A Family Office, or FO, is an entity established or engaged by a single family, or a group of families, to manage all of their financial affairs. The focus of the family office is on building and sustaining wealth for current and future generations. It also plays a major role in risk management, by building a diversified portfolio instead of one built on a single holding, and ensuring that this portfolio is properly managed and be able to provide the funds to meet all the family’s goals and objectives.
One of the key motivations for creating a family office is to centralize the management of a substantial family fortune and more effectively transfer the established wealth across generations. It allows a family in business to create a trusted environment with a maximum level of control and the possibility to reflect the personal risk attitude as well as the long-term view of the family.
As the term ‘family office’ is unregulated, its definition can vary. The family office was created to look after the wealth of an extremely “high net worth family” and with the duty also to assist in various personal matters. So they may act as mediators between siblings and governors of trusts, while keeping all aspects of family life organization.
Single-family offices can be understood as an often integrate combination of deliverables provided to family members. These deliverables usually include investment management, advanced planning, administrative and lifestyle services and all these categories can be split in other products and services. According to Angelo Robles, founder and CEO of the Family Office Association, “There are certain services such as money management that are common to most family offices. However, investment management at one single-family office is not necessarily the same thing at another family office. In order to really understand what each family office is providing requires getting into the details.”
Why They Are Becoming So Popular
According to the New York Times, the Rockefellers first pioneered family offices in the late 19th century and they started re-gaining popularity in the 1980s. An incredible growth of private wealth globally in recent years has resulted in “The Forbes World’s Billionaires” list growing from some 140 billionaires when it was first launched 25 years ago to over 1,300 currently. The emergence of new industries, particularly financial industries, is largely responsible for this unprecedented progress in “new wealth”.
In addition to that, in recent years, there has indeed been an increasingly high level of global uncertainty in both the political and economic spheres and, as the majority of economists state, a big cause for this rapid increase in demand of FO was the 2008 financial crisis, which led more people to seek astute investment advice and asset management. Out of the original concept of the family office, two main variants have emerged, the single-family office and the multi-family office, along with other similar types.
Main types of family offices (source: EY Family Office Guide Pathway to successful family and wealth management):
- Single Family Office (SFO) – In its purest sense, a single family office is a private company that manages the financial affairs of a single family. Typically, a fully functional SFO will engage in all, or part of the investments, fiduciary, trusts and estate management of a family; many will also have a concierge function.
- Multi Family Office (MFO) – A multi-family office will manage the financial affairs of multiple families, who are not necessarily connected to each other. Like a single family office, an MFO might also manage the fiduciary, trusts & estate business of multiple families as well as their investments. Over time, SFOs often become MFOs.
- Virtual Family Office (VFO)- Families looking to achieve the benefits of a family office managing their financial and other affairs, but who don’t want to set up an actual company to do so, can opt for a virtual family office. This can be achieved by outsourcing all services to external providers of services and consultants.
Noticeably, in our investor relation world, the FOs that really matter are those focused on the assets management and those who can invest in listed or, sometimes, in not listed companies – i.e. PEs.
The Family Office Ecosystem
To understand the importance of the FO nowadays, let’s consider for a moment the risks associated to any kind of business, that entrepreneurs and CEOs face every day; we refer to mainly four broad categories of risk: Concentration risk; Management risk; Balance sheet risk; Succession risk.
Without entering in details, we can assess that the family office is a sort of risk mitigator and there are about three main roles the family office plays in this. “Diversification” of the core concentrated asset is often a prudent way to protect the risk of loss should the improbable happen. At the same time, it must be flexible and leave family options as open as possible. Another family office’s job is “Integration”. The family office, with its deep knowledge of the family and its goals, as well as its staff’s experience in a wide variety of professions of origin, plays an important role in providing the family with clear goals, perspective and integrated advices. “Discipline” is the third factor a family office can bring in. The family office can bring independence and objectivity, a less emotional perspective and a fair and fact-based decision making process that can significantly improve the workings of a family and the management of its wealth.
The Modern Family Offices
Single-family offices hold about $1.2 trillion in assets and multi-family ones manage about $500 billion, according to Bob Casey, senior managing director for research at consulting firm Family Wealth Alliance. Today many made their money by building their own businesses and are big enough to operate like a pension fund or endowment, with a staff to pick investments, and those are the ones of interest for the IROs world.
“We saw a growing demand for advice and expertise arising from direct investments”, said Michael Maslinski, Partner and Group Head of Strategy and Know How at Stonehage Fleming, the largest family office in Europe, the Middle East and Africa. “This was compounded by increasingly complex regulations, a more litigious society and the risks of an unstable global economy. From an advisor perspective, we witnessed an increasing recognition that financial capital cannot be managed in isolation and that the wider legacy of families is crucial to long-term wealth preservation. This has a major impact and family offices need to develop a broader skill base to address these wider needs.”
Family offices are more popular now than they have ever been and, in our view, in the next years, we will see a move towards greater professionalization of the family offices. As wealth grows, particularly in the emerging markets, there is no doubt that family offices will play an even bigger role in the management of wealth. It is difficult to estimate how many family offices there are in the world, because of the various definitions of what constitutes a family office, but there are at least 3,000 single family offices in existence globally and at least half of these were set up in the last 15 years. Also in our “old world”, in Europe, the importance of family businesses cannot by underestimated. They are essential to growth and employment creation throughout the world’s biggest economic area. The top 100 represent a broad range of industries, from automakers to luxury and consumer good giants such as Ferrero.
What is mostly relevant for us, is the enormous enlargement of possibilities for our SM caps world. We have on the table a truly broad range of advisory services, including wealth management, asset management, family office, trustee services, club deal and alternative investment solutions, to meet our sophisticated client’s requests, and we need to be able to leverage on all these options. It is to be considered that like the most advanced RIAs, a Family Office allocates capital dynamically and follow a disciplined, forward-thinking approach to managing investments. More and more they develop innovative programs integrating leading investment management capabilities with the critical facets of portfolio diversification and strategic focus.
Our strong advise to IROs is to consider FO in their roadshow’s agenda even more.
Make sure you meet the right ones: if they like you, they will certainly have an interest in investing in your stock for a medium-long term perspective.