A Simple guide to family offices.
Strategy
Updated on May 29, 2023Table of Contents
Family offices have been around since the 19th century, the Rockefeller family being the most notable example. Wondering what is a family office? For some, the term may conjure up images of an industry stuck in yesteryear – where business is done over whisky and cigars or on the golf course. Rather than a physical location, family offices are full-service private wealth advisory firms that serve the needs of ultra-high-net-worth families.
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Whether it is a single family office or a multi-family office, the overall purpose is to grow and transfer wealth over generations. In addition to investment management, they often provide a breadth of concierge service which eclipse any single stand-alone service required by ultra-high-net-worth (UHNW) families. In this guide to family offices, we’ll break down exactly what these services include, which can range from philanthropy to property management.
The average wealth for ultra-high-net-worth families operating family offices is around $100 million in investable assets, with the company’s financial capital being the family’s own wealth. However, there is an emerging market of multi-family offices that serve a historically underserved segment – the sub-$100m category.
Family offices are a unique breed and tend to be incredibly opportunistic when it comes to putting capital to work. Where the average institutional investors require longer and more protracted due diligence cycles, family offices have significantly greater thresholds for longer investment hold times.
What was once a niche industry focused mainly in the United States, has now gone global. Over the past two decades or so, family offices have rapidly evolved, thereby changing the way in which the ultra-wealthy manage and allocate capital. An increase in private wealth has continued to expand the creation of new family offices in areas that were essentially void of them in the past.
The growing number of family offices is not the only pointer that showcases the power of this industry. In this list of the largest family offices in the world, we have outlined how their capital allocations span across all traditional and new asset classes, making family offices and their wealth an important and impactful player on the investment field.
What’s more, as a new influx of wealth owners enter the market and family offices ‘come online’, diversification of wealth categories is starting to take place. Tech wealth is growing twice as fast as other private wealth, leading to an increasing number of entrepreneurs establishing family offices to manage and professionalise their capital.
What are the types of family offices?
Like any vertical dealing with the ultra-wealthy, each family office is unique in set-up and structure requiring a different combination of services. Usually, we recognise three main types of family offices: a single family office, a multi-family office and a virtual family office. However, as family offices start to fully realise their potential, capabilities and directions, new types are emerging. Therefore, some families might consider a hybrid single-multi-family office when comparing single and multi-family offices. As the hybrid types are still rather rare, we proceed with describing the common types, while we are on the lookout for forms, sizes and shapes may emerge in the future.
The single family office
A Single family office tends to be the choice for families who recognise the importance of family legacy and purpose. These families tend to have complex family structures and a number of generations that the single family office serves. The main advantage of setting up a single family office is customised services, a high level of privacy, and a personal approach to maintain family harmony through a defined purpose and investment philosophy. As the costs of running a single family office are quite high, it is a good option for families with more than $250 million in assets under management.
Multi-family offices
Multi-family offices best serve affluent families with less complex requirements. In contrast to single family offices, this structure is more cost-effective due to economies of scale and is becoming an increasingly popular option for wealth owners. The threshold of multi-family offices is also lower and they accommodate families and individuals with a net worth of $30 million and upwards. The range of services provided is similar to a single family office, but due to the higher number of served families and lower costs the solutions can sometimes not be made-to-measure.
Virtual office
This option suits best families that are spread across geographies and are looking for less complex solutions. Thanks to the advancement of technology and its security, virtual family offices represent a low-cost opportunity for wealth owners to receive remote on-demand services.
Do you need a family office?
Be it family business owners, heirs, or individuals that gained their wealth in any other manner, it is essential to ensure succession and facilitate proper wealth management. Although there are many ways to manage family wealth, establishing or joining a family office best satisfies the unique needs of families and individuals. The easiest and most straightforward formula, therefore, is ‘if you possess significant wealth and want to manage it sustainably and make it last for generations, a family office is a vital solution’. The question then is, what type and structure fits your family office best?
There are several factors that need to be taken into consideration that determine the objectives and best-fitting structures. Above all, families must evaluate to which extent they want to be involved in their wealth management, whether a dedicated team is required, what are the asset levels, what services are needed, or the amount of control the family wants to have.
Why start a family office?
