New Fortune | Bessemer Trust: a model for family MFO
Global Family Business Research Center

The Phipps family was a Carnegie Steel Corporation minority shareholder. Many of their contemporaries were unable to pass on their fortunes, but the Phipps family established the Bessemer Trust, which has served six generations of family members. It now serves as a model MFO, managing $95 billion in assets for over 2,200 clients. The real secret is that this is a family business that spans generations. The company has a long-term vision, not profit-driven, putting the "client first," staying up to date with current trends with careful planning.
 
Source: New Fortune, July 2014
Author:
Gao Hao (Director, Global Family Business Research Centre, PBC School of Finance, Tsinghua University)
Liu Chung Hsing (Founder of Sino Suisse Capital and previously Head of UBS Ultra High Net Worth Division Greater China)
Jiawei Ye (Head of Philanthropic Foundations and Fundraising, World Economic Forum)

 
Bessemer Trust has its headquarters at Rockefeller Center on Fifth Avenue in New York. The current Chairman of the Board of Directors is a descendant of Henry Phipps, a partner in the legendary American steel magnate Andrew Carnegie. By the end of 2013, Bessemer Trust has managed up to US$95 billion of wealth (with an average single-family asset of US$43 million) for over 2,200 high net worth families through 16 branches and over 800 employees worldwide. Nearly 90% of the assets it manages comes from external clients. William Asmundson, CEO of the Rockefeller Family Office, has expressed his strong appreciation of the firm. It is worth noting that nearly half of the $21.3 billion in assets managed by Rockefeller Family Office belong to the Rockefeller family.
 
Among Bessemer Trust's 2,200 clients, other than members of the Phipps family, it includes high net worth families with investable financial assets of $10 million or more, and even some celebrities in politics or business. For example, former US President George W. Bush, the 45 CEOs of the Fortune 1000 US companies and former US Treasury Secretaries Donald Regan, Nicholas Brady, and Lloyd Bentsen.
 
Bessemer Trust was named the Outstanding Family Office by Private Banker International in 2005. In 2014, the firm was awarded the top Multi-Family Office (MFO) in the US by the Family Wealth Report. In a survey of 500 US high net worth clients conducted by the Luxury Institute, an independent research firm, Bessemer Trust was acknowledged as the wealth management firm for the "Best Reputation" in 2005 and 2006, in a survey from the top 10% of the wealthiest people in the US.
 
How has the Bessemer Trust become so prestigious in the field of family wealth management? How has it survived two world wars and multiple economic crises as an institution with a history of over 100 years? The secret is a true client-first philosophy. As MFO, Bessemer Trust has an unprecedented client/staff ratio of 3:1. This means that the company is well placed to offer its clients a single-family office (SFO)-like quality and bespoke services. And this is integral to its visionary founder, Henry Phipps. Bessemer Trust retains not only the wealth of the past, but also the invaluable values of the generations that came before it.

 
Phipps: Pittsburgh steel giant, Carnegie partner
Picture source: www.gettyimages.com
A family wealth manager for over 100 years, Bessemer Trust has survived the impact of two world wars and many. economic crises. The firm's remarkable success is inseparable from its founder, Henry Phipps.
 
Henry Phipps came from a middle-class background. His father was a shoemaker who emigrated from England to Philadelphia in 1832 and then moved to Allegheny City, east of Pittsburgh, in 1845. Henry left school at the age of 14 and spent three years as an apprentice in a local jeweller’s shop. In this hard-working neighborhood of artisans, Henry was heavily influenced by his older brother John Phipps. He spent his evenings taking classes and learning double entry bookkeeping. In 1856, Henry borrowed 25 cents from John and placed a job advertisement in the local newspaper entitled The Boy Who Desires Work. This method succeeded in helping him to secure a position with the Pittsburgh agent of the DuPont Gunpowder Company, and within five years he had risen to accountant and become a partner.
 
Later, Henry's name often appeared alongside that of his partner Andrew Carnegie. But it was Henry who first set foot in the steel industry. Henry and Carnegie lived on the same street. At the time Carnegie's mother was working in Henry's father's shoe shop. The two boys grew to be close friends. In 1859, Henry was recommended by a friend to be a partner in the local Kloman iron forge, which was in desperate need of capital. After completing his daily work at the Dupont Gunpowder Company, he had to walk three miles at night to the smithy to record his accounts. Later, the Carnegie brothers' money was added to the smithy. It eventually merged with Carnegie's ironworks to raise $500,000 to form the Union Iron Mills Company, laying the foundations for their steel empire.
 
Following the recession that followed the American Civil War, Henry assumed responsibility for the firm's financial management. Another partner in the firm, Henry Clay Frick, described in his biography that “Phipps did not have Frick's gambling-filled tendencies or Carnegie's business sense for impulsive investments. He wanted to cover his debts.” “Phipps put the brakes on the company's spending and cut costs as though he was possessed.” Henry and Carnegie maintained a perennial policy of low dividends, with dividends amounting to just 1% of annual profits, almost all of which was reinvested in the business.
 
