Perhaps the most important part of the wealth management industry that most retail investors remain unaware of is the world of family offices. While they might not carry the prestige of the more established private banks, many wield immense clout on account of the huge value of the assets they administer. For instance, George Soros’ family office manages a reported $25 bn worth of assets.
But what is a family office and why have they become significantly more commonplace across the world over the last ten years? The first thing to consider when examining the rise of the family office is what they are and how they operate. As the name suggests, a family office is a private advisory firm set up by an ultra-high-net-worth (UHNW) individual to manage their investment portfolios and generally cater to their financial and legal needs on a day-to-day basis.
Why are UHNWs choosing to set up family offices?
Given the obvious benefits for an ultra-wealthy individual in having their own private professional services firm, it’s perhaps surprising that they have only proliferated in recent years. Of course, setting up a family office is not cheap and while there is no set amount of wealth needed to create a family office, it is generally estimated that family offices command at least £30m in investable assets given the operating costs involved.
According to EY, the number of family offices in operation globally has risen from just 1,000 in 2008 to around 10,000 today. The first and probably most fundamental reason for this increase is that the last decade has seen an explosion in the number of UHNWs globally. At the top of the market, the number of billionaires has grown sharply and according to an Economist report, approximately $9 trn worldwide is held privately by UHNWs. While not all of this sits in family offices per say, individuals in possession of this sort of wealth might justifiably feel as though they require a dedicated team to manage their financial affairs.
Wider trends in the wealth management industry have also fuelled a degree of disenchantment with private banks. By setting up a family office, UHNWs can secure more oversight and grant their staff the license to aggressively pursue higher returns. For another, an increase in “liquidity events”, most notably initial public offerings (IPOs), has given an unprecedented number of heirs and founders access to huge pools of cash.
However, perhaps the biggest driver of new family offices comes from Asia, where it is seen as fashionable for the newly wealthy to employ highly skilled advisors to manage their fortunes. According to the 2018 UBS Global Family Offices Report, around 75% of the 5,300 family offices are in North America or Europe but this figure is rapidly falling as Chinese UHNWs in particular are now more likely to set up a new family office.
What does the rise of the family office mean?
In large part, the rise of the family office reflects both the preference of many investors to have a greater say in what happens with their money.
Ultimately, by setting up a family office, UHNW investors can have their fortunes managed by a handpicked group of financial and legal professionals who, by definition, have to act in accordance with their employers’ wishes. This logic also extends to impact investing. The rise in popularity of investing in order to further specific social or environmental goals has certainly played a role in incentivising more UHNWs to bring their financial operations in-house as investors look to boost their legacy as well as their bottom line.
However, the most significant advantage of having a family office is that it can facilitate a smooth transition of private wealth between the generations. Passing vast amounts of wealth from one family member to another can create conflicts but having a full-time team in place to enact the individual’s wishes can help to overcome any transitional challenges (tax, probate, legal etc.) that might arise. The importance of succession planning to individuals with a family office cannot be overstated; the 2018 UBS Global Family Offices Report found intergenerational wealth management to be by far the most important consideration for individuals with a family office–87% of those surveyed rating it as “very important” or “important”.
In essence, family offices are just as much about the “family” as they are about the “office” and this is evident in the fact that many of the larger family offices offer more personal “concierge” services. Indeed, everything from booking holidays to divorce arrangements can be handled by a well-resourced family office. Above all, the rise of the family office reflects the preference of many UHNWs for a bespoke service that is imbued with personal care as well as financial expertise.
How can you build relationships with family offices?
Every year, more and more private wealth is invested by individuals through their family offices and this means that investors and entrepreneurs who rely on private finance have to start engaging with what is a burgeoning sector. Of course, the need for confidentiality represents an obstacle for investors and entrepreneurs looking to engage with family offices; not only do they rarely publish details of forthcoming deals but they rarely accept meetings from unknown entities.
Consequently, you need to take a different approach when it comes to building a relationship with a family office. It might sound time consuming, but networking with office staff is an absolutely integral part of setting up a significant arrangement, financial or otherwise.
However, with family offices increasingly looking to alternative investments in pursuit of higher returns, I have no doubt that the sector’s growth will present opportunities for those offering bespoke opportunities. First though, one needs to ingratiate themselves with what is a growing community.
Associations like the Family Office Council for example, are increasingly attracting new members. Attending conferences run by these associations, certainly represents one avenue for making new introductions with key individuals.
What does the future hold for the family office?
Due to the increased privacy and control they allow, family offices are becoming common among the ranks of the ultra-wealthy. Consequently, it’s essential that both wealth managers and entrepreneurs start adjusting to reflect the increasingly important role that family offices are set to play going forward.
With the number of UK UHNW families at an all-time high there’s no denying their growing importance within the UK’s financial ecosystem. However, with Bloomberg anticipating that the number of UHNW families globally predicted to reach 263,500 by 2025, attention is increasingly turning to emerging markets, where new UHNWs increasingly hail from places like China. Consequently, the challenge for investment houses, banks and financial firms, is learning to appropriately engage with very wealthy individuals from an array of financial and cultural backgrounds.
Alpa Bhakta is the chief executive officer of Butterfield Mortgages Limited