen attendees, demand has created a growing market for conferences and other more formal gatherings within the industry.

Gregory Kushner, chairman and senior managing director of Beverly Hills multifamily office Lido Advisors, organizes some of these events through the company’s consulting arm. He said 70 to 100 people show up to the firm’s Family Office Wealth Management Forum in Laguna Beach every year, while as many as 400 attend its annual investment symposium in Santa Monica.

“If you think about how much wealth has been created in the last 20 to 30 years, it’s not surprising (the family office industry) has grown tremendously,” Kushner said.

For many years, the family office model was adopted only by the highest echelons of the affluent. Eli Broad (Broad Family Office), Anthony Pritzker, (Pritzker Group), Gary Michelson (Karlin Asset Management), and Marc Nathanson (Mapleton Investments), are among the billionaires in Los Angeles who have family offices handling their assets.

But a variation on the model featuring multiple wealthy families pooling money has helped the industry grow in the last several decades. These days, the family office treatment – or at least some approximation of it – can be had for as little as $2 million or $3 million.

Those figures come with caveats, of course: The specific attributes of each individual office vary as widely as the families that invest their wealth in them, but the overarching goal is always the same.

“We all specialize in the transfer of generational wealth,” Kushner said. Other than that, the delineation of a family office – and the services it provides – is fluid, he explained. Kushner’s clients, for example, run the gamut, from having a net worth of about $3 million all the way up to about $400 million.

The structure of these family offices can vary as widely as the client base they serve. Generally led by a chief investment officer, their staffs can range from one person to more than a dozen. The compensation for the CIO can vary as well; some are paid on a fee-based system, some take salaries, and some invest their own money along with the families they represent and participate in the gains (and losses).

Perks and add-ons are also widespread. Some single-family offices also provide in-house tax and legal services. Others have a full accounting staff and philanthropic wings. Kushner said everything from property management to bill-pay services to travel bookings are offered at the most comprehensive family offices.

Lido, however, takes a different approach.

“We act as more of a quarterback and think it’s better to work with and help steer third parties who specialize in these fields,” Kushner said. “We have avoided the walk-the-dog strategy that some single-family offices might provide.”

Gary Winnick, billionaire founder of defunct telecommunications firm Global Crossing, is actively involved in his family office, Winnick & Co. of Beverly Hills. Though he takes a hands-on approach, he’s also a fan of the outsourcing model. In addition to having third parties act as tax and legal counsel, Winnick also vets his deals through outside sources.

“I have a whole team in-house constantly looking at deals, but I always bring it to someone outside before committing,” Winnick said. “Screening investments is very important, and I like outsiders because they have a wider exposure to different viewpoints.”

Family value

Regardless of size or setup, asset managers at family offices are always on the hunt for a deal or choice investment opportunity. Winnick, who checked in this year at No. 44 on the Business Journal’s list of Wealthiest Angelenos with an estimated net worth of $1.33 billion, said while there’s no best way to go about these things, finding quality advice is paramount.

“No family office can do a good job without good advisers,” he said. “Just getting a good seat on an airplane these days takes three different people.”

Gregg Richie, who spent almost 20 years at the helm of Winnick’s family office before stepping down last year to start his own family office consulting firm, Skybones Capital in Marina del Rey, added that many family offices have gotten burned by impulse investments in startups and other private companies. While there is definite value in some of those investment opportunities, acting off a suggestion from an accountant or a friend – something Richie said is all too common – can be disastrous.

“The irony is that there are these successful guys with hundreds of millions of dollars and their strategy for investing in private companies is essentially going off a stock tip,” he said.

Both Richie and Kushner said they’ve seen a greater number of families make investments in tandem as a way to spread out risk. There’s also an added level of comfort because the deal has been vetted by multiple parties, he said.

“If families get to know each other well enough they begin to collaborate,” Richie said. “There’s more and more informal deal sharing in the family office world.”

More money, problems

While wealth certainly provides for an array of advantages – such as the ability to set up a family office – it can also trigger some unique problems. Internal struggles about money or even basic interpersonal issues among parents and children can derail a family office’s ability to effectively manage a fortune over the long term, according to Kushner. It also can put asset managers in uncomfortable positions.

“Sometimes we know more than the spouse,” he said. “But I certainly don’t want to bite off some of the family issues. It’s definitely not in my bailiwick.”

To skirt such hurdles, Kushner and some other family office investment managers often bring in specialists to help with the issues that crop up when relatives have assets tied up in a single fund.

Psychologists Jamie Weiner and Carolyn Friend, co-founders of Inheriting Wisdom with offices in Culver City, often consult in those types of situations.

“Nonfamily members in the family office can feel stuck on some level,” Friend said. “It’s their job and they don’t want to risk it over some family squabble.”

But squabbling can cripple the decision-making abilities of a family office, especially if several generations are involved and the patriarch or matriarch is deceased.

“Families who have a lot of money and decisions to make need to set up a clear governance plan and have systems in place detailing how the family is going to work,” Weiner said.

Keeping the family fortune whole beyond the first generation can often be just as difficult. Winnick said he struggled with how to raise his children to respect the value of money – something he feels he achieved – but said there’s ultimately no full-proof plan.

“I sought out people that I had great respect for who had experience and asked them how they managed it,” he said. “But it’s not an easy task. Not to pollute a child and not to make them entitled – it’s a big issue.”

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