By 1899 the Carnegie Steel Company owned its iron ore mines, coal mines and quarries. The company transported its ore to their own ports on trains operated by themselves on railways which were laid by the company. Given full control of the chain, the process of making steel was completely free of payments to outsiders. Its profits amounted to $40 million for 1900 and the steel production exceeded that of the whole of the UK, enough to shake up the global market.
 
This business model caught the attention of the legendary financier J.P. Morgan. J.P. Morgan planned to merge the steel companies into the U.S. Steel Corporation (U.S. Steel) to achieve a monopoly on the market. This eventually resulted in Carnegie selling the business to J.P. Morgan for US$480 million, while Henry, the company's second largest shareholder, received US$50 million worth of stock and US$17.5 million worth of bonds in the new company.

 
Bessemer Trust & Bessemer Securities: a two-tier structure for wealth transmission
Picture source: www.gettyimages.com
Carnegie Steel owned its own iron ore mines, coal mines and quarries. The company took full control of the chain by. transporting ore to its own ports on their trains over railways that they laid themselves.
 
In fact, the family office in Phipps already had a framework for development before the sale of the business. After the sale of the business, Henry devoted most of his time and money to charity work, family, and travel. As his children grew up, the demands on the family office grew. Henry divided his wealth equally between his children through a trust. In 1907, he brought together all the family trusts with FO responsibilities to form the Bessemer Trust Company. The company was named after the Englishman Henry Bessemer, who innovated the steelmaking process in a way that reduced the processing time from two weeks to 12 minutes. The success of Carnegie Steel relied heavily on the Bessemer technique.
 
In 1911, Henry further bequeathed a large amount of real estate and securities to his descendants. The Bessemer Investment Company, which he founded, then held approximately $17.5 million worth of real estate and stock and $23 million in bonds. During his lifetime Henry gave a total of $45 million to his children and $28 million to his wife ($73 million in 1914 equates to approximately $1.7 billion in 2014, with an annual inflation rate of 3.2% over the period). Mrs. Phipps similarly transmitted all her assets to the children upon her death.
 
In 1930, five members of the second generation of the Phipps family gathered their real estate and securities under another family business, Potomac, respectively. A few years later Bessemer Securities Company was established and became the center of aggregation and investment of most of the family's assets.
 
Bessemer Trust owns more than 90% of the outstanding shares of Bessemer Securities with fiduciary supervision over the latter. However, the management of Bessemer Securities remains the responsibility of its Board of Directors. There is a clear division of labor between both. On the one hand, trust services, financial services and wealth management are the responsibility of Bessemer Trust. On the other hand, investment activities such as trading in shares of listed companies, long-term equity investments, real estate and PE are operated through Bessemer Securities. Bessemer Securities has the freedom to invest, but the distribution of wealth is handled by Bessemer Trust, which adheres to strict rules. This two-tier structure avoids awkward competition for resources between the two sister companies and emphasizes the two main functions of the FO through the different divisions of labor. The first is to manage and recreate the family's wealth; the second is to ensure its transmission over generations.
 
As of 2007, six members of the Phipps family had served on the boards of two companies, with the CEO and president of each company also as a director of the other. Henry's eldest son, John Phipps (nicknamed "Jay"), has run the family's affairs since 1904. Henry retained supervisory powers and taught Jay about investment, management, and other aspects of the business. In 1915 Henry retired from the FO altogether and Jay assumed the chairmanship of the Bessemer Trust, assisted by Jay's brother Henry C. Phipps. When Jay relinquished his position, Henry Carnegie Phipps' son, Ogden Phipps, was chosen as chairman. By the 1950s, John Kingsley - a company executive - was nominated as CEO of the family's two flagship companies. From then on, the Phipps family gradually began to cede operational management positions to professional managers. The family maintained control through board oversight.
 
From SFO to MFO
When the second generation of Phipps family members took charge of the company, the Bessemer Trust was still relatively small. Its main services were family budgeting, trusts, tax planning, investment advice, daily living expenses and merchandise purchases for five second-generation members and 17 third-generation members. In 1957, the firm began receiving fees for its services. As far as possible after the 1960s, most of the Phipps' foreign relatives, after much deliberation, still separated from their family FO to join the Bessemer Trust.
 
Currently, there were 52 third generation members of the Phipps family. Considering that the number of family members would grow exponentially in the future, the directors of the Bessemer Trust and Bessemer Securities began to prudently consider the cost of running the business. The Bessemer Trust had to spend approximately $1 million per year, with the largest cost coming from the input of the senior investment manager.
 
According to a study by leading management consultancy firm Kearney & McKinsey, the Bessemer Trust was faced with three alternative paths: sell the FO; reduce the range of services; or open up to other families and become an MFO. The proposal to sell the FO was immediately rejected. A reduction in control would mean a loss of family heritage, which was unacceptable. The reduction of the FO's range of services, retaining only the core functions of investment, trust, and wealth management, was also subsequently rejected. In the end, the Bessemer Trust eventually opted to become an MFO. In fact, most SFOs (Single Family Offices) were transformed into MFOs because they could not afford the high costs, such as the Rockefeller FO and Sand Aire, the famous FO founded by the Scott family in the UK.
 
