More and more families are accumulating enough wealth to need not just a private banker, but a whole flock of them, growing the ranks of family offices.
Family offices to help the ultra-wealthy manage their finances have existed since John D. Rockefeller set one up in 1882, but few date back so far. These advisory structures have proliferated as concentrating wealth spawns more multimillionaire and billionaire fortunes. In 2017, wealth management firm Campden Wealth identified about 5,300 single-family offices worldwide.
“We reported that two-thirds of all family offices were established in 2000 or later, with 37% of these opening their doors on or after 2010,” says Rebecca Gooch, the firm’s research director. A record-high stock market and positive business conditions increased the number of US families with a net worth of $30 million or more in 2017 by 9%, to 80,000, according to research firm Wealth-X. The group’s total wealth rose 13% year over year to $9.8 trillion.
But it’s not just the US. In Campden’s 2017 report, family offices were predominantly in the West: 42% in North America, 34% in Europe, 17% in Asia-Pacific and 8% in the emerging markets of South America, Africa and the Middle East. “In 2018,” Gooch says, “we saw notable growth in new family offices in the US and Asia-Pacific.”
Most of this wealth is found in large families with substantial ownership of successful businesses founded by one or more of the family members. If it’s an operating business, most of the family’s net worth may be tied up in the company. But if the family monetizes the business, a structure becomes paramount—especially if the family wants the money to last generations.
Family offices are a natural evolution from private wealth management, yet there is some confusion. “There are many terminology problems in this area,” says Robert Casey, senior managing director for Research at the Family Wealth Alliance, a Chicago research firm. “Most people put under the rubric of ‘family office’ both single-family offices and multifamily offices, but these are two dramatically different animals and it causes misunderstandings.”
A single-family office is established by one family to manage its financial affairs. Multifamily offices are comprehensive commercial wealth-management firms specializing in multigenerational families; the clients are unrelated family groups. “The multigenerational context is key,” Casey says.
In the US, a private bank provides high-end, premium commercial banking services for wealthier clients, and the difference between banking and private banking is a matter of gradation—like the difference between a regular credit card and a gold card.
“In Europe, however, private banking is a different animal,” Casey says. “The services provided by European private banks are much more extensive and tend to be multigenerational. From a service perspective, the European private banks look more like US multifamily offices. Private banking in the US is much less defined.”
Support for family offices from private banks is a big deal, according to Casey. Large private banks, such as Northern Trust and Citibank, and fund giant Fidelity, have big businesses supporting single-family and multifamily offices, acting as custodians and providing other wealth management services.
At the private bank, a family can have a “virtual” family office, with a wealth advisory team inside the institution, hiring outside legal counsel or accounting services as needed.
However, when their fortunes become vast and complex, some families decide that they want an entire team dedicated to the family and controlled by the family, with no outside hired help. That’s when they form a single-family office. This way the family controls its information, creating privacy and security.
Typically, families consider such a move when their wealth reaches $250 million. “Clients weigh the cost of paying fees to third-party institutions to manage assets, as opposed to the cost of running their own investment team,” says Dave Fox, president of the Global Family & Private Investment Offices Group at Northern Trust. “The more assets you have, the more efficient you can be.”
Generally, family offices have a higher allocation to alterative investments than your average wealthy individual. This includes private equity, real estate and directly investing in other businesses.
“They don’t mind the illiquidity risk in exchange for a higher return,” said Fox. “Because they don’t need it for retirement.”