A Glimpse Into The Secretive World of Family Offices: Some reflections on the past, present and future.

The world around us is always changing. Wealth is build and destroyed constantly within most human societies. Build, perhaps, from generations of service to the Royal Household, from the sale of an entrepreneurial lifework, talent or from inheritance. Wealth comes from the most unlikely causes but once it is there, it rarely stays in place for very long. Statistics show, that wealth (both Old and New money) is typically quickly dispersed - within even just a few generations.

A successful entrepreneur, businessman or financier, will focus on wealth creation and retention for his whole life until the moment of death. Upon his death, the fortune will often be passed on to the heir(s) of the next generation, but the next generation may have other values and not the same focus - or talent - of creating wealth that the parent generation had.

The banking industry (especially the private banking sector) has long served as a trusted advisor for wealthy families and helped them both to preserve their wealth and even grow it responsibly.

Times are changing and so are the needs and demands of the wealthiest families on Earth.

In more recent times, wealthy families have been leaving the Private Banking sector behind for to several reasons. Many families have not been satisfied with being "one horse in a big fold" & living an more uncoordinated and stressful life: Having to wait on hold when calling the bank or lawyers, having a "casefile", with many different, larger institutions, being just one client out of many others... Not receiving specific enough advice/guidance, as well as not being able to implement this effectively, is often problematic. Not having individual plans and strategies for all family members in one central place.

All of this has created many problems for wealthy families in traditional banking. The relationship with the external managers becomes weak and the trust often falls over time. Many things, such as fees, procedures or products, are completely outside of the Family's influence and are often hard to even understand (lacking transparency).

It is difficult for, even the wealthiest of families, to be front-and-centre in the attention of a large institutional fund manager. He/she will have many other wealthy clients & projects to manage, things to do/places to be, and likely prefers little client involvement anyway.

Having a Family Office ensures the Family's needs are always front-and-centre.

In recent times, wealthy families have also been interested in investing their funds into new exciting and meaningful projects for the future. After the sale of an entrepreneurial lifework, for example, a Family may want to invest a part of this wealth, directly, into new promising projects, exciting sectors and new opportunities. They know their wealth can play very important roles for society and create economic and social wealth for future generations and, if done responsibly, this can be a great future endeavour for a wealthy family, to invest their money in, even -far- outside of the sector(s) in which they build their fortunes in. Even the complete development of life-saving prostate cancer drugs, has been created due to direct financing from a Family Office (Michael Milken).

So the real-world impact these shadowy investment entities have, is not to be underestimated.

The Last Few Decades Have Been Disappointing To Many Wealthy Families

Bad experiences with traditional money managers, private banks, investment funds/trusts, and greedy or unqualified financial advisors have cost the families a lot of money but also it has reminded them, that their wealth is a BIG TARGET for bad and unqualified attention. The main aim of a Family Office is therefore simple: To protect the Family and safeguard their intergenerational wealth. And this is why, I believe, many Family Offices are very secretive. Most (like 75%++) do not have any websites, most do not appear in public phonebooks, and many avoid public situations, fx doing public appearances, TV interviews, news columns, job listings etc. They are (often) designed to be well hidden, and shield the Family, because this is, exactly, what the Family prefers.

However, many families still want to make a difference, be part of something great, and continue their path forward.

Independent advisors such as a Family Office, surely have nothing to "hide". No second agenda. No investors/owners to please: No double-interests (financial etc.) other than being entirely dedicated to the Family and their lives & wealth.

A private bank, fx, has investment products to sell (their own products or those of others), it has owners to please and financial results to achieve (top/bottom line objectives etc.). The point is: Non-independent advisors always have many other contradictory interests, and often, the transparency, from the point-of-view of the family, is often low. It is hard to see why some things are the way they are, fees, procedures and costs... Why does an investment product/service cost what it costs, for example? It is not always clear with the traditional banking sector.

"Performance may be up or down, but the fees never falter" - Warren E. Buffett

A traditional private bank or investment fund, typically is here to create wealth, whereas a typical Family Office, is here to preserve wealth.

Globally, FOs returned 5,4% in 2019, which is testament to this. Family Offices are often naturally more risk-averse (than fx Hedge Funds or Mutual Funds) in their investment operations and would like to spread their risk-exposure accordingly.

In, our neighbouring, Norway and Sweden, between 25%-30% of wealthy families are now serviced by independent advisors and the % is rising steadily in a trend estimated to continue - or even accelerate - in the coming decades.

The trend is global: With an estimated 5,9-6 tn USD invested into Family Offices - making them a larger capacity than all Hedge Funds combined (global HFs combined are estimated to be managing around 4tn USD in 2023 - NOTE: The double counting issue in wealth comparison, as many FOs are clients of HFs).

The point where it makes financial sense to create this dedicated entity has long been estimated at around at least $50–100 million in investable assets, but this number is also not fixed and it really depends, entirely, on the circumstances.

A simple Family Office, with a smaller payroll and fewer activities/less complexity, would be able to make financial sense with less than this amount. However a very large and complex one, with a larger payroll, may find it hard to be profitable and achieve all its objectives, by having less than this amount.

This may be the case, if they have whole, fully integrated (inhouse) legal/tax/accounting/reporting (etc.) departments and - perhaps in some case - even departments specially to operate their charities and many other activities / projects. Even, in some case, staffed service stations (etc.) to service the fleet of vehicles or portfolio of residences belonging to the Family Estate (yachts, cars, airplanes, properties).

As a result, the size and function of Family Offices vary greatly - as long as they are deemed potentially profitable in their endeavours.

