Family offices are entities established by Ultra-High-Net-Worth (UHNW) individuals and families for wealth management purposes. Beyond traditional wealth management, family offices also offer a suite of specialised services tailored to meet the unique needs of their clientele. Let’s explore the common purposes of establishing family offices and how this changes the structure of these entities.
Types of Family Offices
There are two primary types of family offices: single family offices (SFOs) and multi-family offices (MFOs). While SFOs are exclusively dedicated to serving a single family, MFOs cater to multiple families and operate in a corporate or commercial fashion. In recent years, we have also seen an emergence of virtual family offices (VFOs), with the aim of reducing costs. This has also significantly lowered the Assets Under Management (AUM) threshold for establishing Family Offices, making them accessible to a wider range of families.
This article will primarily focus on the purposes of Single Family Offices.
Primary Purposes of Family Offices
Administration of Family Wealth and Assets: Our 2023 Global Family Office Compensation Benchmark report indicates that the main reason for setting up a family office is to manage family wealth. This involves a variety of activities focused on handling and increasing the family’s financial assets. Family offices serve as a central hub for financial management, offering a cohesive strategy to monitor investments and ensure that the family’s financial objectives are met. Additionally, they provide highly personalised services adapted to each family’s specific needs and goals, ensuring that their financial strategies are in line with their unique circumstances.
Wealth Preservation: Our 2023 report found that wealth preservation was the second most commonly stated goal for families establishing family offices. A family office acts as a vehicle for families to implement sophisticated risk management strategies, safeguarding assets against market fluctuations, economic declines and other unexpected events. By developing asset allocation strategies that align with the family’s appetite and financial objective, family offices aid in optimising portfolio diversification and boosting long-term wealth preservation.
Philanthropy: For many, the inception of a Family Office is fundamentally tied to philanthropy, offering a structured avenue for impactful charitable engagements. This setup guarantees that philanthropic initiatives reflect the family’s core values and objectives.
Risk-adjusted Growth: By focusing on risk-adjusted growth, family offices can help ensure that the family’s wealth is not only preserved but also grows over time in a sustainable fashion.
Family Harmony: A family office can bring family members together through clear communication channels. Establishing a family office is an effective means of encouraging transparent communication, resolving conflicts and helping in the development of succession planning strategies. This has been echoed by some of our clients who have experienced significant improvements in family dynamics and decision-making efficacy due to the creation of a family office.
The objectives of a Family Office can evolve considerably, depending on its life stage. For example, a wealth creator who has sold a business and is looking at using a family office to maintain wealth for generations to come may have a very different purpose to an entrepreneur in the early stages of the wealth creation journey and still has a majority share in an operating business.
It is also worth noting that some families may have a combination of purposes. A family office can be driven by wealth preservation, but also have a focus on philanthropy. From our observations, we notice that the majority of the families would naturally use the family office as the control centre of the administration of family wealth.
Functions to enable Family Offices to achieve their purpose
Investment Management: Investment management is a core function of many family offices. Our report reveals that creating risk-adjusted growth through a family office is the third most common purpose for setting one up. With the creation of highly personalised investment portfolios, family offices can shape their investment approaches to suit the individual risk appetite and unique objectives of each family. Access to alternative investments, such as private equity, venture capital and real estate, can provide enhanced returns and diversification benefits. Regular performance monitoring and reporting enable families to make informed decisions about their investments.
Governance: Family governance is essential for ensuring the long-term sustainability of family wealth and family offices are instrumental in promoting that. Additionally, with intergenerational wealth transfer being a pressing concern, a family office is well-equipped to manage a seamless transfer of wealth between generations by reducing risks related to inheritance taxes and familial disagreements.
Operational & Lifestyle Management: Family offices can streamline operational and lifestyle management tasks, providing a central hub for managing various aspects of family life. This includes coordinating travel arrangements, managing properties and overseeing household staff. By centralising these functions, family offices can reduce administrative burdens for the family members.
Accountancy & Tax: A family office can serve as a central hub for all accounting and tax management activities. This includes tracking income and expenses, tax returns and ensuring compliance with regulations.
By offering a wide range of specialised services, family offices can effectively support the family’s goals and objectives. Whether focused on wealth preservation, investment management, philanthropy or a combination of these purposes, family offices provide a tailored approach to managing complex financial affairs and ensuring a secure financial future for generations to come.
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