A brief history of Trust, its decadence and the blossoming of family offices.
Updated: Dec 23, 2019
An introduction to this contemporary trend may root back into the centuries. As for the dawn of the banking system, it all started with merchants that, by having excess resources from their successful trades, decided to land to other merchants against a promise of repayment with an interest through a fruitful business. It might sound complex to some and banal to others, but that was, in fact, the simplest form of banking we have known to date, and it was mostly based on one coefficient: TRUST, which we all subconsciously perceive as firmly linked to our survivorship as it gets. Hence, trust is the most critical feature for any human organisation and relationship and its evolution went along with the evolution of our societies and social architectures, particularly when humans formed bigger communities. Here, the role of trust became paramount, for the once basic promise “I will diligently mind our current belongings and interests” suddenly was taken for granted and we moved from reeling on what it seems a more proactive form of trust with people now acting on behalf of other to improve the status-quo of their communities. From here, when the previous principal-agent relationship doesn’t function as expected, we start to encounter the infamous problem of agency, which often leads also to moral hazard. These contingencies occur in many realms of human organisations such as politics, family, business and even religion, but arguably in recent times, the principal-agent problem manifested most vividly about a decade ago, with an escalation of events that exploded in 2008.
As we all know the GFC (Global Financial Crisis) of 2008 marked with tears and shame the lives of many people and it had a dramatic impact on the whole global economy. The banking system lost almost all its credibility, to the point that Governments and Central Banks had to step in so to grant trusts back into the system as (to put it in simple terms) the same banks that they were regulating landed money unwisely to unworthy borrowers. And why? Well, because these banks were almost certain to recycle their books of loans through the sale of securitised financial products to third-party investors: what someone might call a fully flagged scam.
Since then, all global banking systems started to lose their credibility, and this sided by an international trend of Quantitative Easing (QE) set by various central banks, brought interest rates to decrease and the value of major asset classes to increase. This, in brief, made asset and wealth owners richer.
Now richer wealthy individuals face the situation of having more wealth to invest but they also don’t trust anymore the same bankers that until yesterday were selling to them subprime products: so, what to do? Well, the logic applied by the wealth owners has been generally to create a private investment structure, generally known as family offices, with managers and employees on a payroll, which is usually tightly linked to their actual performance in managing the financial resources allocated to them by the wealth owners.
As we speak, this snowball effect that we see within the family office space is only increasing with the risk of creating a more rigid and fragmented financial market but with the plus of having the trust coefficient much more under control. So, what's most in need?
From my perspective, and looking at the wisdom of the ancient merchant, I am strongly convinced that in order to ease the capital flow of private wealth into the economy, the financial system and the investment management industry need alternative platforms independent from the banking system. What I look forward to is, in fact, a system that will match the wealth owners a landers with talented entrepreneurs and thriving companies, a system that necessarily will demand accountability and will see trust at the forefront of every transaction, with the independent platforms serving as clearinghouses in charge of choosing the worthiness of the participants. Once this will be provided the transactions will be executed by the wealth owners and the capital managers or companies independently. In this way, a gargantuan simplification will bring about more interest alignment inside and outside the investment and wealth management activities. I believe that at some point we will see a positive spiral that will spark a superior flow of capital within the financial industry; and as a wise person once said, trust takes years to build, seconds to break and forever to repair – so, instead of repairing why not reinventing it?