What’s in a name? That which we call a family office? And would a family office by any other name still be considered a family office? In 2022, despite a global pandemic that forced us to re-evaluate everything, family office popularity is at an all-time high and this begs the question that if we’re no longer subscribing to the previously established rules, then are family offices doing the same? What does a family office look like in 2022?
On paper, we can agree that the definition of a family office might still be the same. That they are privately-owned companies responsible for the primary investment and wealth management needs of ultra high-net-worth (UHNWI) clients. But in the post-pandemic age, when technology is at its peak, does a family office still refer to a team of people? Does it have to? Especially when we’ve seen that even just a principal, an analyst and a solid piece of tech can manage billions of dollars. Does this family office rose still smell as sweet?
The Modern Family Office
Although the concept of family offices has been around since the 6th century, modern family offices are often said to have been popularized by the family of JP Morgan who established the House of Morgan in 1838 which was responsible for their financial as well as asset management needs — so still a fairly modern idea. Another example often quoted is the Rockefeller family who in 1882 also established their own family office which now exists as a global, multi-family office giant headquartered at the Rockefeller Plaza in New York City.
Today we see more family offices making changes taking place, based on where they’re at in their lifecycle. One of the more recent developments was when the Brenninkmeijer family office opened up their Anthos Asset Management Investment Platform to other families who are aligned in terms of values.
The Importance of Family Offices for UNHWIs
The wealth management needs of UHNW clients inherently differ from that of general clientele due to their high-risk factors. Family offices can cater to these needs by developing personalized investment strategies and philanthropic services to suit their specific needs. For example, a 2021 Ernst & Young survey of family offices in the Indian market showed that nearly 18 percent of their investments were focused on startups and VC funds and such private investments had doubled in the last five years. This is significantly high considering very few investment firms would include VC investments into their portfolio for non-UHNWI clientele.
The key benefits of acquiring the services of a family office are:
- Having a dedicated team of finance management experts who understand your family’s specific wealth management needs, risk tolerance, and generational wealth creation outcomes and create strategies to reflect the same.
- UHNWIs often require more than investment planning services for their wealth management needs. These include various advisory services that can all be handled under the single umbrella of a family office. This makes FOs a highly efficient and cost-effective solution for UHNWIs.
- Family offices, by definition, consolidate the privacy and operational risk and management issues by operating through a centralized channel. Since the wealth of UHMWIs is inherently exposed to tremendous market volatility, having a family office can help mitigate that risk to a large extent.
Types of Family Offices
Family offices can be of various types and can be classified based on their clientele, size, and organizational structure. It is, however, important to point out that every type has its own distinct set of advantages and disadvantages that can work for or against a specific use case.
The following are five of the most ubiquitous types of family office solutions to consider:
Embedded Family Offices(EFOs):
Such family offices exist within a family business/enterprise. In most cases, the wealth management needs of the family are entrusted to the senior managers of the company and handled through the finance department. It’s a cost-effective solution for families who feel like they require personalized wealth management services but aren’t prepared to establish a dedicated family office to do so.
However, since EFOs function within a business itself, the line between the ownership of assets between the business and the EFO often becomes blurred. Moreover, if the wealth of the family is significant enough, an EFO might not be able to serve the wealth management needs of the family adequately. In such cases, one can consider outsourcing to a Multi-Family Office.
Multi-Family offices cater to the wealth management needs of multiple UHNW families under their belt. Most MFOs employ a team of financial and wealth planning experts that offer, for the most part, the same suite of services as a single-family office(SFO) but at a much lower cost since the families do not have to worry about the MFO’s operational and talent management, establishment expenses and more.
MFOs can also be of various types:
- Commercial MFO: They are the most common type of MFOs that are designed to turn out a profit for the services provided to multiple UHNW clients under its client umbrella.
- Private MFO: Also known as closed MFOs, these provide their services to a limited number of families that share its operational costs.
Traditionally, the key downside of a multi-family office, as opposed to a single family office, was that families lose out on having a bespoke, tailored wealth management team that caters solely to the personal needs of that family. Nowadays, many MFOs are also offering customized services and product solutions centered around specific needs of the clients.
If privacy and highly personalized wealthy management are a priority for a UHNW family, establishing a single-family office is the way to go. Single-family offices constitute a dedicated team of personnel, handpicked by the family itself, that can plan, structure, and execute their specific wealth management needs. Apart from investment planning and execution, they also offer services like tax regulation and compliance, real estate investing, accounting and reporting, and other concierge services.
However, SFOs require a much higher investment to establish and also, in general, have higher operational expenses than MFOs. Therefore the beneficial owners of a single family office can often partner with other UHNW families and transition to a closed MFO to optimize operational costs to a large extent. An SFO might also require the family to be directly involved with its management, talent acquisition, and sometimes owners even like to get involved in daily operations.
Virtual Family Offices(VFOs):
In a VFO, the family can outsource every service module they require out of their family office to external advisers. The outsourcing of staffing helps keep the operational costs of the family office at a minimum while it also ensures that the family always has access to the best external adviser of their choice.
A VFO is a great option if the family has assets under management (AUM) between US$ 20-200 million where they’d require more control over their wealth management than an MFO but do not need the large overhead expenses of an SFO. However, in a VFO, the family will need to serve as the information exchange between the external advisers. Privacy also becomes a key point of concern since VFOs, by definition, have a decentralized organizational structure and because of that having a solid technology layer in place to enable secure operations is crucial.
Where to next?
The surge in popularity of family offices comes as no surprise when their market revenue is expected to grow at a staggering 6.01 percent compound annual growth rate(CAGR) between 2021-2026. The key driving factor for their recent popularity is their efficacy in ultra high net-worth wealth management and generational wealth creation.
With operating costs on the rise, and modern ways of working increasingly lending to partnerships and collaborations, were are likely to start seeing more consolidation in the family office space with both vertical and horizontal integrations. This consolidation requires some more clearly defined best practices but a lot of development has happened in this area over the past couple of years. Family offices remain a space to keep a keen eye on.