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What is a Family Office (Investment Strategy + Set Up Tips) - YouTube
Channel: Kent Cliffe
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in this video I'm going to go through
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what exactly a family office is how they
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operate but most importantly how their
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investment principles differentiate from
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an average investor now I am NOT a
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family office expert I only spent a
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couple of years there with a couple of
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different families but ultimately a lot
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of the things you see online aren't
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exactly true many families keep their
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details highly confidential ultimately
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if you're wanting to start your own
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family office or just invest like one
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this skeleton overview of the basics
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followed by an in-depth view of the
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investment principles will give you a
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clear understanding of how to navigate
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that or thoughts for you to ponder in
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your own investment portfolio and the
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first thing is don't sue me this is just
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general advice you need to go to my
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disclaimer which is linked in the
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description section of this video
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am I going past this point in the video
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you agree to be bound by the terms and
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conditions of the disclaimer in the
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purest form a single family office is an
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organization which is dedicated to
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looking after the family's assets as
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well as toys organizing the family and
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having some form of governance which is
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set out in what's known as a family
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Charter that sets the purpose of the
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family office family officers often come
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about when a founding family member has
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a large liquidity event of an asset sale
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or they divest control of an operating
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business which frees up capital these
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funds are then lent or paid into a
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consolidated structure which effectively
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holds all of the family's assets the
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intent of setting up a family office is
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really personally dependent on each
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individual family but there are a range
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of common issues which I saw one of
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these was key person planning or
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succession planning from generation 1 to
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generation to the next reason was to
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unify the family members around a common
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set of goals or purpose and the reason
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for this was that their success led
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through lost connections or evacuate
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purpose particularly if they sold a
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business and the family members no
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longer work together in family offices
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under a hundred million dollars it was
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common for them to look after generation
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one and two and for family offices over
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a hundred million dollars their plan was
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to look after generation two three four
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and five and onward there is
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often a philanthropic which is aligned
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to the family office and a structure as
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to how they deal with charity ultimately
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the intent is to pull assets and
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investments and have governance around
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how money is spent and invested the idea
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is that pull assets with a robust
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structure would lead to better
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investment returns it is also important
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noting that good transparency and
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involved decision-making from family
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members helped to unify the family
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finally it is worthwhile noting that
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asset protection
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estate planning and a exit strategy
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commonly known as a glide path are
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important functions of a family office
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but these aren't often the reasons why
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founding family members consider a
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family office how our family office is
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set up well there are two types there's
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a single family office and a
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multi-family office often a multi-family
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office is effectively a wealth
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management firm selling wealth
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management services to wealthy families
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a single family office is effectively
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the actual organization which is set up
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solely by the family to look after the
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family to enter the family office club
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you need about twenty to thirty million
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dollars which is dictated by the costs
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of operating the family office this is
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around one point five to two percent of
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your assets under management meaning
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that if you have thirty million dollars
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at one point five percent this gives you
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an operating budget for your family
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office of about four hundred and fifty
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thousand dollars in terms of the set up
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I don't wanna get too technical here but
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it's common to have one holding company
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and each family member has shares in the
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holding company and this is where the
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family charter sits then you'll have a
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range of special purpose entities and
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trusts which are wholly owned by the
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holding company I have mentioned a
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family charter a few times so what
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exactly is it effectively it's a
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document which governs who exactly the
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family members are what is the purpose
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or values of the family then it goes in
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to discuss the governance so who makes
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what decisions and what is the
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accountability then the management which
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is more about the day-to-day operations
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in the family office from here on it
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gets a little bit more technical or
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personal depending on the family so you
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can include things like how your advise
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or change the Family Charter you might
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talk about succession planning or a
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glide path how you want a family office
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up you may include things such as
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filling
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pick endeavors and there can be a whole
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range of other things the family might
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want to include in it but finally the
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last thing which you should include it
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is subscribing to this channel separate
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to the family char there is often
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another important document called the
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IPS or investment policy statement and
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again all family members agree on it and
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it is basically a document that sets out
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the investable assets asset allocations
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timeline and arisin for investment
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target returns other investment
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considerations such as ethical investing
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and finally the delegation or who can
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make what calls on the different types
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of investment from these to court
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documents depending on the family office
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there can be a range of other policies
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common ones I've seen have included
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things like sharing of pooled assets a
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payment or employment of family members
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philanthropy and also things like
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meetings and agendas ultimately it's as
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big as the organization so if it's a
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large family office there might be IT or
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employment policies as well getting onto
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the goods how do family officers invest
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different to the average investor first
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things first is family officers get rid
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of conflicted advice now what do I mean
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by that well as an average investor
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stock tips generally come from your
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stock broker your financial adviser
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recommends products on their platform
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and product manufacturers solely
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recommend their product and all the
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research that you often get about those
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products comes directly from the person
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who introduced you the investment so how
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the family offices overcome a conflicted
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advice well first things first is they
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either have someone in-house or an
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independent third party who will
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deconstruct the opportunity for them and
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benchmark it against other opportunities
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in the marketplace and this will give
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them a view on how it sits relative to
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other possible investments they also
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often have a network of connections that
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they can ring around to and speak to
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about the opportunity and see if it's
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being shopped around ultimately to build
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that network of connections is often a
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full-time job in itself as a preeminent
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family office it's my recommendation
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that you work out how to deconstruct
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deals and benchmark them against other
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opportunities to see if they're a good
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investment ultimately even gonna pay
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other people to do it it's good to have
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a high level understanding so that you