Many clients think of family offices in terms of their net worth and wealth management. However, the role of family offices is more diverse than that. Above all, family offices allow families to securely store private information about many aspects of their life, including their health records, financial statements, or highly confidential documents. Families benefit from this form of gatekeeping in terms of governance and privacy.
As already stated, by using a family office to manage one’s wealth, families can avoid paying fees for services that they do not need, that could otherwise be included in a package offered by banks or other wealth managers. This ability to choose desired services and monitor the budget spent on outsourcing them helps families focus their investments where their interests are.
These are the four main reasons to start a family office:
1. Complex financial needs
The financial needs of ultra-high-net-worth families can be extremely complicated, which is why a family office provides significant value through its integrated service model. Managing a large pool of wealth can also be time-consuming and difficult and therefore, an external partner can ease the process.
2. Gaining an overview
Family offices are designed to help families best leverage assets and preserve wealth through legal support and wealth management services. When families work with multiple professional partners, it is often the case that important items fall through the cracks. Working with a family office can therefore provide oversight and reduce the silo effect.
3. Dedicated support
Family offices focus on few clients and rely on good relationships with family members for income. As a result, they are incentivised to deliver high-quality service and support. Many financial advisory firms provide advisors a stable salary and a commission, which can mean the interest to serve isn’t quite at the same level.
4. Trust-based relationships
Where financial advisory firms often experience high turnover, family offices are built around the idea of long-lasting relationships. This personal touch creates the much-needed trust for ultra-wealthy families – where the family office advisors are in some ways seen as extensions of the family. This trust is crucial with advisors gaining deep insight into the business and finance operations and as a result, being able to provide more strategic guidance.
Why family offices are becoming so popular
Over the past decades, family offices have gained importance among HNWIs for various reasons. Firstly, the boom in tech and media personalities printed plenty of entrepreneurs who need help managing their private wealth and philanthropic activities.
Following Bill Gates, Mark Zuckerburg founded ICONiQ Capital – a multi-family office – to manage his philanthropic work and investments in various startups. Other examples include OW Management, LLC, a single family office responsible for Oprah Winfrey’s education foundation and real estate investments.
Secondly, the dynamic global economic climate makes preserving family wealth very challenging. According to The Family Firm Institute, only 30% of wealth filters into the second generation, 12% makes it into the third generation, and just about 3% survives into the fourth generation or beyond.
To beat these odds takes a dedicated team of professionals working in unison to preserve the wealth and legacy of a single family. Hence forming a family office is surging in popularity.
What services do family offices provide?
Family offices often provide a comprehensive list of services across financial management, strategic planning, administrative support, and other services. Each of these domains is crucial to establishing a well-functioning family office.
Investment planning
Setting up financial goals and building a plan to meet them is a crucial step before investing. This service is usually provided jointly by external providers and family offices themselves.
Financial planning
While investment planning is focused on investing strategies, financial planning overviews the entire financial picture of the family office including salaries, retirement planning or financial security.
Philanthropic investing
Family offices nowadays recognise the power their wealth has and often focus on philanthropic activities and other donations. The most common focus is on the environment, human rights, or child development.
Strategic planning
In order to support strategic planning for ultra-wealthy families, family offices must offer business advice, strategic estate planning, succession planning and educational planning.
Estate and tax planning
One of the key functions of family offices is to ensure that the legacy of the family remains strong through the next generation of wealth owners. Following laws and regulations across different geographies, estate planning focuses on estate tax liability, the succession of the family business, equitable distribution of property among family members, etc.
Concierge services
Whether provided by individuals or companies, concierge services provide assistance in different parts of personal life – be it lifestyle or household management, or travel and vacation planning.
Lifestyle management
This includes concierge services where family offices are expected to handle their clients’ lifestyle requirements including conducting personnel background checks, travel, and inventory management.
Advisory services and family financial literacy
Additional to the other domains are advisory services where family offices provide tax, legal, compliance, and regulatory advice alongside support on risk management. It is further a responsibility of a family office to ensure that the next generation of wealth owners are educated on management.