In 1974, the Bessemer Trust, which was licensed as a New York bank, began receiving funds from external families. Specifically, the entry level for clients was US$1 million (raised to US$10 million in 2001) and the service fee was 1% of total assets, decreasing as the size of assets increased.
 
Upon becoming MFO, the Bessemer Trust established the crucial golden rule of treating the Phipps family the same as external families. With potential conflicts of interest eliminated at the institutional level, the Bessemer Trust was able to maintain its reputation in the seductive world of Wall Street for decades. In 1991, the Phipps family accounted for 2/3 of the total assets under management of the Bessemer Trust, and by 2001, the external family accounted for more than 2/3 of the assets.

 
Family foundation system: the Family Plan
Picture source: East IC
Stuart Jenney, great-grandson of Henry Phipps and chairman of the Bessemer Trust, says: "We never wanted to list or bring. in new investors, nor did a change to the equally divided shareholding structure within the family."
 
Henry Phipps started his business without capital and a complete education. His fortune was built on the hard work and diligence of his youth. To compensate for this, he gave his children a good education and always taught them to be strictly moral. However, the Phipps family inevitably encountered some common problems, such as the difference in values between the two generations. Children who had not experienced the hardships of life were prone to misconceptions about the value of money. Henry decided to discipline his children's allowances by requiring them to record their expenses and to ensure that they had the ability to dispose of their property before they passed on.
 
In 1911, Henry divided all the shares and bonds equally among his five children and wrote each children a letter that would have a lasting impact on the whole family. This letter, which resembles the family constitution, is now embedded in the Bessemer Trust's headquarters and 16 offices around the world. In this letter, Henry presented his Family Plan. He wanted his wealth to benefit his children and future generations and stressed that it should remain within the family as much as possible. Before selling shares or bonds held by the FO to outsiders, family members should have the opportunity to buy them first at a fair price.
 
For the management of the FO, he would like to have the consensus of all five children on every decision. In the event of a disagreement on a particular resolution, a vote should be taken. A similarly old and successful family, the Hermès family, after six generations, has seen a clear tilt of power in the three main branches of the family. Most of the key positions in the business are held by the Dumas branch of the family. Although the Hermès family had developed a good mechanism for communication and decision-making, friction inevitably arose over time.
 
Henry Phipps wisely gave equal power to the five descendants in the early years of the family and exhorted them to resolve their disagreements democratically. This approach avoided the dominance of one family branch that often occurs in Asian family businesses and enabled the five branches of the later MFO to have equal power and control. He also advised his children to follow the experience of Carnegie Steel by not paying dividends for at least ten years and reinvesting all profits.
 
Having endured the Second Industrial Revolution and the American Civil War, Henry was aware of the unpredictability of the future and did not lay down rigid rules, but merely outlined general directions and principles. Yet he repeatedly stressed the importance of financial self-discipline for future generations, not taking on personal or corporate debt, limiting expenditure appropriately, saving some of the income and maintaining a prudent and conservative approach to business management.
 
Within a week of receiving their father's letter, Henry's children immediately signed a shareholders' agreement. They promised to ask the other family members for a reasonable price before selling their shares in the company to outsiders. This contract is still in force today. At present, nearly 300 members of the Phipps family remain firmly in control of 100% of the voting rights of the Bessemer Trust. Stuart Janney, Henry Phipps' great-grandson and chairman of Bessemer Trust, says: "We never wanted to list or bring in new investors, nor did a change to the equally divided shareholding structure within the family."  The five second generation members also abided by their father's wishes and never made a dividend in ten years. The dividend policy is still balancing the family members' living demands with the funding requirements for the growth of the business even after ten years.
 
The Bessemer Trust plays a key role in passing on family values, the core of which are complementary to the family values. These are faithfully adhered to by Henry's children and their own descendants. The retention of family values has been a factor in the success of the Bessemer Trust. John Hilton, CEO of the Bessemer Group, summarizes the five keys to its success as: maintaining an intact corporate reputation; offering competitive investment products; providing excellent customer service; finding and retaining the best people; and making a profit. Interviewed by Barron's, he stated that reputation is first and always the most important, while profit is last. The management, besides the clients' investment advice, are also highly integrated with their own assets, thus minimizing possible conflicts of interest. As Marc Stern, CEO of Bessemer Trust, said, "Bessemer's shareholders, employees and clients are all invested in the same portfolio."
 
"Balanced growth" is at the core of Bessemer Trust's investment philosophy. Its objective is to reduce risk and achieve long-term capital appreciation through a diversified portfolio of investments. At the beginning of the 21st century, Bessemer Trust lost many clients because of its cautious approach to investing in alternative investments. However, after the bursting of the internet bubble and the 2007 financial crisis, it regained its position as a safe haven for ultra-high net worth families as it did not involve itself in bad investments such as subprime mortgages.

 
Investment philosophy: prudent and proactive