The ultra-rich don't invest like other Americans. They don't cost-dollar average into subpar mutual funds they were forced into by their company's 401k plan. They don't get a hot stock tip from their hair dresser. And they don't put their nest egg in crypto-currencies, hoping for the market to recover. People with a net worth of 8, 9, or more digits utilize family offices to preserve and grow wealth for the next generation. Simply, a family office is a private wealth advisory firm that manages a variety of financially-related interests for a wealthy family that may include investments, insurance, estate planning and taxes, and many other services.
Family offices vary wildly in size, scope, and structure. Sometimes they are managed directly by family members, but others are completely outsourced. The assets under management by U.S. family offices is estimated at over $1.7 trillion. There are a number of investment strategies family offices use, and some of these can be emulated by someone who isn't a super high net worth individual, but strives to be.
Hedging Their Bets
Family Offices protect their wealth from market corrections by investing in non-correlated assets. These assets, such as farmland and timber, move up when other assets - such as stocks and bonds - are falling. Because their portfolios are diversified across many different asset classes, they tend to be less vulnerable to volatility in the equity markets. During massive robo-driven flash crashes, alternative asset investors have peace of mind while everyone else is scrambling for the exits. Diversification across real assets, to include natural resources, can also boost a portfolio's risk-adjusted rate of return.
Cutting out the Middle Man
Family offices often make direct investments into an operating business. Of course, they appreciate dividends for cash flow, but they are aligned in a partnership focused on growing the business over the long term. In some cases, they take an active role in managing the company, in other cases, an asset manager stewards the investment. Unlike publicly-traded equity markets where information such as financial statements are freely available, private companies are much less transparent. This inefficiency, though it reduces liquidity, can amplify returns. Another focus of some family offices is impact or ESG investments. The priority may be on sustainability, green energy, or other causes that are important to a family, but also help to create generational wealth. It is much easier to get involved with a cause when there is a direct relationship with the company, rather than investing through a sustainable mutual fund managed by someone whose interests may not align directly with the investor's.
Time is on Their Side
Unlike private equity firms, venture capitalists, or hedge funds, family offices are not concerned about closing a fund or achieving quick turn-arounds. Wealth preservation is the ultimate goal for most of these investors, but of course, maintaining a certain lifestyle and philanthropic causes are also priorities. They like natural resources, such as timber, that produce out-sized returns, but may take 10, 20, or more years to mature. These assets benefit from the so-called illiquidity premium that achieves some amount of expected additional return received for the risk of tying up capital in a less liquid asset.
Family offices can pay wealth managers hefty fees to achieve these benefits, and the minimum investments into a private business or timber stand or piece of farmland often begin in the low millions of dollars. However, new and evolving ways of investing provide people with a more modest nest egg a means to structure their investments more like a family office and at a much lower cost of entry. These strategies include diversifying into assets like private real estate deals and natural resources without the headache of managing them directly.
Equity crowdfunding is a way to get many of these benefits. Unlike rewards-based crowdfunding - think Kickstarter - where one "invests" money in exchange for a product or t-shirt, in equity crowdfunding the investor provides direct equity or debt financing for a business venture. Depending on how a particular deal is structured, the equity crowdfunding company acts as an asset manager, working directly with the sponsor to maximize your investments while you passively collect interest, dividends, or capital gains.
But don't I have to be an accredited investor to get access to private placement deals? In many cases, yes. But changes to securities laws enabled by the JOBS Act of 2012 allow some unaccredited investors access to these deals within certain constraints. By diversifying not just across asset classes such as real estate and agriculture, but into separate private deals that allow for low minimum investments (such as $5 or $10 thousand), risks can be dramatically reduced.