Vistra Insights

The ever-changing face of the family office

Raynald Tavoillot, Director Client Services, Corporate and Private Clients, Luxembourg, examines the boom in family office services in recent decades.

One of the most fascinating developments in the private wealth industry since the start of the new millennium has been the evolution of the family office. A concept that goes back to the 19th Century – if not further – a family office was typically set up by a wealthy family to manage its assets. The Rockefeller family office, which was founded in 1882, is probably one of the most well-known.

At its heart, the concept has fundamentally remained the same. A family office will usually take care of the management of cash, investments, real estate assets and wealth structuring. But as the world, and financial services, have moved forward, so has the family office. 

Nowadays, a family office may provide those traditional services, but it might also cover matters such as philanthropy, concierge services, liaising with lawyers and tax experts, and estate and succession planning – ensuring that the next generation are educated not only from an investment point of view, but also that the core values of the family are being transmitted. 

These service developments have seen the broader nature of the family office ‘industry’ change. Previously, a wealthy family would create an office purely to take care of its own requirements – a single-family office. The level of wealth needed to do this is significant – with a minimum of $100 million in liquid assets the figure that is often given as a starting point. 

Now, however, high-net-worth individuals (HNWIs) who haven’t yet attained that level, are looking to take advantage of the high-quality professional services that are available. Many are doing this through a multi-family office, which, as the name implies, provides those services to a number of families or individuals. Indeed, the Rockefeller Global Family Office now offers its services to other HNWIs.

Drivers for change

This all may seem perfectly natural, but there are a number of interesting drivers and factors that are behind this development in family office, or private office, services.

Firstly, there has been a considerable growth in global wealth. According to the Capgemini World Wealth Report 2020, global high-net-worth financial wealth rose from $46.2trn in 2012 to $74trn in 2019 – and all of that wealth needs to be managed. Similarly, the number of HNWIs – those with investible assets of $1 million or more – has grown significantly in recent years, from 12 million in 2012 to 19.6 million in 2019.

Understandably, then, many have turned to family offices – whose job it is to make sure that assets and cash are properly safeguarded as well as delivering required returns on investment.

From a personal experience of dealing with wealthy families, the years since the global financial crisis have been challenging. Many families and individuals have struggled to find affordable assets or those that could meet their investment objectives and criterion. This has been set against a low-interest-rate environment, a continued stock market volatility and high multiples.

Alongside this, the global regulatory landscape has become far more complex, with regulation around taxation having become particularly stringent. This has led to HNWIs looking for more advice in this area – and family offices will either be able to provide this or will work closely with third-party advisers to facilitate it.

With this increase in the need for professional services, it’s unsurprising that there has been a significant growth in family offices in recent years. According to Campden Research, there were 7,300 single family offices worldwide in mid-2019, up a significant 38% from 2017. 

Of course, as explained above, not everyone can or is willing to afford a single-family office and many HNWIs in need of the necessary advice will have turned to multi-family or private offices – so it’s a relatively safe assumption that the number of such offices has grown significantly as well.

What comes next?

Earlier this year, Vistra published its ‘Global Private Wealth and the Future of Philanthropy 2021’ report (available here), and one of the most significant findings was that 91% of respondents said they already use the services of a family office. On the surface, and compared with other industry-wide statistics, this seems high – but it is also explainable.

As the global financial landscape becomes more complex and a whole new range of investment options open up, wealthy individuals are turning to professional service providers and are more engaged with wealth managers and advisers who are offering a suite of services. As a result, those individuals may well think they are using a family office, because the services are similar. 

There is no reason to believe that this shift to using professional services is going to change any time soon. And in this regard, we certainly can’t ignore the Covid-19 pandemic, which has made wealthy individuals increasingly aware of their mortality, as well as any shortfalls in their wealth and succession planning. Indeed, only 52% of survey respondents said that they had a succession plan in place, which certainly points to a huge cohort that may well turn to advisers (and family offices) for support – or may well be doing so already.

As much as the family office has changed in recent decades, so it will continue to change. It’s quite possible that individuals will increasingly turn to the services of a multi-family or private office to ensure that their assets are properly safeguarded and that investments are delivering the required returns. Beyond that they will want the family office to act as a ‘hub’, connecting them with tax lawyers, alternative investment advisers and so on – a centralised model, with the family office at the heart of it.

This will help create a strong framework as a family’s requirements change – as they increase their philanthropic endeavours and to support the next generation as they come in, with their own plans, beliefs and ideas. The pandemic has already created a shift in philanthropic giving, with our survey showing that healthcare and the environment have been the main recipients. With a more socially aware next generation, there is no reason to believe that this shift to philanthropy will abate any time soon.

And effective philanthropy requires that the most appropriate structure, such as a foundation, is put in place. And this plays to the strengths of many private wealth providers and family offices.

As the world opens back up again, global mobility will return to some degree – not least in the form of wealthy families educating their children abroad. In the search for investment opportunities, it is pretty sure that families will continue look to other countries to find investment opportunities, especially in areas such as real estate. So, it makes sense that the family office will have a more global reach in order to meet client requirements. 

According to Knight Frank’s 2021 edition of ‘The Wealth Report’, the number of ultra-high-net-worth individuals (UHNWIs) around the world – those with $30 million or more – is predicted to grow by 27% in the five years to 2025, taking the total to 663,483. Over the same period, the number of millionaires globally is set to rise by 41%. If this proves correct, it’s fair to assume that family office services are likely to be very much in demand.

Future of Philanthropy Report


 

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