THE RISE OF FAMILY OFFICES

HOW THEY HELP UHNW'S MANAGE THEIR WEALTH

Family offices have become increasingly popular over the past several years, largely due to the increased flexibility and control they allow ultra-high-net-worth individuals during rapidly changing economic conditions. 

However, the concept of a ‘family office’ as a specific path for UHNWs can be somewhat misleading. As family office professionals like to say, ‘When you know one family office, you know one family office’—meaning that a family office is not a singular, predictable entity at all. Family offices are as unique as the families they represent. They range from relatively simple to extraordinarily complex and vary widely in their strategy, size, and structure.  

In this article, we will answer the question, ‘What is a family office?’ and explore considerations UHNWIs should take into account when deciding how best to nurture and grow their wealth. 

TOM P. M. MEGANCK
15.05.2023

What is a family office? 

A family office is a wealth and asset management firm that works for one or more UHNW families to grow their wealth, ensuring its safe passage to the next generation. In contrast with investment vehicles such as hedge funds, endowments, and the like, family offices do not pool third-party capital to invest. Instead, they operate with a single family’s (or multiple families’) assets.  

Family offices also differ from traditional financial advisors because they represent a complete financial and investment solution for a UHNW family. In addition to financial planning and investment management, family offices typically also administer charitable giving, provide tax services, engage in wealth transfer education and planning, advise on insurance solutions, and provide general concierge services. 

Put simply, a family office is a ‘one-stop shop’ for wealthy families who want to protect, grow, and transfer their wealth.  

Types of family office 

There are two primary family office models: the Single Family Office and the Multi-Family Office. 

As the name implies, a Single Family Office (SFO) serves a single family. In essence, an SFO is tasked with the full-time job of managing a family’s wealth and ensuring its preservation for future generations. 

By contrast, a Multi-Family Office (MFO) works for and with more than one client family. MFOs are less expensive to erect and maintain due to economies of scale. Often, these offices begin as SFOs and become MFOs as more families join. These families may be related by blood, or they may choose to pool their assets due to similarities in their wealth accumulation timelines and strategy.  

Why are family offices so popular? 

Demand for family offices of all types has grown substantially over the last several years. Private family capital is now larger than private equity and venture capital combined, and UHNWIs are increasingly turning to family offices above other investment solutions.  

The family office exists to combat the traditional three-generation ‘arc’ of wealth, popularly referred to as ‘shirtsleeves to shirtsleeves in three generations.’ It ensures that a family has a mechanism in place to protect their wealth—not merely through its growth, but also by educating younger generations on responsible stewardship. For example, a family office may opt to secure real estate assets within a foundation so they can’t be sold prematurely, ensuring that the family maximises the benefit of their investments.  

While this may sound unusual, UHNW families must operate more like a business than an individual when it comes to their wealth. Asset management becomes more akin to running a multi-million-dollar business than to personal finance, which comes with a unique set of requirements. These families need expert advice and assistance with everything from tax planning to charitable giving, real estate management, investment management, succession planning, etc.  

The rising popularity of the family office has become something of a self-fulfilling prophecy, thanks to improved transparency and data-sharing in recent years. The annual UBS Global Family Office Report is an excellent example; where family offices were once extremely private, data is now available for others to learn from. Family office professionals have unprecedented insight into what other families do, enabling them to apply benchmarks and leverage critical learnings. 

Why set up a family office? 

Establishing a family office represents a significant step toward professionalising a family’s wealth management. As such, SFOs and MFOs handle tasks well beyond the scope of traditional personal finance. They can help acquire lawyers, navigate special interests, manage lifestyle concerns, assist with luxury asset acquisition (art, for example), and accomplish essentially any task that pertains to the family’s continued success. 

Among the most common reasons UHNWIs choose to set up a family office are: 

• Bespoke service: Family offices are customised to the needs of the family. Single family offices in particular have only one client: the family in question. This makes them laser-focused on that family’s objectives above all else. 
  
  
• Balance: The balance between wealth preservation and growth and the family's immediate financial needs can be difficult to maintain. Family wealth is often spread across many family members and generations, all with different expectations and needs. Family offices help to balance those requirements. 
  
  
• Purpose: A family office will generally decide on a clear defining purpose, which helps a family narrow down its aims and create a lasting legacy. 
  
  
• Security: Within a family office, all personal information is housed in one secure location, accessible only by a small number of vetted staff. This stands in stark contrast to a large firm, which may have hundreds or thousands of staff members with access. 
  
  
• Expertise: Family offices are rooted in professionalism, which is essential for families looking to manage their wealth as effectively as a business, complete with a dedicated team of experts. 
  
  

Basic steps to establish a family office 

 In general, industry experts agree on a $100 million net worth threshold as the tipping point at which a family office becomes a viable option. Below this level, it is often more effective for families to pool their assets within multi-family offices. However, MFOs are only effective economies of scale if all of the families involved have similar needs. For this reason, MFOs generally work best if they start as a SFO, with other families joining an existing platform that suits them. 

The size and scope of a family office will be determined by the extent of a family’s wealth—and, therefore, the complexity of their need. Family offices will vary based on: 

• Strategy: While wealth preservation is often the primary goal, growing or transferring a family’s wealth can be just as important. 
  
  
• Size: Depending on the family’s capital, the size of a family office could range from ~$100 million in assets under management to multiple billions. 
  
  
• Structure: Every family office will look different, depending on its size. Some will have a full staff, others a single advisor. 

Ideally, individuals establishing a family office will take these considerations into account from the start. However, most families begin with existing requirements based on their current wealth structures. Family office planning should therefore start with a thorough overview of the family’s assets to determine the most advantageous way to move or maintain existing structures.  

Family offices aren’t just about investment management; they are also about people management. Our team have decades of experience establishing and maintaining the robust needs of a family office. Get in touch to learn how Palmela can help preserve and grow your legacy.