Definition of Family Offices
Family offices serve ultra-high net worth investors. Traditional wealth management shops offer a total outsourced solution for managing the financial and investment side of a wealthy individual or family, but family offices are different. For example, many family offices offer charitable giving, budgeting, family-owned businesses insurance, tax services and wealth transfer.
Investopedia explains the two types of family offices, single family offices that serve one ultra-affluent family while multi-family offices seek to build their business upon serving many clients and are more closely related to traditional private wealth management practices. Also, the family office can also handle non-financial issues such as travel arrangements, private schooling and miscellaneous arrangements (other household arrangements) and can also be classified based on the range of services they provide.
For example, an administrative family office employs staff that provides tax, bookkeeping and administrative services to the family, while a hybrid family office provides legal, administrative, and taxation advice, but outsources non-strategic functions.
A fully-integrated family office provides legal advice, tax, administrative, and core investment management functions.
According to Rishi Yadav (2012), a family office has several advantages over a traditional wealth management firm that serves as a central source of information and advice on all of the family financial affairs and meets all wealth management needs of the family by acting as a central financial management solution.
Family offices provide confidentiality and privacy to ultra-wealthy individuals and better meets client needs due to their familiarity with client risk assets, profile and investment history.
They provide access to fund managers and professional advisors to oversee the financial affairs of a family and also provide a dedicated team of professionals who are focused on client goals.
Finally, by achieving a full balance sheet, financial management and investment solutions all in one place, family offices can be more efficient as compared to wealth management firms by helping to reduce costs.
Nevertheless, setting up a family office is a costly affair as compared to obtaining advice from a broader-based wealth management firm where the average costs for a single family office are about 0.6% of assets under management. Since all support activities such as IT and legal need to be procured and run from scratch. It often costs more than $1 million.
Family offices do not have high volumes and thus cannot leverage efficiencies of scale. They also do not have the same buyer power in making market investments as is the case with the big hedge funds and investments banks.
Family offices usually cannot provide real-time investment advice due to a lack of technology capabilities and sophistication, when compared to their wealth management counterparts.
As the firm can spread the cost of investments over a larger asset base and achieve higher cost efficiencies, a multi-family office negates some of the disadvantages of a single family office.
While in a multi-family office, new families and their assets can be added to the existing platform, a single-family office requires incremental investments in infrastructure or technology systems. Nevertheless, a multi-family office does not provide the same degree of personalised advice and the benefits of an independent family office. Single family offices only outweigh the costs when the size of investable assets are close to half a billion dollars or more, on average.
Investopedia website viewed at 6th October 2013 http://www.investopedia.com/terms/f/family-offices.asp
Rishi Yadav, 2012, “The Global State of Family Offices”, Capgemini