I struggle to understand the point of the article.
>Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked.
OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it.
>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.
How on Earth is it related to populism?
>Family offices have created inequality.
If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
At a micro level, taking money out of a deposit and investing it does not create inequality. At a macro level, the fact that simply having wealth begets more wealth in a way that labor cannot accomplish is a driving force behind inequality.
Up to a point. The ultra-rich have so much money now that it would take a monumental disaster for them to become poor again. IIRC only one person in history has ever stopped being a billionaire: J. K. Rowling, and that was due to enormous philanthropic giving.
Mere millionaires come and go, but once you're talking hundreds of millions the positive feedback loop of capital makes it difficult to lose everything.
My hypothesis of the world is that someone must have luck AND skill to become 100M+ wealthy and I think people commonly create a false dichotomy of luck OR skill.
Maybe the reason we never see hundred millionaires lose everything is because they have the necessary skill to manage the money well.
I don't think it would be correct to attribute causation based on the information we have available.
This article suggests that their investment strategies may be suboptimal in many cases.
Some of it may be the forced diversification you get with this much money. It's hard or impossible to dump $100M into a single stock unless you are an Elon Musk type and own the company. So if you make a bad bet and lose a million bucks, well, that's just 1% of your portfolio and the rest will make up for it. Of course you're a regular millionaire and lose a million bucks on a bad investment you are going to the poorhouse.
You could dump $100M into GE without triggering anti hostile takeover actions, but they're also not likely to go bankrupt anytime soon.
Maybe some hundred millionaires could have had their portfolio completely tied up in Lehman Brothers a few years ago, but even then you probably would have gotten a fair bit of money back.
But this goes back to my point that as long as you aren't pants on head with your investments you are beyond the point where it's possible to ever be poor again.
I think it's not possible conclude on optimality without firmly understanding the specific goals.
The articles says '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.'
It uses the word 'usually' and it's also a blanket that's trying to generalize all these parties, while in a reality that may not be true.
Here are 3 constructed but plausible goals one may have:
1) Make 100% sure that you remain wealthy (make almost nothing but never lose anything)
2) 9-in-10 chance to do worse than SP500 index, but 1-in-10 chance to get 'literally take over the world' rich
3) Investing in causes that seem good for the world a la green energy, tesla motors, etc
As a counter example, I present cases of lottery winners who go broke. There are multiple documented cases of 10+ million and 100+ million winners who lose the majority of their wealth.
Even if it happened rarely capital gains would be a force driving inequality as the barrier to entry into investing your capital to offset for doing actual work remains high. That it sometimes fail would be sad for the ones it failed for, but still doesn't stops it from being a driving force for a big effect on the economy.
I am honestly curious as to what you found confusing. I think it's fairly well structured and written.
> How on Earth is it related to populism?
A populist would generally be opposed to the concentration of wealth and power in a small subset of the population. Populism is on the rise today, as is the trend of family investment offices which are a result of concentrated wealth and power. Thus family offices are destined to face uncomfortable questions by populists.
> they didn't create inequality.
Yes, you're agreeing with the author. The surrounding sentances from the sentence you quoted:
"[...] the objections to them [family offices] will rise exponentially. The most obvious of these is the least convincing — that family offices have created inequality. They are a consequence, not its cause."
The article does not say that family offices have created inequality, it actually says that they have not.
Regarding the "point of the article":
This is an Economist "Leader", which is a one-page summary of the three-page full article published in the print version of the newspaper. It says the following:
2) Explains why the populist argument "family offices create inequality" is wrong.
3) Presents three arguments for "family offices are bad" with which the author does not agree, and their rebuttals:
a) "family offices destabilize the financial system" - but data shows that actually they are doing the opposite.
b) "family offices magnify the power of the wealthy" - but this is against the interests of their owners who want to diversify.
c) "family offices might beat regular investors because they have privileged access to information" - they don't outperform the markets right now, but privileged access to information and insider trading could be a problem with family offices.
The author arrives at the conclusion that family offices are a force for good, but more regulation and transparency might be required to address (3c).
> A populist would generally be opposed to the concentration of wealth and power in a small subset of the population.
You (or the author of the full piece) seem to be describing Socialism. Populism is sometimes but not necessarily opposed to a wealthy elite, and the type of populism on the rise in the US and Europe seems generally to be a vague conception of a cultural elite, instead. Seems odd to bring into this discussion.
> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in one place, then you very directly create inequality. That's exactly what inequality is. By definition.
Money ownership didn't change when money management switched to family offices. So distribution of wealth hasn't changed. How did family offices create inequality?
I think the author is suggesting that society would be better if rich people were to end up so mired in the principal-agent problem that they ended up with no more influence on the market than the average person. Of course, this appears to overlook the fact that if you don't like it when people accumulate power, then you actually want corporate executives to be beholden to an active stock market.
In this case I suspect the author is talking about a popular interpretation of populism where a politician in question intends to make sweeping changes to constitutions and rights where those are seen to be working against the popular interest.
In this case the answer might be to curb the rights of specific types of family investors somehow, for instance in European property markets (to take an example from the author) where this is seen as distorting the markets and causing pain to people - for instance not being able to afford housing, or ending up in negative equity because such funds pull out of the market and cause a bubble to collapse.
>If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. //
If you can afford to invest, and do so successfully, you therefore make money from others labour. As poor people can't do that, any successful investment is contributing to wealth inequality.
In general, if you win on investments someone else is losing.
This means that if having large capital base means you have accessv to better investments - eg avoiding large fees - then you'll drive more inequality.
To recapitulate: There's only a certain amount of wealth generated, if you receive "higher reward" without doing more wealth generation then those generating the wealth are getting a smaller proportion.
>Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked.
OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it.
>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.
How on Earth is it related to populism?
>Family offices have created inequality.
If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
What's the point of the article?