There is some confusion within HNWI circles surrounding what exactly a family office and so this introductory article hopes to bring some clarity.
Family offices are complete financial and wealth management solutions for HNWIs, which cover everything from providing investment, charitable giving, budgeting, insurance, taxation and multi-generational guidance. Family offices are generally available to families or individuals with at least USD 100 million in available assets. It is estimated that currently the 2,500-3,000 single family offices in existence combine for a net worth of over USD 1.2 trillion in assets.
What separates the family office from traditional wealth management solutions providers is that not only do they offer advice on your investments, but they go a step further and offer guidance on taxation, charitable giving and even multi-generational wealth management.
Because of the high flexibility of the solutions that can be offered by family offices, they are often considered preferable for the HNWI that would like to have all their financial operations taking place under a singular body to ensure strategic cohesion. It also makes things much simpler when you have only one contact for all your financial considerations. Many HNWIs do not want the headache that comes with splitting up their wealth management strategy between multiple solutions providers.
Another benefit of using a family office is that they are usually operated by extremely talented individuals, i.e. fund managers, and they offer access to other benefits that would otherwise be inaccessible to the general public under ordinary financial schemes.
Despite this increase in valuable advisory resources, many clients have actually found that operating under a family office has worked out being more cost-effective than having to split up their wealth management strategy between high numbers of companies who operate with considerably less quality services. Why pay more for a service of less quality?
Family offices have seen steady growth in recent years. This increase in popularity can likely be attributed to a number of factors. For example, the number of HNWIs that have the kind capital that makes having a family office attractive has increased. The higher the number of ultra-wealthy individuals, the higher the demand for family offices to help them manage their wealth.
Another factor is that wealth management companies can see the financial benefits for themselves in order to offer a complete financial service to their clients – the more holistic a service they can provide for their clients, the higher the fee they can charge for their services. However, on the other end of the spectrum, many wealth management companies have been accepting family offices for individuals with a lot less than USD 100 million. Many of these companies have been happy to lower the threshold required to take clients on board as they can see the potential profit behind doing so. The industry standard for a company to accept a client for a family office is for them to have a net worth of over USD 100 million, but there have been companies willing to allow clients with between USD 5-10 million.
Examples of celebrities who make use of family offices include Michael Jordan, Oprah Winfrey, Bill Gates and a number of others. However, it is mostly individuals who have recently sold companies and are now in possession of hundreds of millions of dollars. They then seek out the services of family offices to best help them invest their money for both maximum profit and, if requested, maximum philanthropic benefit. A number of family office clients have also inherited their net worth and require guidance in order to manage such wealth.
So is setting up a family office a worthwhile venture for HNWIs? This depends largely on the net worth of the individual. As mentioned earlier, although it is technically possible to set up your own family office with a net worth of between USD 5-10 million, in reality the costs involved with setting it up and also the further yearly costs of maintaining it would outweigh the benefits and one would most likely lose money through operational costs rather than gaining money through wealth management/investment strategies. For individuals in these situations, it would most likely be better to stick to multiple wealth management firms rather than setting up a custom family office.
However, if the HNWI has USD 100 million+, having all your financial needs operated under one roof will likely lead to an increase in effectiveness, leading to higher gains in net worth at the end of each fiscal year. This is because having the financial strategy of your entire family be handled by a single entity means that every action taken and decision made will be undertaken with the bigger picture of your financial situation in mind, leading to a more effective and cohesive financial plan.
So you have decided that a family office is the wealth management option that would best suit your needs. How do you go about choosing which family office provider is best for you? Perhaps not surprisingly, you should meet with the team behind operating the family office and perform a judge of character. Oftentimes your own intuition as to whether a person(s) is trustworthy or of good character is the best. Another way is to try to locate other individuals who are clients of the company and ask them how their experience with them has been. It is also recommended you seek legal advice before committing to any family office schemes for security reasons.
If you are sure that this is a company you would trust with your finances and are absolutely certain that the family office scheme is the best one to suit your needs, then you should certainly embark. Under the right circumstances, the family office really does offer the best service for HNWIs seeking the most effective management of their finances operated by top industry talent with the minimum amount of headaches. As always, it is recommended that you perform your own due diligence before committing to any financial decisions, but hopefully this information has enlightened you as to the world of family offices and the rationale behind choosing to operate one.