This publication breaks out the major themes shaping the world's family offices industry.
Those sometimes mysterious-sounding creatures, family offices, have inched away from the shadows of financial life in recent years to attract more media and business attention. And part of that heightened awareness is driven by the sheer scale of the sector.
Even on the more conservative estimates, there are 7,300 single family offices (SFOs), according to data from Campden, the research firm, although that figure contrasts with data from EY (aka Ernst & Young) in 2016 pegging the figure at 10,000. This news service’s data and analytics partner, Highworth, has recently argued that all such figures need to be treated with a pinch of salt. Hard data on which such assessments should be built does not exist. And Highworth, as explained here reckons that if there are about 6,000 SFOs globally at present which are known, then on a simple extrapolation basis, the total indicative assets under management comes out in the region of more than $11.9 trillion.
However one slices and dices the sector, the SFO sector is big, and of course there is now a sizeable chunk of multi-family offices. Recently, this publication carried a guest article speculating why single family offices make the “multi” jump and pal up with other SFOs. The kind of trends that are shaping much of the financial industry, such as the need for scale to cope with regulation, client expectations and obtaining buying power, affect the family office space. In the past few days – and continuing further – we have looked at some of the issues driving the sector.
For example, one development is a willingness by family offices, even the larger ones, to outsource more of their activities, whether they be to handle bill payment, taxation, concierge services, the chief investment officer role, custody and security. There comes a point of course (as discussed here) where nothing more can be outsourced without there being little more than a legal shell. So deciding what to outsource and what to keep in-house is a constant debate. Banks such as UBS and Citigroup have been setting up family office arms in recent years to provide advice, support and services to family offices, much as such firms have also done the same for external asset managers. The theme appears to be “if you cannot beat them, join ‘em”. As recently as this week, Geneva-based private banking group Reyl announced that it was reshaping its family offices and entrepreneurs business segment. In our North American news channel, we covered a major appointment by professional services firm PKF O’Connor Davies to appoint industry veteran Steve Prostano, and launch a family advisory services arm.
Family offices have been around for more than a century, getting their start in the US during the era of John D Rockefeller and fellow “Gilded Age” business tycoons determined to pass on wealth without blighting their children’s lives and sense of reality. And fairly early on in the process, family offices realised the need for a level of professionalism, certainly among the larger ones. This publication, for example, has spoken to headhunters about the need for more professionalism in hiring external, non-family members to work in SFOs and MFOs, ensure that interests are intelligently aligned, and keep potentially fractious family members happy.
We have also looked at the structures family offices use to run themselves, such as trusts, limited partnerships (such as found in the private equity industry) foundations, or even types of corporation (which arguably received some momentum after the Trump corporate tax cuts of 2017). Much also depends on whether family offices are attached to businesses that still operate and produce cash, or are older entities where the original company has been sold or floated on the stock market. Again, there appears to be no “right” or “wrong” way to structure a family office, or any one agreed way that they should be led.
For example, a recent US study, from the Merrill Center For Family Wealth, showed that families vary a lot in how they arrive at decisions. The report broke down families’ philosophies about decision making in great detail: 35 per cent of them are “autocratic”; 21 per cent are “technocratic”; 17 per cent “democratic”; 17 per cent “meritocratic” and 10 per cent are “representative”. These terms are defined as follows: autocratic is where one person makes the main decisions and others give few or no contributions; technocratic families draw input depending on the special knowledge and training of family members; democratic families adopt collective decision-making; meritocratic families enable decisions to be made by those with a proven track record of making good decisions, and representative families will select certain members to act on behalf of all members on their behalf.
The family office might still appear to many to be a structure associated with the West, and the dominant white male segment. But Asia is a growing family offices breeding ground, and in regions such as the Middle East, where there’s often little dividing line between local state actors and families, what are deemed to be sovereign wealth funds could also be classified as family offices. Asia is likely to be a particularly important market, given current growth trends and the needs of the Next-Gen.
A final point is that family offices, unlike institutions such as pension funds and life insurers, don’t come under the kind of regulatory, political or economic pressures to go into certain investment areas or stay out of others. They can be more adventurous, which explains why SFOs and MFOs are often trailblazers in investing directly, or using venture capital, private equity and other avenues. Some family offices have also been created by investment tycoons such as George Soros to avoid coming under the regulatory umbrella post-2008, which means they no longer take in third-party money.
This is a fascinating space: challenging to cover in some ways, highly diverse, but not immune to many of the concerns that affect the wider population, whether they are coping with low saving rates, cybersecurity, or worries about the values of the next generation. We hope our recent coverage and planned features continue to shine a bright light on this important sector.