Exceptional, January 2014
Asset consolidation and protection, confidentiality, flexibility and tax are just some of the compelling reasons a growing number of top earners are looking into setting up family offices.
Even in turbulent times, one thing is certain: the wealthy are getting wealthier. The number of people in the world with at least US$1m of investable assets, excluding primary residence and collectibles, rose to record levels in 2012.
With private wealth management emerging as a key issue, some industry experts believe family offices are becoming a major driver for investment. Single-family offices are also becoming an important vehicle for controlling assets.
Indeed, some reports suggest these institutions currently oversee a larger pool of investable wealth than all the hedge funds put together. Others state family offices are among the fastest-growing investment vehicles as more families seek to secure a greater say in how their assets are managed.
Following unprecedented upheaval in the capital markets during the past few years, it should surprise no one that successful entrepreneurs and wealthy families are seeking out alternative ways of preserving their wealth.
A new report, Pathway to successful family and wealth management, produced by EY in conjunction with Credit Suisse, the University of St. Gallen and a host of active family offices, explores the issues facing families and individuals looking to manage their wealth through the framework and security offered by family offices.
Download the definitive guide to setting up a family office, Family Office Guide: Pathway to successful family and wealth management.
“Family offices have gained prominence because wealth-holding families want greater control over their investments,” says Peter Englisch, Global Family Business Leader at EY. It makes sense. Minimizing intra-family disputes and ensuring a smooth transfer of wealth from one generation to the next is one thing, but the idea of taking control of financial activities in times of uncertainty is, for an increasing number of wealthy families, a compelling reason to establish their own wealth management vehicle.
Moreover, family offices enable entrepreneurs to draw a line between the family business and its wealth while building a stronger bond with their financial advisors — a relationship that can be lacking when multiple advisors counsel different members of the family.
For most families, the core objective of proactively handling their wealth is to maximize returns. Through the centralization of asset management activities, family offices can achieve higher returns and/or lower risk.
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They can also properly oversee philanthropic, risk, tax and estate planning in accordance with specific objectives and expressed goals. While much can be said for family offices, there are also downsides to this approach.
For instance, many family offices operate most effectively within sophisticated, mature legal and tax frameworks where the necessary financial infrastructure is well established. In the absence of these conditions, the development of family offices can be undermined, and this may explain their limited uptake in emerging markets.
More generally, regulatory and compliance reporting — and its associated costs — can be considerable. In fact, before committing to such a venture, individuals should first verify their assets are sufficient to offset these costs. To address this issue, some families join multi-family offices in which several families pool their wealth and spread the costs.
Some reports suggest family offices currently oversee a larger pool of investable wealth than all the hedge funds put together.
“One size does not fit all,” Astrid Wimmer from EY Tax Services explains. “As the single family office can purely focus on the specific needs of the underlying family, traditional providers of multi-family offices, such as private banks, provide a much broader platform of services.”
In-house or outsourced?
Another point to consider is which services the family office should manage in-house and which ones should be outsourced. Traditionally, financial planning services, financial accounting and reporting, asset allocation, risk management and manager selection are kept in-house.
Areas such as global custody, alternative investments and private equity, and tax and legal services are often outsourced. While there are no hard and fast rules for striking the proper balance between in-house and outsourced, the benefits of favoring an in-house approach include privacy, control and the ability to tailor the service to meet the family’s specific needs.
On the flip side, outsourcing services can help reduce costs and deliver economies of scale while ensuring independent and objective advice. “Depending on the two different categories of services — managing wealth and services related to family support — there are certain areas, especially related to managing wealth, where specialized outside expertise could achieve more efficiency,” says Wimmer.
“I strongly recommend outsourcing the legal and tax services. Also, to balance risk, it is always favorable not to keep all the expertise in-house.”
Marc Halsema, Americas Family Office Leader believes achieving this ideal depends on a number of factors, not least the size of the family, its geographical spread and the size of its wealth. “All these factors can have a bearing on the final structure of the office and all must be taken into account in order to achieve the right mix,” Halsema explains.
There are also important cost implications to mull over. The size of a family office can vary from 1 employee up to 50. Research from the consulting firm Family Office Exchange shows that more than 60% of the total running costs associated with a family office are allocated to staff.
Calculating the total costs of running a family office can be even more challenging due to the huge variations that exist between different family enterprises. That said, conservative estimates suggest these costs reach at least US$1m annually, meaning a family’s worth needs to be between US$100m and US$500m to make the venture viable.
“Securing wealth for generations involves a lot more today than it did even just a few years ago,” explains Englisch. “Many entrepreneurial families are now aware their wealth needs to be administered and structured with the same level of care and attention as the capital in their companies.
Visit ey.com/familyoffice to download a copy of this report and access other materials.
The DNA of a successful family office