What exactly is a family office?
There is a common saying in the family office industry which is as follows:
“Once you’ve seen one family office, you’ve seen ONE family office.”
This is a brilliantly succinct way to explain the huge scope and variety of services on offer. By their very nature each and every family is unique and requires a completely bespoke and highly tailored range of services from their family office. Consequently the origin, size, structure and strategy of these offices is, in turn, every bit as diverse as the families they serve!
Family office wealth can of course be first, second or multi-generational in origin ranging from “old money” to fortunes generated since the turn of the century by new-age technology. Naturally this leads to huge variations in the range of services offered from the mundane, such as basic concierge services, to the highly specialised, such as investing and managing complex portfolios across a range of asset types and classes.
Arguably the simplest definition of a family office is that of an organisation which assumes the day to day management and administration of a family or multiple family’s affairs. To this end it seems reasonable that each family office needs to provide more than just a wealth management and investment function.
A diverse range of services
Most people in the industry would agree that a family office should provide a variety of services including tax and compliance advice, estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, co-ordination of professional advisors and family support, education and governance. Add to these advice on philanthropic and foundation management and of course personal and concierge services and it’s clear that family offices cover an awful lot of bases.
This is not to say they have to offer all of these services to qualify as a family office but a good range is likely to be wanted and needed by most wealthy families. We will explore these services in greater detail later in this article but before doing so it is beneficial to understand the point at which the wealthy, particularly successful entrepreneurs, need help to manage their increasingly complex affairs.
Who needs a family office?
For many family leaders there comes a point when the day to day management of their family’s affairs simply exceeds their capacity to cope. Business transactions become so numerous, and administrative functions so complex that they run the risk of neglecting the core day to day business of running the family firm that has often built their success. This is the point at which help from an individual or a team becomes vital to keep on top of everything. Often, but not always, this coincides with a desire to start involving the next generation in the business.
Across the globe many wealthy families have reached this position in recent years and the decision about which type of family office will best support them can only be reached after a thorough appraisal of their needs. Also invaluable in this decision making process is an understanding of the origins of the modern day family office and the different options open to them.
What are the origins of the modern family office?
It’s clear that family offices offer a unique range of services and as an asset class they have boomed since the 2008-2009 banking crisis, thanks in no small measure to the vast quantities of wealth created in the capital markets. As a consequence the UK and Europe has witnessed a massive growth in the number of family offices. This growth has been mirrored in the USA where modern family offices were first pioneered as long ago as the 19th century by financiers JP Morgan and the Rockefellers. The House of Morgan was founded in 1838 and the Rockefeller family office in 1882. The latter is still going strong managing some $43 billion in assets for a range of families, individuals and global institutions.
There is of course a saying, that where America leads Europe follows, but we shouldn’t forget that the conceptual origins of family offices date back to the 6th century when “majordomo’s” (stewards) were held responsible for managing royal wealth! In time the model was also adopted by the nobility and by the 15th century family offices had started to invest capital in early-stage ventures. A great example is the Medici family in Florence who actively supported young artists by investing in their works, patronage which saw several of these artists develop into some of the greatest masters of all time, men like Michelangelo, Botticelli and of course Leonardo Da Vinci.
It’s clear to see then that although the origins of the modern family office can be traced back almost two hundred years ago to 19th century America the concept of administratorship was born and refined long before the new world was even discovered!
What is the difference between single and multi-family offices?
Before detailing all of the reasons for the rapid recent growth of family offices it is perhaps important to clearly differentiate between the two principal forms. Family offices are typically either defined as single-family offices or multi-family offices, SFO’s or MFO’s in acronym form. A single family office is a business run by and for a single family. Its primary function is to centralise the management of a significant family fortune. The company’s financial capital is the family’s own wealth. It’s reckoned that most wealthy families with a single family office have more than $100M in investable assets and the advantages to the family include total control over how it is run, complete privacy and discretion and no potential conflicts of interest. By contrast a multi-family office is an independent organisation that supports multiple families to manage their wealth.
Interestingly, many multi-family offices grew out of single family offices where the family, instead of covering the entire operational costs, decided to offer its services to an ever growing number of wealthy families. J. Stern & Co in London is typical, having grown into a multi-family office from the Stern family’s 200 year old banking business. This trend was further accelerated from the 1980’s onwards by rapid developments in technology within the financial markets, leading to the decline of bank trust departments and a requirement for increasingly talented, specialist and of course more expensive advisors. By combining the financial muscle of several families, multi-family offices were able to attract better talent whilst simultaneously defraying the costs. They also benefitted from a cross-fertilisation of ideas that can only arise from solving issues for a number of families. In London multi-family offices such as Stanhope Capital and Square Capital now have billions of pounds under management.
