Many factors are contributing towards the evolution of the traditional family office. These include increased regulatory concerns, a generally increasingly litigious world and risks linked with the prolonged environment of global instability.
Every family office is from necessity designed to deal with the family’s specific wealth management needs. However, there are trends emerging from recent events and over the past couple of decades that must now be considered when setting up a new family office. Equally important for existing family offices to review and adapt their strategies.
Family offices are adapting to the changing needs of the wider environment
Fundamental changes throughout the wider socio-economic sphere are, in some ways, challenging the very economic viability of an old-fashioned family office. This is why they now need to redefine their objectives and devise a unique working model for their family.
Traditional family offices are evolving all the time, particularly those that have grown organically with new functionalities added on in reaction to evolving events. Many of the traditional family offices originated as extensions to other entities, such as family estate offices and businesses.
Originally, the role of family offices was traditionally administrative. Today, family offices are far more complex and act as a conduit between the family and other advisers, banks and financial services. This means today’s family offices are significantly different to older models.
4 drivers of change for family offices
1. Family offices must now give specialised advice
Families increasingly demand more and more complex and nuanced advice from their family office. Their expectation is that the family office acts as a kind of legal gatekeeper to ensure that any barriers to improving their collective wealth are dealt with.
If the family office doesn’t have in-house specialist advisers, then they must locate them. And then they must interpret the advice given by external advisers and communicate it to the family in a way that ensures their wealth is being maximised.
2. Wealth management is becoming more complex all the time
Wealth management 20 years ago is very different to today. It is incredibly complex in 2021, with constantly changing structures, products and strategies to understand, implement and utilise in a way that serves the overall strategy for the family’s wealth management. These days it’s very unusual to rely on one investment manager and is far more common to work with an array of different specialists. It’s the family office’s role to monitor, manage and administer all of these conflicting strategies and structures.
3. Sophisticated risk management is demanded
The world is unstable and will be for a long time to come. This means that risk management is more important than ever for wealth management purposes. Family offices must deal with complex risk management across every aspect of the family’s wealth.
4. Family units are more complex
Families are generally more internationally located and often more complex with their internal structures. This obviously means a higher degree of skill and negotiation is needed by the family office. Each member of the family may also have many differing business interests that also have to be managed individually.
Defining the specific role of a family office is important
Given all of these factors, it’s fair to say that many current family office models are no longer fit for purpose. For those that find themselves firefighting regulatory and compliance changes in a way that leaves little time to plan ahead and devise a workable strategy, it’s time to make changes.
The definition of a family office remains loose and changeable, and this doesn’t help. Defining the differences between the family office and its responsibilities and those of external specialist advisors is important. Without doing so, time and money can be wasted as work is duplicated and opportunities missed.
At the core of every family office is the responsibility to their client to implement a wider, workable and successful wealth strategy. To do so, it’s important not to try to absorb other roles (such as asset manager) that culminates in a loss of focus.
It is difficult to define the exact role of a family office, and there is no one size fits all solution. Different families have different expectations and aims for their wealth management. Family offices must therefore evaluate and analyse the family’s aims and needs. This includes how much the family members want to be involved, how many external advisors to select and work with and who is responsible for what. This should be defined when launching a new family office and should be part of any review of an existing office.
Include the family in the definition of the role of the family office
The family’s own history and expectations must be taken into consideration. For example, how many generations does the family stretch back, and how many members are involved now?
Everything from the location of family members, the leadership and authority of members, jurisdictional considerations, collective assets and individual assets owned should come under this umbrella of analysis and consideration. It’s very different running a newly set up family office for a first-generation entrepreneur with one child from managing a family office that goes back four generations and has 150 members located all around the world.
Again, this comes back to the importance of defining each separate family office’s responsibilities. It also comes down to accepting that there are changes for wealth management, and these are likely to include increased taxation. While this will in turn lead to higher costs for the family, acceptance of this is vital to ensure that any strategies are realistic for the long-term.