As David Bain highlighted in Family Offices and Nightclubs the label "family office" seems to be appearing everywhere these days. Bain questions, "Are they really family offices or just private banks in family offices’ clothing?"
Well, for the most part it’s the latter. And it’s not just private banks. It’s also asset managers, hedge funds and a multitude of other financial organisations that are adopting the term ‘family office’ in their marketing literature.
The saying goes that “when you’ve seen a family office you’ve seen just that” – in other words every family office is different. Whilst definitions vary, there are some key characteristics of true family offices that should be noted, whether a single family office or a multi family office.
The first, and possibly the most important, aspect of a family office is that you have at your disposal a number of people whose sole priority is the benefit of their client family. Their independence is crucial so that they bat for the family and the family alone. Over years they build deep personal relationships with the family members and understand not only the structures that define the separation of wealth and the plans for succession but also the dynamics of the relationships and the politics within the family. Frequent turnover of staff, in heavily incentivised roles within banks and asset managers where staff are driven to win assets, is incongruous to the depth of understanding that is imperative to understand these family dynamics.
This point then extends to the role of the trustees. The matriarch or patriarch will put in place a structure designed to protect and preserve their wealth for future generations. Trust is central to this arrangement. A true family office allows the wealth creator to look into the eyes of their trustee and take comfort that their children’s financial welfare is in safe hands.
An important priority for true family offices is control. If an asset manager is failing to keep pace with an expected yield, it is very easy for the family office to monitor the performance and reduce or remove the mandate from a provider. There is an inherent conflict in a number of self-proclaimed MFO providers that they have a fiduciary obligation to the beneficiaries of a structure yet work in an organisation that is targeted to win AUM. That conflict may also extend to pressure to place those funds in-house rather than consider the most appropriate solution across the market.
As Bain highlights, the true number of single family offices that exists is hard to measure due to the family’s desire for confidentiality. The banking crisis, regulatory fines amounting to hundreds of millions of dollars and failures in data security have left something of a scar on the reputation of a number of major global banking organisations. Many families that created their wealth in their own businesses, often spanning a number of generations, rate their ability to keep their affairs secure, within their control and confidential more highly than trusting the services of the big banks.
It is pleasing that the propositions of the major banks have evolved to recognise the more complex needs, both corporate and personal, of today’s wealthy families. Asset managers in turn have sought to offer institutional type products to the wealthy underpinned by armies of research capability within their firms. The wealth management industry is beginning to better understand the requirements of ultra high net worth families, both multi-generational wealth and the rapid emergence of significant new wealth in Asia and other economies.
However, it is my contention that only those organisations that are truly independent, that can draw in professional advisers as required, that have the tenure of staff extending to decades to understand their client families, and are untainted in their objectives are the ones that can claim the true meaning of the phrase ‘family office’. Many banks and asset managers that see such wealth as merely another segment, above private banking and below sovereign wealth funds, will never be able to provide the essence of a true multi family office.