Family office space feels the forces of expansion and change

The family office ecosystem is fast becoming a major financial powerhouse, with significant implications for the global economy and society. 

Increased wealth concentration, successful transfers of generational wealth and ‘liquidity events’ spurred by sale of family-owned businesses have driven a massive surge in popularity of family offices (FOs) in recent years. These forces are expected to continue significantly impacting the sector’s expansion.

Today there are 8,030 family offices worldwide, managing an estimated $3.1tn in assets. This figure is expected to grow 73 per cent to $5.4tn by 2030, surpassing the current assets under management of the global hedge fund industry ($5tn). The number of FOs is estimated to rise to 10,720, according to Deloitte.

North America is the largest, wealthiest hub for family offices, Europe the oldest, and Asia Pacific the fastest growing, with the majority of Asian FOs setting up branches outside the region.

Most FOs (90 per cent) serve first, second and third generation families, with only one in 10 catering to families that have broken ‘the third-generation curse’.

The many challenges families face in retaining their wealth long-term explain why FOs are established mainly to preserve and grow their wealth across multiple generations. Preparing the next generation to be responsible wealth owners and ensuring shared goals and vision for the family’s future are also key family concerns, according to research by Citi Private Bank. This goal, though, is not reflected in the little time spent taking care of younger generations.

Financial powerhouse

In addition to serving families’ interests and wealth, the FO ecosystem is increasingly becoming a major financial powerhouse, with significant implications for the global economy and society.

“The family office arena is getting so large that it's starting to serve as a feeding ground for many different industries that support the wealth management sector,” says Rebecca Gooch, Deloitte Private’s global head of insights. “The legal, investment, tax and consultancy sectors are all flourishing because of their ability to support the family office arena.”

Family offices could also have significant impact on global challenges of climate change, education and poverty, she says, with many engaging a significant portion of their portfolio in sustainable investing, driven by the more environmentally and socially conscious rising generations. Many family offices also play a critical role in the global community by steering families’ philanthropic efforts.

Moreover, with private markets increasingly a key investment area for wealthy families, FOs are becoming an important source of business capitalisation.

“Family offices are changing the paradigm of how wealth is getting into markets and investments. Not only are they creating new wealth, but a lot more private families are going into private enterprises, without intermediaries,” says Don DiCarlo, president of Wilmington Trust Emerald Family Office & Advisory in the US. “Underlying businesses seeking capital are looking at these emerging family offices and micro funds as sources of funding.”

The virtual reality

Whether it is being formed for the first time, or transitioning from another structure, the family office serves to organise the family around a common purpose or need, explains Anne Bucciarelli, New York-based senior national director for family engagement strategies at Bernstein Private Wealth Management.

As families’ needs evolve across generations, so should their family office. When this does not happen, it may be “the root cause of families’ discontent”, she says.

Sale of the operating business, a sudden death in the family, or the rising generation taking on greater decision-making responsibilities are all factors forcing families to look at their existing office from a new perspective.

A quarter of ultra-wealthy families organise their personal interests around their operating business, according to Bernstein’s internal client research, while Deloitte’s study shows family offices embedded in business-owned families represent 25 per cent of the total FO universe.

This current set-up creates interesting growth opportunities for the family office sector, says Ms Bucciarelli. When the operating business is sold, the entity taking care of the family’s interests disappears too, driving families to assess what they want to accomplish through their family office, and which model is the best fit for them.

Many opt for an outsourced ‘virtual family office’, with a small internal staff, or no staff at all, relying on external partners to provide services to the family.

In Deloitte’s study of 354 family offices overseeing an average AuM of $2bn, employing merely 15 members of staff, more than a third are looking to rely more on third-party service providers this year, to gain scale and expertise.

“Families must assess what are the most urgent driving factors that cause them to establish a family office,” says Ms Bucciarelli. “And in a perfect world, they should leave enough flexibility so the family office can evolve in future, to continue to meet client needs.”

Or at least they should lay “some groundwork” to anticipate these potential issues, allowing families to have that “sound decision making model in place, perhaps before the family even thinks they might need it”.

Wealthy families may find it beneficial to get advice from an advisory firm experienced in working with FOs, which understands their driving needs and the meaning of success, she says. Importantly, an external firm may be able to take “that objective look, being out of the weeds of the family”.

Wilmington Trust’s Mr DiCarlo confirms that “family office design and evolution is an emerging field”. Wealth managers and advisers are increasingly helping families think about their own structure, design and succession, while providing financial services to support them, he says.

Holy grail

While the growth of family offices is undeniable, what today is taking “more centre stage” is the “professionalisation of the family office”, adds Mr DiCarlo.

Effectively, the concept of FOs embedded in family businesses means financial officers, accountants, trusted advisers, and family members themselves take care of the family and personal issues as part of their business role. “Many family office functions, such as risk management and family engagement are being done by families well before they ever begin to articulate that it's a family office or put a label to it,” he says.

As personal wealth and complexity grows, families realise they may need to create a different structure, professionalise it and hire investment and other professionals, or outsource.

Most family offices are “some sort of joint investment vehicle through which multiple family members approach the market collectively”, believes Mr Di Carlo. In practice they work as private investment offices.

As the FO matures, the focus of the structure shifts to legacy creation. “Families realise the true value of a family office is not investments, but the ability to provide a platform for legacy development and educational engagement of the family. Investment isn't the purpose of the office, it's the facilitator,” he explains.

The growth of family offices is linked to “complexity management”, says Mr DiCarlo. Families today are multi-generational, multi-jurisdictional, have diverse interests and more sophisticated financials.

“Human, financial and geopolitical factors, as well as psychological factors have all increased,” he says. “Families are responding to that by trying to find an elevated wealth management solution that can try to integrate that complexity. People want peace of mind that comes with wealth.”

The “holy grail” for mature family offices is the “fully institutionalised family office” that provides financial integration, not just with data, but with processes and advisers, in real time, he says. “This combination of data management and high-end expertise is where I think the family office value proposition will be in the future.”

Branching out

Rather than lasting forever, practitioners agree FOs need to naturally evolve and branch out into new structures or lines to meet a clan’s changing needs. “Often the best family harmony is not to stay together. A family office, by definition, is on a timeline,” says Mr DiCarlo.

When families realise that needs or objectives of the FO have changed, or it has fulfilled its purpose, the FO needs to evolve into something different. “This is a success story not a failure story,” he explains. “Family offices should last as long as they serve the purpose for family members and no longer.”

Families tend to “spin off” new offices, especially when the family business ceases to be their “common denominator”. Then it is advisable for families to find a different common ground, such as philanthropy, and establish an office with that as the core.

Branching out into new FOs clearly impacts economies of scale, hugely relevant in the investment space, but it is more important that different family lines achieve their own aspirations.

Wealth advisers also need to help rising generations understand they should, at some point, stop seeing themselves as next generation members, urges Mr DiCarlo. “New generations must understand they are new stewards of wealth and are going to have to look at things differently. Goals that were set need to be revisited, and new lenses must be taken. Nobody's permanently G3, eventually they are G1, they just don't know it.”