In response to F. Scott Fitzgerald’s famous declaration that the very rich, “are different from you and me,” Ernest Hemingway is alleged to have quipped “yes, they have more money”. Today many of the world’s wealthiest families feel the pressures of managing modern day life, but as Hemingway alludes to, the scale they may feel it on is often larger.
Shifting economic and market forces, and the continued globalization of society, commerce and regulation, are driving many family empires – representing both old and new money – to a historically low profile business model for managing their increasingly complex affairs, often known as the Family Office.
Called by many names, and seldom the same:
Although the term ‘Family Office’ has recently come into vogue, this model for professionally managing a family’s assets and personal affairs dates back before Fitzgerald began observing the Jazz Age communities of Long Island, Lake Forest and Saint-Jean-Cap-Ferrat. References to this discreet administrative function extend to the late 1800s, when Europe’s landed estates formed structures to handle the family’s commercial and personal interests. Even Jane Austen would have known that Mr. Darcy had an estate office to manage his £10K annuity and the wider Pemberley Estate.
Over the years, Family Offices have taken many forms, from a modest, one-person operation – often a bookkeeper, lawyer or appointed family member – working within a family business, to a separate, multi-staff set-up with a mix of internal and third-party advisors at their disposal.
Definitions vary, but one could safely describe a Family Office as the ‘ecosystem’ that a family builds around itself to get organized, manage their assets and enable them to enjoy their lifestyles. Depending on the family’s needs, this could encompass investing the financial portfolio, leading business transactions, tending philanthropic interests, or managing multiple households – including paying the personal chef or pilot. As a result, it is regularly quipped that “If you’ve seen one Family Office, you’ve seen one Family Office.”
A Family Office of some description generally appeals to Ultra High Net Worth Individuals, typically defined as persons with investable assets of US$30 million or more1. Generally speaking, only families with US$1 billion or more will normally have the critical mass of resources to justify a dedicated Single-Family Office (SFO) and employ many in-house staff. However, depending on the services required, families worth tens of millions may enlist a third-party, Multi-Family Office (MFO), where they share resources with other, unconnected families. By using such a MFO, they can leverage the economies of scale, and access high-calibre advice from a team of specialists. When they start to move into the territory of several hundred million or more in investable assets, wealthy entrepreneurs and families may opt for some form of an internal SFO, but with some specialist services outsourced to external providers.
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What’s fueling the Family Office trend?
There has been a surge in the number of Family Offices established to manage the affairs of wealthy families in recent years. The Global Family Office Report 2019 by UBS and Campden Wealth noted that 68 percent of the 360 Family Offices surveyed were founded in 2000 or later2. Partly the explanation for the increase is a numbers game. The growth in number of Family Offices has been mirrored by the rise in worldwide wealth over the past two decades. Phenomena like the dot com boom and proliferation of tech starts ups have bolstered the ranks of the billionaire population, with US$8.6 trillion of assets held by 2,604 billionaires2 and a further US$31.5 trillion held by 255,810 individuals each worth US$30 million or more3. However, in our experience, the numbers only tell a very small part of the story. So what else is behind this meteoric rise?
Complexity:
Many factors determine whether a family office should be considered, but perhaps the largest factor propelling interest in Family Offices is the complexity that individuals and families encounter today when they manage their affairs on their own. Imagine a juggler trying to keep a number of ‘balls’ in the air, be they household administration, legal and tax matters, personal investments or charitable ventures. At some point, these tasks become a full-time job and the juggler could use more ‘hands’ or expertise to ensure no balls are dropped.
Complexity also relates to asset management itself, as today’s low interest rate environment, volatile financial markets, and increasingly unstable geo-political conditions, prompt wealthy families to seek better returns which often leads them to consider more complex investment vehicles, from private equity to real estate to hedge funds, often in foreign markets. Such complexity demands more sophisticated money management and coordination of holdings, which can strain a family member, or a single trusted advisor, wielding a cheque book and an excel spreadsheet.
Cross-border assets and families:
Not only are the successful ‘going global’ with their investments, but the families themselves are crossing borders, as their members study, work and settle far from the family’s home base.
This geographic dispersal is also fanning demand for Family Offices. For instance, aging parents might establish formal means to preserve wealth for their children living in other countries and often on different continents. Or, self-made entrepreneurs may choose to step back from their sprawling enterprises and enjoy their wealth be it through travel, new business ventures in new territories, hobbies or overseas charitable missions – the family office will often pick up the slack and seamlessly deal with administration and effective day to day management of what quickly becomes a multiple cross jurisdictional personal empire. With such diverse priorities and expectations among multi-generational families, a Family Office may even add various branches, with distinct objectives and capabilities, catering to different wings of the clan.
Preparing for inevitable death and taxes:
Another trend we’re seeing across the world is an increase in the sheer volume and complexity of tax legislation. The globe-trotting clans referenced above may recognize that their international footprint can create a confusing jumble of different tax and reporting requirements in each country where they work, reside or even study. Managing this in order to avoid the reputational risk of violating local tax regimes is also leading people to a Family Office solution. Those families with a foothold in a number of jurisdictions may also consider establishing a Family Office in a neutral tax location, to avoid tax duplication in jurisdictions with conflicting or overlapping tax rates.
Lifetime taxes are not the only tax concerns families face, many wealthy families select Family Offices to assist with succession planning, as families and individuals may wish to lessen the impact of estate or wealth taxes on offspring. Family Office advisors may be retained to help the family plan for the future and Family Offices often play a wider role in the ‘wealth’ education of the next generation.
Contributor
Greg Limb
Head of Family Office & Private Client
KPMG International
Footnotes
1 World Ultra Wealth Report 2019, Wealth-X.
2 The Global Family Office Report 2019, UBS and Campden Wealth.
3 Billionaire Census 2019 – Wealth-X.
4 World Ultra Wealth Report 2018 – Wealth-X.
