Introduction and need for research
While global wealth is growing at an unprecedented pace with 300,000 UHNWIs (individuals with more than $30 million in investable assets) controlling $27 trillion worldwide, very little is known about family offices, important wealth management institutions for affluent families. Since the foundation of the Medici Bank in Italy, the earliest form of these asset management organisations, the industry — perceived as analogue and non-innovative — remained secretive for centuries until it caught the attention of researchers about a decade ago. With the opening of an increasing number of family offices, especially in emerging markets, Asia-Pacific and North America, these wealth management institutions are receiving more attention from the public, other companies and science.
Although a handful of academics are working on specific topics such as family governance, and consultancies or banks are producing high-level industry reports, to date there has been very scarce academic work for a variety of reasons. This makes family offices an under-researched topic. In particular, there is still no scientific analysis that summarises the most important developments in the family office landscape and presents the current changes within the organisations.
Methods
To fill this research gap, we conducted an extensive review of academic papers, practice-based literature, web articles and podcasts. Together with four semi-structured interviews with family office leaders and researchers, we were able to identify developments in the areas of organisational structure, governance, use of technology, generational change, collaboration and investment strategy.
Types of Family Offices
Although family offices are tailored to their families’ needs and thus are very individual, two main types are in existence today:
The term SFO encompasses all organisational entities owned by a single business family to support the financial needs of a family group and to manage or invest the family’s assets. The required assets to justify overhead costs are at least $100–150 million.
An MFO is an organisation that provides family office services to more than one family. It provides a similar range of tailored services as a single-family office, but without the need to set up a separate FO infrastructure. The required assets are therefore reduced to as low as at least $50 million.
The most frequently mentioned motives for the foundation of a family office are the separation of asset management from the family business, a liquidity event due to the sale of a company or inheritance. After establishment, wealth preservation and transfer to the NextGen as well as the preservation of family cohesion are the primary objectives of family offices. Apart from the increasing number of family offices, the above mentioned motives and objectives of family offices are not changing, but we have noticed developments in the following areas:
Results
The term we observe most frequently in relation to the organisation of family offices is professionalisation. This includes both the professionalisation of the family through formal governance structures as well as the professionalisation of the FO itself and the corresponding internal workflows. Through defined and documented processes, an external person can take over the lead within a few days if a family officer leaves, and decision-making is expedited. Together with the advantages over other investors, such as the freedom to structure capital, family offices are becoming increasingly attractive to investment professionals and will be the top destination for business school graduates in a few years’ time. Besides formalized processes, clearly defined and specialised roles are emerging such as a CTO or a Chief Learning Officer (CLO) to educate the current and especially the next generation of wealth owners.
Wealthy families are becoming increasingly international and complex. Therefore, the need for appropriate governance measures to mitigate conflicts between family members is increasing. Conflicts often arise from differing views on investments or diverging liquidity needs. Therefore, a growing number of families rely on professional governance measures such as a family constitution, an investment policy statement, an advisory board, and family meetings. The latter is particularly important to maintain a common identity as a family and thus prevent a break-up of the office in later generations.
Family offices have long been analogue and manual. With the pandemic and younger, tech-savvy people opening family offices, this is changing and we see a trend towards digitalisation and automation in recent years. Cloud tools, in particular, are gaining traction because there is no suitable IT talent to be kept in a family office and cloud providers have more money to spend on cyber security. This is a concerning term for family offices, as cyberattacks are the biggest threat to family offices, by now. Especially in reporting, family offices are increasingly using automated tools or partnering with fintechs for joint solutions, as clients have become accustomed to real-time information in many areas.
The world is facing a major wave of wealth transfer in the coming years. This transfer to the next generation is therefore not only often a goal of the family office, but is also a topical issue for them that will be of growing importance in the near future. Although this process is handled opportunistically in many families, a growing number of families are recognising the advantages of professional preparation. For a successful generational change, the advantages of the family office must be made visible to the younger generation and a core must be created to which the next generation can build an emotional bond. In addition to an emotional attachment to the office, the NextGen needs, above all, to be educated in financial matters and the working basics of a family office. In addition, skills in dealing with uncertainty and responsibility of wealth should be acquired. The new generation places new demands on family offices, partly also due to the increased fortune of women and their different perspectives on money. For example, the desire for VC and ESG investments is particularly strong among the younger generation.
Cooperation between the different players in the formerly siloed and isolated family office industry is increasing. In recent years, several exchange bodies have emerged that publish best practices and organise events on specific topics. However, family offices not only use the network of such associations, but also partner with each other. On the one hand, there are MFOs that manage certain asset classes for SFOs to ensure better access to investments and the required expertise. On the other hand, family offices co-invest in the direct investment market to place larger tickets and share due diligence.
Although there are very long-term trends in the scene such as a move away from fixed income due to low interest rates and a move towards alternative asset classes (in particular private equity and real estate), the strategic asset allocation in family offices does not alter to a large extent. But changes within asset classes do occur. The former — in the eyes of other investors — unprofessional family offices accelerate their direct investments in venture capital and private equity, while simultaneously being the fastest growing investor group in impact and ESG investments. The highly diversified family investors have certain characteristics that distinguish them from other investors and make them an attractive partner for investment targets. Nevertheless, they need to increasingly build a brand and attract experienced personnel from the private equity sector.
