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Family Office Services
• Broadly speaking, the purpose of a family office is to manage the wealth and interests of families so that they can be successfully transferred to the next generation.
• Family offices typically provide a range of services, including investment management, legal services, tax planning, treasury functions, through to operational and cyber security functions. Family-owned businesses may also fall within the office’s scope, depending on the degree of involvement.
• Whilst single family offices (or “SFOs”) cater to clients with a significant amount of liquid assets ($100mn plus), multi-family offices can be an economical option for smaller families and perform a similar function.
What is a family office?
Family offices are ubiquitous in the financial world. According to Mordor Intelligence, there are currently over 8,000 single family offices globally, with the number expected to increase in the forthcoming years (1). Considering the staggering scale of wealth creation globally over the past decades, it’s not surprising that their numbers have increased commensurably.
Oftentimes the establishment of a family office is precipitated by a large liquidity event, such as the sale of a family business or investment exit. It can be driven by the desire to consolidate and professionalise the management of a family’s assets and structures. The biggest reason, and this is highlighted in the UBS Global Family Office Report 2023, is that “most (63% [of family offices surveyed] say that they consider supporting the generational transfer of wealth their main purpose.”
What do they do?
In addition to investment management, they can also address governance issues, philanthropic endeavours, tax advice, legacy planning amidst other services. This can become increasingly complex especially when family members have different domiciles – the underlying structure and investments need to be appropriate for all members.
The strategic asset allocation of family office tends to have a greater flexibility than that of individual investors, particularly with respect to alternative investments and private markets (2).
If a family decides to engage in high-risk transactions, either on a direct or passive basis, due diligence will need to be conducted, along with ensuring the suitability and appropriateness for the family. Unless they had the knowledge or inclination to undertake this directly, families will often rely on the appropriate professional to conduct the requisite due diligence on their behalf. Bringing such experience in-house can be costly, as we see below.
What’s the cost?
The cost of running a family office, as a percentage of AUM, can vary significantly. According to the UBS Global Family Office 2023 survey, running costs for smaller family offices (ca. $100-250 million) can run at ca. 47bps per annum. For larger families ($251 million plus) the cost is slightly less at ca. 36-37bps per annum (3), this excludes extraneous costs for custody and asset management fees. Staff costs are expected to increase, commensurate with industry wage growth and the increasingly competitive nature of the industry as the number of family offices grows.
Ultimately, the total cost is subjective, relying on factors such as the size of the family, domicile, structures, types of investments, the number of custodians, staff, compliance functions (where applicable) etc. To properly determine risk, it is crucial to have a holistic view of a family’s assets. This can require investments in portfolio management systems and can cost hundreds of thousands a year to implement, not to mention any servicing or back-office support staff, if required.
To that end, it can be an exorbitantly expensive enterprise for families that require support but have less than $100 million, regardless of whether their investments, interests, and structures require additional support and oversight that may not be provided by a single-custodian model.
What’s the alternative?
People often assume a causal link between asset size and complexity. Ultimately, the underlying structure will be determined by the complexity and breadth of a family’s financial and business interests. As such, smaller families (4) face can face similar challenges to those with a significantly larger quantity of assets – albeit costs will bear greater consideration.
Smaller families can benefit from outsourcing key functions to a set of trusted advisors. This is to help achieve a balance between present financial needs and establishing a basis for transferring whatever further capital is accumulated to the next generation.
Independent multi-family offices, like single family offices, can provide invaluable assistance managing the investments of a family. Moreover, they can provide a family with a holistic view of their assets and risks across multiple custodians. The overall strategic asset allocation can be tailored accordingly. Risks can be assessed and, importantly, concentration risks can be mitigated – certainly a consideration for those with family-owned businesses.
They can also source best of breed investments for their clients – tapping into a valuable network of banks, asset managers, and private transactions (5).
Multi-family offices can significantly reduce costs and overheads on multiple fronts, such as custody, if they have a negotiated fee arrangement, allowing clients to diversify assets across whatever jurisdictions best suit the circumstances and family structures without necessarily requiring the quantum to negotiate with banks directly.
A trusted advisor can also call upon their network of lawyers, accountants, fiduciary service providers and tax advisors to help ensure that the family meets their required objectives and ensure that the structures and portfolios are optimised according to their needs and domicile. They can also support a family’s philanthropic endeavours should they choose to establish a foundation or charity.
Whatever the solution or structure, clarity of purpose, alignment of interest and a solution-orientated focus are key to delivering successful outcomes.
Appendix.
1. https://www.mordorintelligence.com/industry-reports/global-family-offices-industry Given the private nature of the industry, many family offices are unlisted. As such, the true number may be higher.
2. By this we mean hedge funds, private equity, private debt, infrastructure, venture capital, Hedge Fund or something that has long lock-up periods and a high risk-tolerance.
3. UBS Global Family Office Report 2023, pg. 50 https://www.ubs.com/global/en/family-office-uhnw/reports/global-family-office-report-2023/download.html
4. By smaller, it is relative to the ‘typical’ family office client (around $100 million plus). This would be for clients with investible assets between approximately $20-$100 million.
5. Subject to their suitability.