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can at least understand the basics the
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next is a symmetric risk and as
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average investor it's quite common to
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put a large amount of your investment
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portfolio into index funds or defensive
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assets our family offices operated a bit
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different where they took a small part
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of their portfolio and put it in highly
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speculative but possibly very lucrative
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investments
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this included pre IPO seed startups
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unlisted businesses private equity or
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turnaround opportunities when I say
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isometric risk what I mean by this is
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that there is a higher chance that they
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could lose a hundred percent of their
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investment this is why they put a small
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amount of their portfolio in it and
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spread it across a range of different
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investments but if successful the payoff
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would often be 3/4 or 10x what their
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initial investment was as a preeminent
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family office I am NOT giving you any
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form of investment advice this is just
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what I saw this brings me on my next
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investment principle which is that
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family officers tended to favor direct
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investment meaning that if they were
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taking asymmetric risks on companies
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they wouldn't be investing in a fund
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which we're looking for companies they
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will be looking for individual companies
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that they could directly invest into and
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skip the manager average investors would
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do the opposite where they would make
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most of the investments indirectly
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through a managed fund or ETF whereas
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with the family officers they were going
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out buying properties direct on the SXL
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picking individual stocks and with fixed
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interest they were lending directly to
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borrowers and there's a range of reasons
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for this mainly it saved them on paying
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a manager as an intermediary there was
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flexibility on sourcing the deals and
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finally there are some tax planning
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matters that help when you directly
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invest in an asset now don't get me
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wrong they did not invest in funds but
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the reason why they invested in funds
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was different to the average investor
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the reason why they were vesting in
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funds was often for diversification out
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of their core investments or if they
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didn't have expertise in a particular
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area and wanted to take a position
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ultimately when they were investing and
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putting large positions into funds they
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weren't shy in asking for discounts from
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a manager the next thing is pulling of
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expenses and toys and as an average
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investor I don't think we would have the
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Galle luxury or
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private jet a yacht or a French villa
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and the family officers do buy these
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things because ultimately it's a way to
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enjoy their dividends to save them time
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but most importantly I say this
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tongue-in-cheek
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depreciate them in a high tax
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environment but what can we learn from
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it well first thing first is that family
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officers often set a budget at the start
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of the year and clearly understand the
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expenses of all their toys they do this
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so that when they model out a projection
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into the future they make sure that
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their costs don't start eating into
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their capital and this way they can
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remain wealthy over the long term the
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other thing is is when they're looking
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and buying things they make sure it's
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based on a timeshare model that rather
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than going out and buying four different
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boats for four different family members
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they might buy one boat and share a
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quarter between all family members
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ultimately these three things help them
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effectively save money in the long run
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even though these are massive expenses
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as a preeminent family office my
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recommendation is to know the expenses
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of your toys make sure that the cost of
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your toys doesn't dig into your capital
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base and if you have the opportunity to
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buy a toy with a friend or family member
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this might be a financially smart
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decision the next thing is capital
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protection and in all business and all
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investing it involves risk and it
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doesn't matter how good you are at
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investing or picking different
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investments at some point in the future
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you are going to lose money the way
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family offices operate is they want to
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protect their whole capital first
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meaning that they don't want one
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individual investment they can block
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their entire portfolio family officers
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focus on capital protection first and
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what I mean by this is they understand
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that each individual investment that
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they make could go to zero and they lose
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everything but they want to make sure
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that each individual investment that
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they make doesn't blow up their whole
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investment portfolio and there is a
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range of different ways they do this
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which I'm going to go through in brief
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detail the first simple way is to
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diversify and not put all your eggs in
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one basket the second way is a little
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bit
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complicated family officers understand
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the difference between commercial risk
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and all other risks for example if you
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are in a lemming deal as a family
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officers a lender you understand that
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deal could go bad and commercially you
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can lose your money but separate to the
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commercial risk there is a legal risk
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and this is a risk which you can manage
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so instead of putting a half-baked legal
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agreement together often family officers
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get the right lawyers in the right
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people with a track record in order to
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minimize all the other risks all the
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other example is when they invest into a
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fund many people would just look at the
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IAM and understand that this is what the
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manager promises whereas a family office
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might dig a bit deeper into the
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management agreement and the trustee to
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ensure that all the documentation
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Alliance along with the I am what are
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the lessons for the average investor
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well first things first if you don't
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want to take what said to you at face
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value get swept up in the excitement
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don't cross your eyes don't cross your
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eyes don't cross your T's and dot your
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i's and then end up exposing yourself to
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more risk than just the commercial risk
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of the investment these were mainly the
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investment principles which I spoke
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about but there's a whole raft of other
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things that family officers do well
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outside of this the top three for me was
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that they understand delegation and time
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is the only thing that they can't get
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back so they give the right jobs to the
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right people the second thing is they
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spend a lot of time on purpose and where
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they want to be over five to ten years
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and finally they do a lot around
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transparency and making sure that all
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family members understand where they've
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come from and where they are going
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finally the best thing that family
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officers do or more important the
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preeminent family officers or average
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smart investors just like yourself
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watching this is subscribe to this
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channel because I'm going to go through
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in more detail the things and vetting in
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due diligence that I did for other
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family officers so that you can gain
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that knowledge and be able to vet deals
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just like me and understand
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what is a good investment so if you are
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a preeminent family office starting with
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$1,000 these investment principles and
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God will help you get to that 100
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million dollar mark sooner and if you
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are already a family office well I'm
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sure that this gave you a bit of extra
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value seeing what other family officers
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do so until you set up your next family
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office or our family office best of luck
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and I'll see you in the next video
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