Each form of family office clearly has defined advantages and both types thrived when the economic recovery really began to take hold in 2011-12. A spike in the number of ultra-high net worth (UHNW) individuals contributed, as mentioned previously, to exponentially increasing amounts of capital and a further acceleration in the growth of both single and multi-family offices. More recent years have seen a continued proliferation of family offices as a mechanism to deploy this ever-growing wealth.
What differentiates family offices from other financial institutions?
So against a background of surging capital and wealth, family offices in both their principal forms, have thrived by offering a huge range of bespoke and tailored services, but what truly makes family offices unique and sets them apart from other financial institutions, is the speed with which they can put capital to work. As private wealth vehicles they are often incredibly opportunistic and reactive, much more so than their institutional rivals, who are generally restrained by specific investment mandates and protracted due diligence cycles.
Family offices can power ahead with faster decisions, higher thresholds and longer term deals, all of which makes family office investors a really attractive pool of capital and explains the growing direct investment trend by family offices. These offices are constantly looking for unique opportunities to put money to work and compound capital and whilst they will still carry out comprehensive due diligence, the amount of red tape is still likely to be considerably less than is found in the large institutional markets.
As family offices have increased in sophistication in recent years they have refined and developed their capability to allocate capital directly into the private space. Crucially, they look to preserve capital across generations, unlike many venture capital firms which have contractually shorter time horizons. Furthermore, the founders of family offices can offer tremendous guidance, advice and the many connections of the family to younger entrepreneurs creating a virtuous circle of quality advice and opportunity, without the aggression and machismo traditionally associated with venture capital companies.
A favourable regulatory environment also encourages rapid growth
According to Ernst and Young the number of single family offices in the USA has almost doubled in the last 15 years. Interestingly, between 2011 and 2019 The Wall Street Journal reports that nearly 40 hedge funds converted into family offices. The reason for this is simple, US securities regulations tend to give family offices favourable treatment. The Family Office Rule exempts family offices from onerous registration requirements under the Investment Advisors Act.
This lack of regulatory oversight enables US family offices to retain a significant level of control and privacy over their operations. As a result they can invest discreetly and, as detailed above, with a speed that other major institutions simply can’t match. Going forwards, if this advantage as an investment vehicle is maintained, it’s likely we’ll see more private equity funds and hedge funds transitioning in the US.
This growth trend in the US has been mirrored in the UK, where a similar doubling in the number of single family offices is estimated to have taken place in a little over 10 years since the 2008-09 banking crisis. With the number of ultra-high net worth families at an all-time high, there can be no denying their growing importance within the UK’s financial ecosystem, which arguably provides an even more favourable tax and regulatory environment than New York.
Most of these firms are unlikely to require registration with the Financial Conduct Authority (FCA). Consequently, behind a growing number of smart Georgian facades at prime West End addresses, these private offices, aided by the high concentration of financial and luxury lifestyle services in London, have become a natural safe haven for those from the Middle East, China and Russia.
Ernst and Young estimate that the number of family offices in operation globally has risen from around 1,000 in 2008 to possibly as many as 10,000 by last year. In the UK some of these offices now manage family wealth that can be compared with the assets of FTSE 250 companies, and globally Ernst and Young believe that these offices look after well in excess of $5 trillion of family wealth. Whilst dominated by New York and London, family offices are also based in a small number of other key cities where a favourable regulatory environment sits alongside robust governance institutions and a strong private banking system. Politically stable cities and city-states such as Zurich, Dubai, Luxembourg and Singapore all attract concentrations of family offices.
A family focused approach
It’s becoming clear that a well-run family office can hold many intrinsic advantages over venture capitalists, wealth managers and private bankers. At the same time of course they can and often do work in close collaboration with all of the above to maximise outcomes for their families. The collaborative nature of family offices is perhaps in part explained by the fact they are as focused on their family or families as they are on the wealth itself.
Family offices appreciate that the long-term preservation of wealth across the generations is actually more dependent on the family than it is on professional advisers and that, as a consequence, pro-actively engaging and where needed educating family members in the process of stewardship, is the key to lasting success. The family office role requires a deep knowledge and understanding of the family as well as their wealth. By working with the family to achieve good governance, excellent communication and collective agreement on the management and administration of their wealth, family offices effectively provide their families with a plan for succession.
