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The global business environment has been impacted in recent years by geopolitical and economic tension, turbulent markets and the rapid increase of technological advances that have transformed the way companies are doing business. In today’s wealth management marketplace, there is a surge of interest in the creation of family offices as the vehicle of choice to preserve and protect accumulated wealth. High net-worth individuals are finding the family office to be a personalized, outsourced solution to managing their financial and investment needs, while also tackling new and longstanding risks. Once a relatively unknown term accessible only to the exceptionally affluent, the family office has increasingly become more mainstream.
What Is a Family Office?
Family offices are private wealth management advisory services that are tailored to the specific needs of high net-worth individuals and their families. Some of the services provided through family offices include:
- Investment management
- Corporate governance
- Cash management and budgeting
- Wealth planning
- Wealth transfer
- Estate planning
- Philanthropy
Family offices may be set up for a single-family or for multiple families. Multi-family offices, also known as MFOs, are often run similarly to private wealth management practices, and allow for cost-sharing between clients. These offices typically require professionals with specialized skills in a number of disciplines, including the legal, insurance, investment, estate, and business and tax arenas.
The number of Family offices has increased by 38% since 2017. 70% of these family offices have reported an increase in wealth over the past year, and half have reported an increase in operating business revenue. 43% of family offices have reported an increase in clientele and half report an increase in the degree of governance or reporting structures they’ve put in place to further professionalize their operations.
In the coming years, it is expected that the number of family offices in developing countries, especially in Asia will increase, thanks largely in part to technological advancements that are bolstering fledgling economies and a booming workforce.
Why Set Up a Family Office?
There are a number of reasons why having a family office makes sense for high net-worth investors and individuals. Some of those reasons include:
Privacy and Confidentiality
Families with a large amount of private financial wealth find it important that this wealth is handled and deployed privately and confidentiality, particularly in an internet-connected world where information can be easily accessed and exploited. The family office is often the only repository for the family’s assets and confidential information, including personal information of individual family members, the complete asset portfolio, and other sensitive materials.
Governance and Management Structure
The family office provides the governance and management structures necessary to deal with the complexities of the family’s wealth in order to avoid future conflicts, address privacy concerns, and to provide a myriad of wealth-management services under a single entity that is owned by the family.
Alignment of Interest
The structure of the family office ensures that there is a strong alignment between the family and their financial advisors. This alignment is difficult to achieve when there are multiple advisors from multiple wealth management firms working with different family members.
Potential Higher Returns
Family offices often produce higher returns, with less risk, from investment decisions due to the centralization of asset management activities (reduced costs) and the formalization of the family’s investment process (improved decision-making).
Separation
Family offices allow for the separation of business assets and personal wealth. This is particularly important for ventures which pose a risk of legal trouble that can impact a company’s wealth. The risks those ventures pose to a family’s wealth can be minimized by proper separation.
Risk Management
Through the operational consolidation of risk, performance management, and reporting, the family office is better able to make sound decisions that are in line with the family’s investment objectives.
Centralization of Other Services
By coordinating other services provided to the family, including charitable giving, tax and estate planning, family governance, communication, and education, the family office is best positioned to achieve the family’s mission and goals.
Future Trends For Family Offices
With the rapid adoption of new investment technologies and the general uncertainty in the financial and political world, the structure and purpose of the traditional family office is continually evolving. Here are some current trends impacting the family office.
Recession Preparation
According to a 2019 survey of family office executives, more than half noted that their clients were preparing for a market downturn. Key preparations made in the face of a pending recession is the re-examination of investment strategies to curb potential losses, increase cash reserves and capitalize on new opportunities. 46% of family offices plan to place more money in direct private equity investments, 42% plan to devote more to private equity funds, and 34% are placing more funds into real estate investments.
Those who have not yet prepared for a recession will find it crucial that they identify their own areas for risk as the predicted downturn unfolds, and develop long-term strategies to grow wealth even during tough economic times.
Globalization and Sustainability
The developing world is having a greater impact on wealth flows. Advancements in technology are changing the entire way that the business world operates, bringing businesses from all over the globe closer and more connected. Yet the socioeconomic disparities between classes and countries, along with growing concerns about climate change continue to dominate headlines and efforts. In the midst of this, families with wealth are not only wanting to take part in the changes but to have an influence over these changes.
In the last year or so, family office executives have noticed an increase in discussions with their clients about sustainable and impact investments. Currently, about half of all family offices allocate less than 10% of their portfolios to sustainable investments. One-third allocate 10-49%. The average amount of the family office portfolio currently allocated to sustainable investment is 19%. However, these executives predict that about one-third of their portfolio will be devoted to sustainable investments in the next five years, and one-quarter will be allocated to impact investments.
Non-financial risks are now playing a larger role in the decision-making around family investments. For example, climate risk is now part of the World Bank’s risk management strategy. Risks to the family’s reputation is another new topic making the rounds through the conversations that family office executives engage in with their clients.
New Family Office Structures
The number of billionaires worldwide decreased by 5.4% in 2018 due to market volatility and struggling economic growth. However, there are more family offices being created now than ever before as entrepreneurs who started businesses in the 1990’s sell and those with recent startups aim to put their companies on the market and unleash a new wave of wealth and investment needs. The family office provides an optimal investment vehicle to manage and preserve wealth. The new class of wealthy individuals have different goals than their predecessors, often valuing access far above ownership. With different goals come different structures that can no longer be defined strictly as ‘single-family office’ or ‘multi-family office.’
One of the new structures that have yet to take hold but is looming on the horizon is the virtual family office. Currently, private multi-family offices are becoming a way for groups of families to pool their resources in order to enjoy co-investment opportunities. With dedicated, shared, or ad hoc resources available. It is advances in technology that makes this sharing economy not only possible but also practical.
Transitioning Family Businesses
The world of business is growing and transforming at a fast pace, and part of this growth and transformation is the sale of established family businesses and the purchase of new family businesses. In the midst of these transitions, families remain interested in preserving their wealth for succeeding generations. With a large amount of current wealth to manage during the transition between operating businesses to managing wealth portfolios, savvy family office advisors are helping their clients to cement a new identity, including creating new support structures and investment identities.
Another trend that is contributing to the transformation of family businesses is the ability of individuals to work remotely, wherever they may be at the time. This has freed up business executives to have more time away from the office and has increased the talent pools in areas of operation that may be lacking by opening up the pool of potential talent to include individuals from across the world. An agile company not only produces additional streams of wealth and increases productivity, but also requires equally agile approaches to investments as well as plans and strategies that take into consideration the global change in both the workforce and the working environment.
Artificial Intelligence
The fourth industrial revolution has dawned, bringing with it artificial intelligence. The developments in artificial intelligence and advanced automation are not only freeing up human time by delegating many tasks to automation but are also spawning a highly data-driven type of innovation that is increasing the wealth of businesses who lead their industries into this new age of information.
While digitization and data science are bringing many positives, they have also made investors uneasy as to the security of their information. The cost of global cyber-crime is expected to reach $6 trillion by 2021, and up to 90% of companies fall victim to one type of cyber-crime or another. Wealth management advisors and family offices are forced to meet the security challenges that abound through security-enhancing software, centralization of information, and regular communication with their clients in order to develop customized solutions. Continuity plans must be developed in order to minimize the losses the family may incur, and family office staff must be continually trained in how to apply security guidelines and regulations into their daily operations.
How we can help.
At Origin X Legal we have extensive cross-border experience with the legal, financing, structuring, compliance and other operational issues involving family offices. If you’d like to know more, contact us on info@origin-x.legal. Let us navigate the regulations, so you can disrupt the future without reservation.
