Do I need a family office?

I am increasingly being asked by clients: Do I need a family office?

The answer is: It depends.

This article will attempt to explain some relevant considerations.

Family offices are emerging as the last outpost of private capital in the world

Increasing numbers of wealthy families around the world are setting up family offices. This is because private capital has grown exponentially in recent generations due to such factors as diversification of wealth through the influence of modern portfolio theory and hedge funds, globalisation through free trade and removal of exchange controls, technological advancements generally and digitisation specifically, increased life expectancy and living standards, gradual reductions in tax rates, global mobility of people, the deregulation of economies (including sales of sovereign assets to private interests), and increased liquidity in global capital markets.

Another factor is that some families have chosen to aggregate wealth rather than fragment it through traditional estate planning. Some families disintermediate some third party service providers by performing many of the roles traditionally fulfilled by lawyers, bankers, investment managers, property managers, travel agents, accountants, quantity surveyors, investment analysts and other professionals and financial institutions. This consolidation and institutional approach to family wealth is usually implemented by a family office.

Why have a family office?

The family office concept is not new and apparently originated in the days of the Roman empire. The first modern family offices were established in the mid-19th century as private banks and trust companies evolved to manage the wealth of the entrepreneurs of the Industrial Revolution. The objective then, as it is today, is principally to preserve and enhance a family’s wealth for both current and future generations of the family.

Here are a few reasons why an individual or family may consider setting up a family office:

• To manage risk
• To preserve the family legacy
• To control, co-ordinate and consolidate family assets
• To implement an institutional approach to family governance
• To implement an institutional approach to family investment
• Preserve and enhance the value of family wealth over generations
• Counsel, protect and educate family members

Do I really need a family office?

Not all families have the need nor the means to set up and sustain a family office. Here are some indicia of circumstances where it may be appropriate:

• Net asset value of USD 50M or more
• A recent or anticipated liquidity event (such as the sale of a family business)
• Complex and illiquid assets (such as operating businesses, art, farmland, etc)
• Esoteric assets (like marine and air craft)
• Multiple professional service providers working in silos rather than in unison
• A need for consolidated financial reporting across multiple asset classes and currencies
• An aging generation of wealth creators, stewards, and controllers
• A rising generation of ambitious family members and wealth consumers
• A globally mobile family with people and assets in multiple countries
• Ad hoc goods and services procurement processes in the family supply chain
• For strategic philanthropy

How about the costs?

International research suggests that most Single Family Offices would need to manage a minimum of USD 100M to justify the associated costs. However, a family with a net worth of USD 50M may be able to establish a Single Family Office of some type. Families with a net worth of USD 25M may be best served by joining a Multi-Family Office or operating an Embedded Family Office or a Virtual Family Office. Other aspiring families can procure certain aspects of a family office arrangement from a third-party (such as a bank, trust company, law firm or accounting firm) with experience and expertise in advising wealthy families. In due course those families may transition to a Single Family Office or Multi-Family Office structure.

Most families and advisors mistakenly view the family office as a cost centre. This perspective overlooks the opportunity cost or ‘value leakage’. The risk of value leakage increases as more assets are acquired and especially where the family is relying on third parties to manage those assets. Value leakage can occur at all stages of the family supply chain – from the operating business (e.g. leasing arrangements, asset financing, and legal and accounting fees) to lifestyle assets (e.g. berthage, fuel procurement and insurance) to real estate (e.g. property management fees) to financial assets (e.g. treasury, custodian, management and brokerage fees). A well-structured, professionally managed family office can more than cover its overhead costs by negotiating preferential rates with vendors and monitoring expenditure in a way that most families would not normally have the systems and processes to do.

A family office can align an otherwise fragmented family enterprise

The family enterprise is the collection of family businesses, philanthropic entities, investment portfolios, and the family office and the governing bodies of each of them. It also includes family wealth structures such as trusts and partnerships – and the family members themselves.

Many family enterprises are fragmented and this can cause issues. A family office can consolidate and align the constituent parts of a family enterprise to be greater than the sum of its parts.

A family office can then facilitate governance within the family council, family board, family assembly, family business, investment committee, private trust company, and associated constructs.?It can do this by cordinating family members, facilitating meetings and setting agendas, and ensuring appropriate governance oversight, operations and decision-making using approved frameworks and policies.

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When properly designed, executed, managed and administered a family office can be mutually beneficial to the family concerned, the local community in which the family lives and carries on business, and the wider economy.

If any of this seems like it might be relevant to you or your clients, I would be pleased to have a no obligations discussion.

At Dentons Kensington Swan we also have a digital portal for our family office clients where they can collaborate, view Deal Flow (VC, PE, Impact, Real Estate, etc), assess Philanthropic Opportunities, and consume Know How and Intel specific to the family office sector. Only family offices (not third party goods and services providers) are eligible to enter the portal in private and with military grade digital security.?