It is a sobering fact that historically only around 10% of super-rich families have managed to retain their wealth over three generations, underlining just how important it is for family offices to prepare the children for money, whilst simultaneously preparing money for the children. The most successful families and family offices can, by sharing a vision for the purpose of their wealth over future generations, create dynasties.
Family office services...explained
Having delved into the origins, the growth, the amazing strengths and the uniqueness of the family office proposition, now is perhaps the time to recap and expand a little, as promised earlier in this article, on what precisely they offer to their families. Families face constant change, never more so than at times of crisis such as the current pandemic. Organisational and governance structures are tested to the full, and as a direct consequence, are often refined and improved.
Of course asset management comes very sharply into focus when markets are volatile. This is when the in house private equity and corporate finance teams within Family Offices come into their own, managing liquid assets and portfolios themselves or working in tandem with external professional advisors. Such management is virtually always underpinned by an extensive administration and reporting platform. With assets, structures and quite often the family itself spread across different countries and even continents, sophisticated administration is required to look after multiple investments as well as properties, trusts, companies and commercial ventures, bank accounts, collections, leisure assets and much, much more besides! Good document management, record keeping, expense management and book keeping are vital.
As well as ensuring they have the right management teams in place, backed by state of the art operating platforms and administration, family offices will mould these elements together with strong governance. In doing so they will ensure there is a defined framework, good communication channels and that key members of the family, alongside any relevant professional advisers, are all fully briefed ahead of meetings so that informed decisions can be made. The family office will also, where family wealth has been built from a core company, be looking to ensure that decisions relating to the company also promote the interests of all family members and beneficiaries.
Wrapped into all of the above, when families are commercially very active, with multiple transactions ongoing across a wide range of asset classes, including real estate, land, gold, boats cars and even art, their family office will also be required to manage these transactions. Consequently they will arrange appraisals and valuations, due diligence, structuring, funding and of course, whenever required, legal advice.
With many families looking to leave an indelible and positive mark on society, advice on impact investing and philanthropy is yet another area where the family office will also need to play an important role. Indeed, it is often through activity in these areas that values are passed down through the generations and the family looks to build and preserve its reputation. It is clear then that family offices oversee a myriad of different transactions, and overlaying pretty much all of these will be the ongoing need for tax advice and planning, yet another area where the family office will need extensive knowledge and relationships with the best external tax, estate planning and compliance experts.
It can seem like the list of services provided by family offices is pretty much endless and we’ve yet to really touch on concierge provision, where needs can be as mundane as walking the dog, booking hotels or arranging flights through to more complex matters such as household staff management or arranging insurance on family assets. Members of the family office team working in these areas can clearly become deeply involved with their families on a multitude of levels in issues such as marriages, births and deaths as well as disputes such as divorces. This closeness, together with the knowledge of the family that is engendered as a result, is another motivating factor in the team’s guardianship of family wealth.
What does the future hold?
Despite the immense range of services already offered by family offices it seems likely that they will continue to expand their reach into ever broader areas. In all probability, they will continue to do more deals in sectors of the market that were once the preserve of large corporates, private equity houses or venture capitalists.
Of course, as family offices expand into new areas they will need to remain permanently abreast of all relevant regulation, be this in relation to compliance, taxation or anti-money laundering. Simultaneously they will need to monitor and react to permanently evolving threats from the increasingly sophisticated world of cyber-crime. For obvious reasons family offices represent attractive targets and extra vigilance will be required to prevent cyber-attacks from extortion and fraud through to cyber-enabled physical threats all of which could lead potential disruption, financial losses and of course reputational damage.
In light of the current pandemic and social distancing requirements both single and multi-family offices, will also accelerate their adoption of digital technology in order to future-proof their operations, not least of all against the threats highlighted above. Investors everywhere have faced significant challenges in recent months but for family offices operating across an ever wider range of geographies and demographics the use of cloud based integrated technology and data aggregation will deliver considerable efficiencies and value to their families. Family offices may be grounded in traditional values but they have always been at the forefront of innovation as well. It’s this combination that underpins their popularity and will ensure they continue to boom in the years ahead!
To learn more about other areas of finance like Private Banking - check out The ultimate guide to private banking in London, UK