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Back when I was fantasizing about what I'd do if I won the lottery, I looked into family offices a bit and concluded that there's basically no point as far as t

Back when I was fantasizing about what I'd do if I won the lottery, I looked into family offices a bit and concluded that there's basically no point as far as the investing advice goes. It's still likely a good idea for some of the ultra-wealthy for estate, tax, and philanthropic purposes, but on the investment side? The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets. And as a bonus, you don't need to stake your fortune on a trust-based relationship. Instead, you get to base things off of institutions and audits - Vanguard isn't going to take the money you shoved into VTSAX and embezzle it through investing in their distant cousin's "company", even if it is a billion dollars.

ljcn 8y ago
Not refuting your assertion, but the concentration of power in tracking funds is a looming problem. The FT did a bit on it last week. Here's something similar from the motley fool: https://www.fool.com/investing/2018/12/01/vanguards-founder-warns-that-index-funds-could-bec.aspx https://www.fool.com/investing/2018/12/01/vanguards-founder-...
- yourapostasy 8y ago
  Only a looming governance problem, but not in any way a financial performance problem. Only the latter will trigger any real reaction from the markets, and Bogle thinks that won't likely happen until 70% of market under passive indexing at a minimum. Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.
C1sc0cat 8y ago
Err no it doesn't for large amounts not losing money is as important - see the previous comment about RCP. You can also get into special sits and arbritrage ala Elliot and partners
whatok 8y ago
Indexing might make sense for a portion of your assets but if you have enough wealth to consider a family office, your investment goals are much different than a standard retirement account. Whether it's a different time horizon or simply having enough money to invest in assets that aren't available to you in your company's 401k, things are different.
mruts 8y ago
If I was a billionaire, I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. I don't think active management makes sense for the majority of folks, but billionaires are exactly the kind of people that it does make sense for. With a billion or two you can probably get yourself into some pretty good closed-end funds (if you're savvy about it) that will probably deliver better risk adjusted returns than vanilla passive. Personally, if I had the money, I would go with 2 Sigma or AQR. Both of their past returns streams are stellar and uncorrelated with the markets.
- dx034 8y ago
  You also need to consider overlap of investments with the main source of income. For Bezos, it makes no sense to just buy a NASDAQ ETF since most of his wealth is already highly correlated with it. Either he hedges this effect out or skews investments otherwise. In either case he'll need knowledgeable people that can plan the effects on both financial and tax side. That's also a likely reason why family office holdings often look very odd as they often only provide a hedge in case the main source of income dries up. And therefore, they cannot have any connection with it. Pure performance on a standalone basis is often only second priority.
- fujimotos 8y ago
  > I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
  - mruts 8y ago
    You don’t consider 100% exposure to purely US equities a problem? It’s a huge risk, especially in this market. With a couple billion you can get yourself some nice deals in a bunch of different asset classes. Also with that kind of money you can put a chunk of your money in illiquid investments that potentially could provide some great returns.
CompelTechnic 8y ago
There is one point you haven't considered: Even though a pure indexing strategy is appropriate, it is not appropriate to use Vanguard for this. At the billion-dollar level, assuming that the index funds had an expense ratio of .05% (among the lowest out there) you would be paying annually: 1,000,000,000*.0005 = $500,000 For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.
- sokoloff 8y ago
  VTSAX is 4 basis points of expense ratio. There are others with 3 bps and Fidelity has one with 0. Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr. I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.
  - whatok 8y ago
    Yeah, I don't think it's that great of an idea. Any sort of operational or execution-related risk you introduce by replicating indices with single names could cost you a lot more than $500k and really isn't worth it.
  - tanderson92 8y ago
    There is additional value that can be added by forgoing an index fund, though. Tax management can be enhanced by rolling your own Total Stock Market index fund, since individual names can be harvested for capital losses, increasing the after-tax returns of your portfolio relative to a vanilla index fund. I'm not sure quite how to quantify that, but I'm sure someone has been able to do so.
    - sokoloff 8y ago
      Absolutely. There are a lot of reasons to run your own family office investment office. "Because Vanguard charges too much" isn't one of them, IMO.
Spooky23 8y ago
It depends on your needs. You may recoup the perceived investment losses via tax savings or other factors. Also, when you get into aging family members and generational wealth issues, you want to have controls to reduce your immediate control. Decades of accumulated returns can be wiped out by a bad decision. If I had billions to worry about, I’d want to make sure I had assets that were more diversified than what Vanguard offers.
cascom 8y ago
What you are missing is that family offices usually farm out most of their vanilla public market securities portfolios to people like vanguard, but that 1/2 to 1/3 of the portfolio is private or alternative investments and that is where the investment team spends a great deal of time. Additionally, a lot of the "team" is often focused on things like reporting, tax, estate planning etc.
- ThrustVectoring 8y ago
  Yeah, what I'm saying is that you probably want to farm out 100% of the portfolio to someone like Vanguard.
thesausageking 8y ago
> The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds. In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.
- ThrustVectoring 8y ago
  >Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds. They can also provide worse returns. You don't know which. You can guess that they'll provide average returns, because the average investment gets average returns. After all, not everyone can be above average. Passive indexing guarantees average returns. Before costs, that is. So not only is the indexing approach cheaper, but it's also safer. >In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. Quite the opposite, IMO. If you do something straightforward like dump 100% of that into the S&P 500 and spend the dividends, you're looking at something like $1.8 million this year. Less in a downturn, of course, but that's still pretty difficult to spend. And if you have known large expenses, fixed income is really efficient at guaranteeing you the money needed to meet those expenses.
  - thesausageking 8y ago
    > They can also provide worse returns. You don't know which. You do. That's the whole point. If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years. Yale is a great example of this; over the last 20 years their average returns are 12% which is 50% more than what an index did (7-8%): https://www.institutionalinvestor.com/article/b17qpx3nyyqywd/we-crush-stock-indexes,-yale-claims https://www.institutionalinvestor.com/article/b17qpx3nyyqywd...

