The Rise of the Family Offices – Finance for Compliance Professionals

The rise of Family Offices is remarkable. While known to only a handful, they have gained more and more visibility in recent years. But why is that so and what exactly are Family Offices? How do they work and who do they work for? And most importantly, how do they evolve in an age of democratisation of investing?

The rise of family offices and the ultra rich

The rise of family offices and the ultra rich

Until a few years only few people knew what was meant by the term Family Office and even today the definitions often vary. They have seen a meteoric rise in recent years with a record year for executives just behind them. It may not be surprising as the number of ultra-rich people has been increasing, too. What is a Family Office though and what does it do?

A century old concept

Despite making more headlines only recently, Family Offices are a century old concept. The House of Morgan, the family that gave the name and origins of today’s financial giants JP Morgan and Morgan Stanley, is said to be the first family office founded in 1838. Another American industrial and banking dynasty, the Rockefellers, followed suit in 1882. While it is a loose term that can differ from organisation to organisation, a family office focuses on the management of the wealth of, as the name indicates, families. But not any family, only super-rich families usually can afford to use the services of such an institution. Family Offices offer an all-round solution for their clients, as it isn’t wealth management in the general sense of the term. Instead, services range from managing all assets of a family, provide planning in terms of investments in all forms from financial instruments to real estate to entire company acquisitions, deal with tax questions, address family governance, provide corporate and trust services, and advise and manage a family’s philanthropical activities. It’s a bit like your own bank without being a bank itself.

Typically, it’s only for the ultra-wealthy as the cost of using a family office start at $1m per year, but since the clients’ overall wealth rarely is less than $50m –though that’s far from the average and well short of the estimated $250m to start a single family offices (see below) – it starts to make sense to have someone at your disposal who takes care of the monetary things in life.

Single and Multi-Family Offices

To cater to the different ranges of rich families, basically two kinds have developed: the single and the multi family offices. As the term says, the single family office caters to one client only. Usually, they are founded by the family itself as in the cases of the Morgans and Rockefellers. Multi-family office serve more than one client and offer their services more like a traditional organisation. They can be standalone organisation or stem from existing financial institutions. For instance, the large private banks have specialised divisions that offer these services that go beyond their more conventional offering.Logically, a single family office can transform into a multi-family one, for instance, when it is used to extend its product range to additional customers as the coverage of the many facets of wealth management as described above is very cost intensive and single family office can struggle to combine all the necessary expertise within a smaller structure, but the motives can be manifold.

Where do you put your millions?

Why a family office?

The key advantages of family offices are threefold: for starters, uniting all wealth related services within office, can save money, but as absurd as this may sound in the realm of people with so much money one might think it wouldn’t matter anymore. Secondly, by using such am organisation, families retain full control and are able to better align it with the family’s values and interests. And lastly, creating a family office establishes at the same time a financial player that can make standalone investment decisions that compete with financial institutions of similar sizes like private equity funds.

Getting back to the point of a family’s interests at the core of the strategy of a family office: one of the more recent trends is the drive towards impact investing from family offices. A report by the WEF pointed out that “many multi-generational family offices are now exploring whether impact investing is a way to unite families around values and positive legacies, thereby more closely involving family members in responsible long-term investing”.

The impact of innovation

With every singly corner of the financial industry under pressure from innovation and technology and no stone left unturned, what is the situation for family offices though? Unsurprisingly, it is less an issue than for other areas and it isn’t difficult to see why: having those amounts available, cost, while it is an aspect, is less of a driver as opposed to general wealth management. Privacy and trust are certainly other factors that would keep families from handing over their savings to an online platform. And the complexity of the different services that a family office offers is difficult to replicate in a comprehensive solution. Having said that, the creation of virtual family offices has somewhat disrupted the original model. The idea is of a lean organisation that uses a high level of outsourcing for the various aspects of its activity to make sure to provide comprehensive coverage while keeping the costs as flexible and low as possible. It isn’t an entirely new concept as it has been in use since the 1990s, but recent innovations should make the concept more attractive, especially since it should drive costs further down and lower the entrance level for potential clients. Like a traditional family office it offers clients the advantages described above and the use of technology might reduce one of the major downsides of a virtual family office to an extent, namely the need to reach out to third party providers, which can create some complicate and create friction in the information and decision making process. Another key concern, however, cannot be resolved as easily though and that is the share of information with a number of different parties and the resulting issue of privacy and data protection.

The future of family offices

In general terms, the future seems to be bright for family offices: The latest edition of the World Ultra Wealth Report, which analyses the state of the world’s ultra high net worth population, i.e. those with $30m or more in net worth, revealed global growth to 226,450 individuals in 2017 with total combined wealth to $27 trillion. The report predicts that this number of the global ultra wealthy population is to rise to 299,000 people by 2021. More rich people equals more interest in the services of family offices. Unless FinTech innovation finds to solve this riddle, too.