Since 2008, the global financial world has seen an increase in family offices, with professional services firm EY estimating that there could be as many as 10,000 single-family offices, a tenfold rise from 2008. Additionally, the amount of wealth that these offices could be managing is estimated to be trillions of dollars, highlighting the growing role of family offices in an area previously dominated by established wealth management companies.
The primary role these offices play is investing (or managing) assets on behalf of the office’s ultimate principal. This aspect is crucial in understanding their role, as family offices are unlike pension funds or hedge funds that pool capital from many investors. Family offices are, by their very nature, dealing with the assets of a family or multiple families.
Why Family Offices?
In many instances, the family office is backed by an ultra-high-net-worth individual or family. The obvious benefit for an individual with such status is that they get to own a private professional services firm that manages their financial needs and investment portfolios. Growth in the number of high-net-worth individuals globally means that an increasing amount of wealth is held by private individuals, many of whom might want a dedicated team to handle their financial matters.
Around the world, many are disenchanted by the wealth management industry, which is driven by private banks and wealth management institutions. Through a family office, these individuals have an entity through which they can be a little more aggressive in their pursuit of higher returns. Additionally, the increase in initial public offerings (IPOs) of various companies has given many founders and heirs access to huge amounts of cash.
In a broad sense, having a $100 million net worth is seen as the point at which an individual could consider setting up a family office. A 2018 Credit Suisse report estimates there are approximately 50,230 individuals whose net worth is north of the stated figure. For these individuals, managing their assets within their firms is one option, as is pooling together to create a multi-family office.
As a former independent financial advisor (IFA), Kevin Neal’s 25 years of experience in wealth management enables him to understand the justification behind setting up a family office.
By having a family office to manage their financial matters, ultra-high-net-worth investors can be more confident in having their assets managed by a dedicated group of financial and legal professionals. For some of these investors, the motivation behind having a handpicked team is to push through investments into non-traditional areas such as the environment or social causes – impact investing that builds the investor’s image.
A second advantage to family offices is that they help with the transition of private wealth between family generations. As some amounts of wealth involved are vast, passing it between family members might create conflict. However, having a family office can make the transition smooth and ensure an individual’s wishes are enacted accordingly.
Thirdly, many wealthy families or individuals generate their wealth by having expert knowledge of a specific industry or sector. Having a family office ensures the principal maintains some level of control over their investments and can play a role in creating value.
Lastly, an underrated aspect of family offices is lifestyle management for their investors and families. This might entail services such as purchase assistance, travel arrangements and other personalised services, depending on the uniqueness of every situation. In many cases, the families will scope out the type of services they require, leaving the execution in the hands of the family office.