Family office tools and solutions
1. Software and technology
While only a handful of family offices relied on technology a decade ago, automation and optimisation have become a crucial part of swift decision-making nowadays. Selecting the right software can help family offices leverage most areas of operations from portfolio management, to accounting and bill pay, governance and document management, or custody.
Find our comprehensive guide to implementing technology into the family office framework here.
2. Data and benchmarking
When it comes to decision-making, data and benchmarking are the most important determinants if one wants to match the dynamic business landscape. Having insight into how other family offices operate, what their investment approaches are or how they approach rising costs, is a key factor to keeping up with others in the game.
We explored how to manage your family office through data here.
3. Experts and advisors
Although family offices nowadays reflect great in-house expertise and specialisation, advisory still plays an important role in their operations. The main two responsibilities of family office advisors are to actively manage families’ wealth and legacy and the other being the increasing complexity and risk associated with wealth management.
To help with selecting the right family office advisor, we compiled this guide.
4. Other resources
To keep pace with the rapidly evolving family office industry, family office executives need to stay abreast of the latest trends, best practices and regulations. To achieve this, they can choose from a range of learning opportunities, such as specialised courses, conferences, workshops, and networking events.
Family office executives can also source their knowledge from a variety of other resources. Books, podcasts, and reports published by financial institutions, research bodies, or other family offices can be particularly useful in providing comprehensive and up-to-date information on various aspects of the family office industry.
The benefits of family offices
Family offices provide access to a range of investment opportunities, including private equity, real estate, and hedge funds. By pooling their resources, family offices can invest in assets that may not be available to individual investors or smaller investment firms. With various types of family offices in mind (single family offices, multi-family offices, or virtual offices), it’s important to consider the family office’s investment philosophy and track record before joining or building one.
While the cost of running a family office can be high, it is a good option for families with more than $100 million in investable assets, as they tend to be incredibly opportunistic and have significantly greater thresholds for longer investment hold times. Establishing or joining a family office is an essential way to ensure succession and facilitate proper wealth management, making it an increasingly popular option for wealth owners.
Q
What is the difference between a single family office and a multi-family office?
A
Traditionally, these were the two main options in terms of management structures and there was a correlation to the level of wealth, with the single family office coming at a higher price. Today however this speaks more of the client focus, either dedicated to a single client, serving a closed group or clients, or open to bringing on new clients on an ongoing basis.
Q
What is an “open” or a “closed” family office?
A
This term refers to a the commercial focus of a family office. A “closed” family office being one dedicated to a serving a single or a defined small group of clients. An “open” family office provides a service to a group of clients and they are open to accepting new clients on an ongoing basis.
Q
How do I start a family office?
A
The process of starting a family office can take several years. To start off it’s important to look at some of the examples of good single- and multi-family office operations and try and see if there’s anything that appeals in particular. Next taking some conversations with various types of family offices to understand what sets them apart can be really helpful to try and narrow down what type of family office would be well suited to your needs.
Q
When should I start a family office?
A
Family offices can either be started when there is still an industrial business owned by the family or individual or after a major exit or inheritance when there is a need to start managing wealth like a proper business.
Further Reading
How to start a family office
StrategyAs wealthy families tackle the complex challenges of generational wealth preservation and succession planning, the family office concept has grown in popularity. However, setting up a family office is a time consuming and potentially costly exercise which needs to be carefully planned and executed.
ESG for family offices: How to draft an ESG statement
OperationsESG is no longer just a buzzword associated with impact investing. For future-thinking family offices, incorporating ESG into all financial decisions is key. Here's what you need to know about ESG and how family offices can draft an ESG statement.
How to choose a family office bank
StrategyThe popularisation of the family office has caused an outflow of assets from the private banking space. However, banks have responded by significantly improving their family office service offering and are becoming more customer-centric in their approach. When choosing a banking partner, the key is to strike the right balance between the capabilities that are employed in the family office and the offerings that are sourced from your bank.
How to get started with venture investments – a step-by-step guide
Venture CapitalDespite a drop in deals, now is a great moment to start investing in venture capital. To get started, family offices must ensure they understand the risk versus reward, and then set out their strategy for allocation, and where they will focus their investments. First timers are advised to start small, working with experienced fund managers, before progressing to larger allocations and direct investments. Success requires patience, but done right, the returns are worth it.
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