Family offices are growing in number and assets wherever you look. Alpa Bhakta, CEO of Butterfield Mortgages, explains why they have become so popular, and how, as a third party, you can get an introduction.
In every one of the world’s financial centres, a new type of financial institution is playing an increasingly dominant role in the world of private wealth management: the family office.
While family offices might not make headlines, many wield immense clout on account of the huge value of the assets they administer. George Soros’ family office reportedly manages $25 billion worth of assets and even “smaller” ones will have at least $30 million worth of assets under management (AUM).
The first thing to consider when understanding the rise of the family office is what they are. As the name suggests, a family office is a private advisory firm set up by an ultra-high-net-worth (UHNW) individual to manage their investment portfolios and generally cater to their financial and legal needs on a day-to-day basis.
According to EY, the number of family offices in operation globally has risen from just 1,000 in 2008 to around 10,000 today. Moreover, the average size of these family offices in terms of AUM has grown considerably with some of the largest commanding enough capital as to rival the world’s most prestigious private banks. But what factors have led many UHNWs to turn their back on the traditional approach (delegating their financial responsibilities to an industry of third-party money managers) and what advantages does going down the family office route confer?
What’s leading UHNWs to set up a family office?
In large part, the rise of the family office reflects the newfound preference of many investors to have a greater say in what happens with their money. The rise of impact investing––the term for investing done in order to further specific social or environmental goals––has certainly played a role here.
A renewed emphasis on privacy and discretion, particularly where one’s finances are concerned has also led many to bring their wealth management operations in-house. By setting up a family office, UHNW individuals can have their fortunes managed by a handpicked group of financial and legal professionals who report to them directly. What’s more, wider trends in the wealth management industry have also fuelled a degree of disenchantment with private banks. Family office owners can secure more oversight and grant their staff the license to aggressively pursue higher returns.
Many are persuaded to set up a family office because they amount to more than just private investment houses. In many instances, they act as full service advisory firms, designed to take care of the family’s every legal and financial requirements. Alongside wealth management, family offices conduct tax planning, business consulting and even co-ordinate the family’s philanthropic activities.
However, the most significant advantage of having a family office is that they can facilitate a smooth transition of private wealth between the generations. Passing vast amounts of wealth from one family member to another can create conflicts but having a full-time team in place to enact the individual’s wishes can help to overcome any transitional challenges (tax, probate, legal etc.) that might arise. The importance of succession planning to individuals with a family office cannot be overstated; the 2018 UBS Global Family Offices Report found intergenerational wealth management to be by far the most important consideration for individuals with a family office with 87% of those surveyed rating it as “very important” or “important”.
How can you build relationships with family offices?
Every year, more and more private wealth is invested by individuals through their family offices and this means that investors and entrepreneurs who rely on private finance have to start engaging with what is a burgeoning sector. Of course, the need for confidentiality represents an obstacle for those looking to engage with family offices; not only do they rarely publish details of forthcoming deals but they rarely accept meetings from unknown entities.
Consequently, you need to take a different approach when it comes to building a relationship with a family office. It might sound time consuming, but networking with office staff is an absolutely integral part of setting up a significant arrangement, financial or otherwise.
However, with family offices increasingly looking to alternative investments in pursuit of higher returns, I have no doubt that the sector’s growth will present opportunities for those offering bespoke solutions. First though, one needs to ingratiate themselves with what is a growing community.
One potential avenue for doing so is via an association like the Family Office Council. While it does not release detailed figures, the council reportedly represents more than 100 family offices with a combined $100 billion in AUM. Associations like the Family Office Council are increasingly attracting new members. Attending conferences run by these associations certainly represents one avenue for introductions.
Due to the increased privacy and control they allow, family offices are becoming more and more common among the ranks of the ultra-wealthy. Consequently, it’s important that both wealth managers and entrepreneurs start adjusting to reflect the increasingly essential role that family offices are set to play going forward.
Alpa Bhakta is the CEO of Butterfield Mortgages Limited.
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