As multiple views abound on what the primary function of a family office is, here we take a holistic look at these vital vehicles and provide an explainer on what family offices are and what they do.
Although family offices have been around for more than a century, with the most well-known perhaps being the Rockefeller Global Family Office, their real use has increased only over the last 15-20 years, in tandem with the unprecedented wealth creation and related globalisation of families and investment over the same period.
However, the family office is still in its infancy in terms of widely understood parameters of what one is and what it does or has the potential to do in future. There is an ambiguity around the term ‘family office’ and everyone defines it with a caveat – “depends on how you look at it.”
A convergence of views
There is indeed very little in the way of a commonly accepted definition of a family office – in legislation, regulation or from professional bodies. In my opinion, the picture starts to become clearer when considering two widely held views that have emerged from the private wealth and asset management spheres.
Looking through a wealth preservation and succession lens, a family office has been largely viewed as a ‘governance step-up’ in the sophistication of modern ultra-high-net-worth (UHNW) families, providing a scalable and efficient solution to tackle the complexities and risks associated with globalisation of UHNW families, including their diverse assets spanning multiple jurisdictions.
Meanwhile, those who hail from the asset management or investment banking sectors have typically looked at family offices as investors – in other words, “LPs” – because family offices often invest into fund structures or directly into private deals historically reserved for more traditional institutional investors. Family offices also often act as asset managers themselves, co-investing with other family offices and their UHNW families (analogous to being GPs of fund structures).
The trend now and going forward however is a convergence of the above two main perspectives and spheres, driven by wealthy families and the surrounding fast-evolving family office ecosystem. Family offices (along with their specialist partners) are, more and more, taking on a central stewardship role for UHNW families, taking over and building upon an area previously dominated by private banks and the investment banking sector.
Variations on a theme
As the family office space develops and definitions converge towards common ground, the fundamental purpose of a family office stays the same: family wealth governance and investment stewardship for the long term.
Driven by this overarching purpose, the different types of family offices that have emerged, and continue to evolve, include:
Single family office (SFO)
Multi-family office (MFO)
Virtual family office (VFO)
Asset manager family office (AMFO)
Beyond asset management
As is clear from the above drill-down into their various types, family offices provide certain services but can’t do everything themselves so they outsource to specialists where appropriate – which, as noted earlier, has evolved from the historical model of UHNW families’ heavy reliance upon multi-service private and investment banks.
The range of the services now falling under the ‘family office’ umbrella (whether delivered directly or in tandem with outsourced providers) provides a good reference point for how family offices have evolved over the years, transforming into multi-dimensional vehicles for family wealth preservation and asset management. Indeed, today’s family office is headed far beyond investment management to serve as an “office” extension of the family itself. Key services areas include:
Asset management and allocation
Governance, governance, governance
Multi-asset class administration and reporting
Legal and tax compliance
Furthermore, family offices have a vital role to play, along with outsourcing partners, in overseeing and managing other private assets, such as super yachts, aircraft, art collections and classic car collections, as well as oversight of holiday homes and other personal luxury assets. Family offices also often take on the task of ensuring senior executives of businesses and/or private equity interests are sufficiently motivated, which brings in various executive incentivisation structures like share plans and carried interest structures. Managing ESG and philanthropic efforts, such as the establishment and management of a foundation, or providing advice on donating to charitable causes, is additionally of increasing importance in the family office context.
Last but not least, education of family members is often a priority. Not only the ‘IQ’ of understanding technical matters like trust structuring, liquidity requirements or return on investment analysis, but vitally the emotional intelligence, or ‘EQ’, of being able to deal with vast amounts of wealth (including family business succession), particularly in second, third or subsequent generations.
What is clear is that the holistic ‘ask’ of family offices is quite wide in scope and, to many, daunting. They can’t answer that ask alone; they need trusted and competent specialist outsourcing partners.
In family we trust
As I write this I look forward to the aftermath of the current global pandemic, when I anticipate that there will be further heightened emphasis on protecting and nurturing family wealth over the long term and across multiple generations. It appears that, more so than ever before, family offices are set to become a prominent feature of the global investment landscape.
As family businesses mature and proceed further along the spectrum of service requirements, it is also likely that family offices will make a deeper contribution to society through positive trends such as sustainable investing. Indeed, the UBS and Campden Research Global Family Office Report 2019 notes that 34% of family offices are now engaged in this impactful activity, with the socially and environmentally conscious millennial generation contributing to further acceleration as they start to take the helm of family businesses.
Family offices are at various states of evolution regionally, with the US and Europe slightly more developed but with places like Asia and Latin America catching up fast. The current context might well mark a watershed moment, both for family offices and the professionals (like ourselves) that support them globally, with convergence of historical perspectives of wealth preservation and investment deployment in all regions bringing further maturity, sophistication and excellence into the family office ecosystem as it continues to evolve, develop and demonstrate true value over multiple generations. Watch this space.