ljcn 8y ago

Not refuting your assertion, but the concentration of power in tracking funds is a looming problem. The FT did a bit on it last week. Here's something similar from the motley fool: https://www.fool.com/investing/2018/12/01/vanguards-founder-warns-that-index-funds-could-bec.aspx https://www.fool.com/investing/2018/12/01/vanguards-founder-...

yourapostasy 8y ago
Only a looming governance problem, but not in any way a financial performance problem. Only the latter will trigger any real reaction from the markets, and Bogle thinks that won't likely happen until 70% of market under passive indexing at a minimum. Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.

C1sc0cat 8y ago

Err no it doesn't for large amounts not losing money is as important - see the previous comment about RCP. You can also get into special sits and arbritrage ala Elliot and partners

whatok 8y ago

Indexing might make sense for a portion of your assets but if you have enough wealth to consider a family office, your investment goals are much different than a standard retirement account. Whether it's a different time horizon or simply having enough money to invest in assets that aren't available to you in your company's 401k, things are different.

mruts 8y ago

If I was a billionaire, I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. I don't think active management makes sense for the majority of folks, but billionaires are exactly the kind of people that it does make sense for. With a billion or two you can probably get yourself into some pretty good closed-end funds (if you're savvy about it) that will probably deliver better risk adjusted returns than vanilla passive. Personally, if I had the money, I would go with 2 Sigma or AQR. Both of their past returns streams are stellar and uncorrelated with the markets.

dx034 8y ago
You also need to consider overlap of investments with the main source of income. For Bezos, it makes no sense to just buy a NASDAQ ETF since most of his wealth is already highly correlated with it. Either he hedges this effect out or skews investments otherwise. In either case he'll need knowledgeable people that can plan the effects on both financial and tax side. That's also a likely reason why family office holdings often look very odd as they often only provide a hedge in case the main source of income dries up. And therefore, they cannot have any connection with it. Pure performance on a standalone basis is often only second priority.
fujimotos 8y ago
> I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
- mruts 8y ago
  You don’t consider 100% exposure to purely US equities a problem? It’s a huge risk, especially in this market. With a couple billion you can get yourself some nice deals in a bunch of different asset classes. Also with that kind of money you can put a chunk of your money in illiquid investments that potentially could provide some great returns.

CompelTechnic 8y ago

There is one point you haven't considered: Even though a pure indexing strategy is appropriate, it is not appropriate to use Vanguard for this. At the billion-dollar level, assuming that the index funds had an expense ratio of .05% (among the lowest out there) you would be paying annually: 1,000,000,000*.0005 = $500,000 For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.

sokoloff 8y ago
VTSAX is 4 basis points of expense ratio. There are others with 3 bps and Fidelity has one with 0. Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr. I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.
- whatok 8y ago
  Yeah, I don't think it's that great of an idea. Any sort of operational or execution-related risk you introduce by replicating indices with single names could cost you a lot more than $500k and really isn't worth it.
- tanderson92 8y ago
  There is additional value that can be added by forgoing an index fund, though. Tax management can be enhanced by rolling your own Total Stock Market index fund, since individual names can be harvested for capital losses, increasing the after-tax returns of your portfolio relative to a vanilla index fund. I'm not sure quite how to quantify that, but I'm sure someone has been able to do so.
  - sokoloff 8y ago
    Absolutely. There are a lot of reasons to run your own family office investment office. "Because Vanguard charges too much" isn't one of them, IMO.

Spooky23 8y ago

It depends on your needs. You may recoup the perceived investment losses via tax savings or other factors. Also, when you get into aging family members and generational wealth issues, you want to have controls to reduce your immediate control. Decades of accumulated returns can be wiped out by a bad decision. If I had billions to worry about, I’d want to make sure I had assets that were more diversified than what Vanguard offers.

cascom 8y ago

What you are missing is that family offices usually farm out most of their vanilla public market securities portfolios to people like vanguard, but that 1/2 to 1/3 of the portfolio is private or alternative investments and that is where the investment team spends a great deal of time. Additionally, a lot of the "team" is often focused on things like reporting, tax, estate planning etc.

ThrustVectoring 8y ago
Yeah, what I'm saying is that you probably want to farm out 100% of the portfolio to someone like Vanguard.

thesausageking 8y ago

> The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds. In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.

ThrustVectoring 8y ago
>Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds. They can also provide worse returns. You don't know which. You can guess that they'll provide average returns, because the average investment gets average returns. After all, not everyone can be above average. Passive indexing guarantees average returns. Before costs, that is. So not only is the indexing approach cheaper, but it's also safer. >In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. Quite the opposite, IMO. If you do something straightforward like dump 100% of that into the S&P 500 and spend the dividends, you're looking at something like $1.8 million this year. Less in a downturn, of course, but that's still pretty difficult to spend. And if you have known large expenses, fixed income is really efficient at guaranteeing you the money needed to meet those expenses.
- thesausageking 8y ago
  > They can also provide worse returns. You don't know which. You do. That's the whole point. If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years. Yale is a great example of this; over the last 20 years their average returns are 12% which is 50% more than what an index did (7-8%): https://www.institutionalinvestor.com/article/b17qpx3nyyqywd/we-crush-stock-indexes,-yale-claims https://www.institutionalinvestor.com/article/b17qpx3nyyqywd...