A Dedicated Team

A Family Office is simply an extension or "shield" of the Family. "Their Arm". It is theirs and it will operate entirely to their needs and wants - just as it was established accordingly. Each family is very different, with different needs, different problems, different dreams and wants for the future. Some may have a lot of projects running, a lot of assets to manage, a lot of succession planning to do and so on, others not so much. A dedicated Family Office will be the solution to all these problems. The team are always there, 24/7, 365, to help and advice on issues in real time, with the utmost discretion and confidentiality, no waiting times - and will the full-time dedication of some of the most experienced and talented and connected professionals the free market has to offer.

Needless to say that Family Offices often attract the best talent, not only because of the attractive compensation but also being part of a smaller, but impactful team is attractive to many. Many prefer the extra freedom, variety in tasks and less strict controls and requirements than many other employers offer.

The Family Office is a smaller but dedicated team always there to take care of the Family's needs, always, of course, operating, with the highest degree of transparency. Not only concerning finances, and this, in my personal opinion, is what sets the Family Offices apart from all other structures -- A Family Office is an entity that encompasses all the services that are needed: Fx legal counselling, accounting, consolidated reporting, insurance management, filing, tax advisory (often complex, multi-jurisdictional legal advisory etc.), Estate management, succession planning, household/staff management, private security, childcare, charity work/sponsorships and philanthropy, PR mngt. - and so on.

Everything will be organised by the Family Office, following direct instructions.

In my own case, investment management was a much smaller part of the job than I had anticipated. Most of the daily tasks for me, have nothing to do with markets at all. Each Family Office will, together with the Family, need to decide on a strategy of how they prefer to manage their investments: More actively or passively, directly or indirectly, more outsourced or not. Number of strategies, risk-profile etc. But a typical Family Office, I hope it is fair to say, is so much more, than just an investment manager or investment advisor.

A big advantage, I believe, of Family Offices is that they can invest almost into any markets, any industry/sector, any geographies etc. Given their structure and management, a Family Office is very flexible and nimble (fx in regards to investment position sizing) and can pursue a plethora of opportunities that traditional investors cannot due to limitations on their mandates. Managers also do not have any investment committee/board of directors to justify anything to and as long as they coordinate their activities with the Family, almost anything is "fair game".

This too, makes Family Offices completely unique in the space of investment management.

A Family Office can be what exactly the Family wants it to be, a wholly controlled entity, to make all/many aspects of daily life easier, even cybersecurity and IT, to communications and calendar planning (organising/booking holidays, work trips, anything) etc. If there are things that can make life easier, then it IS possible to integrate them, and others, into the day-to-day Family Office operations. There is no set standard, and that is a big advantage of the structure. It can always adapt along with the changing times.

Disclaimer: Each Family Office is unique. One may be small and simple, another large and complex. Nothing is "normal" and functions, fx as shown above, vary greatly.

A tendency, which I cannot verify, have no data on, but keep on hearing, is that many Family Offices prefer emerging managers (fx talented, familiar, well connected) over the most experienced, usually very expensive, managers with a lot of focus in a particular market or strategy (fx ex-Head of Client Relationships at a PB, or ex-Private Bankers - who have a network of clients already etc.). Markets change, and so does the profitability of all our strategies, but emerging managers may be better positioned to spot trends early, challenge the status quo, and not attempt a strategy that has worked well in the past - only for it to be unlikely to work in the future. For some Family offices, the need for a highly flexible manager is a requirement due to the everchanging nature of markets / opportunities.

A highly successful manager may also be too busy or otherwise unable to commit fully, unlike a manager with fewer other commitments or activities -running simultaneously- with the employment in the Family Office.

A lot of examples exist, of very successful managers, who have a difficult time with their 2nd / 3rd funds because they have developed a very biased approach to their markets or strategies and are, naturally, less able/willing to adapt. Family Offices are also known to prefer 'Boutique Investment Firms' over large financial institutions, for similar reasons they preferred a Family Office solution in the first place: Namely: A more personal and dedicated approach to the Family as their -only- clients (NOTE: With the exception of the Multi-Family Offices). "Boutiques", similarly, are smaller and also more dedicated.

What -even further- creates the trusted bond between the Family and their Family Office, is often the direct involvement of one -or more- Family members. Some would like a more direct involvement, but some prefer to just have a very laid-back involvement, but nevertheless, the Family Office always acts on the direct wishes of the Family, in all matters.

The Future of Family Offices

The wealthiest families prefer living life comfortably and uncomplicated.

They prefer everything handled in one central place and this is something they can only get with a dedicated team. Everything from A-Z under one transparent "roof", is preferable to many. From analysing interesting investment opportunities, to investing and managing the investments along the way, always accompanied with the dedicated advisory on, fx, all economic, financial, tax and legal maters. In a private bank, fx, you may receive a piece of excellent advice, but how good is this advice, if it cannot be implemented to your strategy or your project specifically? A Family Office can be the solution to all of this.

The compensation may be (is often - to even further align interest between management and the Family) related to performance, but in any case, it is fully transparent and rates/bonuses are always determined solely by the Family. The Family Office is always the first-point-of-contact, the shield, which the family can always feel safe behind.

Having a Family Office has the advantage that the Family members can find more time to pursue their own dreams, spend more quality family time with each other, and live their own lives as they please - and not having to worry and feel the heavy burden, that they would otherwise rest on their shoulders.

The result, of having a successfully operating Family Office, ideally is, that the wealth stays concentrated within the core Family lineage for many generations, and each generation, has the opportunity to continue the path forward in meaningful ways to them, whilst simultaneously safeguarding the wealth created by past generations.

As a result, the secretive Family Offices, I believe, are here to stay and have a vital role to play, as cornerstones of the modern - and even future - global financial system.