A family office is a flexible, convenient way to control investment, administer family affairs and deal with estate and tax planning. It is not a luxury for any family concerned with adequate succession planning and assets management.
A single-family office deals with the affairs of just one family, while a multiple family office manages the wealth of a number of unrelated families.
Over recent years, the model has increased in popularity, with EY estimating that in 2019 there were around 10,000 single family offices worldwide. Wealth tends to start at around $100 million.
The increase in the use of family offices comes as the management of wealth is increasing in complexity. Wide-ranging business ventures, family members living and working across different geographical locations, new investment opportunities and increasingly complicated legal and tax rules mean that a trusted team of advisers and managers is needed to ensure everything runs smoothly.
As their popularity increases, family offices are taking on a bigger role in the wider economy, becoming what has been referred to as an investment phenomenon and a disruptive force.
The function of a family office
Traditionally the family office employs experts to help with the preservation of wealth, tax and estate planning and risk management. Advice and counsel are provided in respect of investment, philanthropic activities, management of other professionals and the provision of objective advice. Personal services such as management of homes, household staff, education and travel can also be dealt with by the family office.
This can be provided by full-time advisers or, for those administering smaller net wealth, by supplementing the key service providers with assistance from third-party advisers as needed. For example, it often makes sense to have a single lawyer as a permanent member of the family office who can then call on outside experts in specific niche areas when required.
Trusted advisers are often drawn from those who have served in the family enterprises for many years or who have worked alongside in the capacity of lawyer, accountant or financial adviser. They may be given the position of trustee or CEO.
The new role
Unlike corporations or private equity firms, the family office has no regulatory oversight and no clients to consider when making investment decisions. The younger generation are increasingly open to risk and innovative investment opportunities.
Increasingly, family offices are encroaching into the territory of traditional investment businesses, offering the advantages of a streamlined process, working with a far smaller number of people who are able to make crucial decisions and the speed and agility that comes with having complete control and less accountability.
Families can focus on the areas that are important to them and gain in-depth experience that is less common in wide-ranging investment companies. They are increasingly acting as venture capitalists and angel investors, taking on roles in ventures close to their hearts.
The family office in operation
Despite the lack of outside scrutiny, governance is an essential part of a strong family office. When setting up the vehicle, the family will need to decide on the right governance model for them and their business and investment interests.
The legal structure then needs to be put in place to support this. The whole family needs to understand their roles, rights and responsibilities and these need to be enshrined in robust supporting documentation to avoid misunderstandings and disagreements arising.
A family constitution should be drafted to serve as guidance for the family, setting out their aims, objectives, rules, beliefs and guiding principles.
Decisions will need to be made as to who has the ultimate say in decision-making and what should happen in the event of a dispute.
Restrictions are commonly put in place to regulate the actions and behaviour of family members, for example, a media policy keeping control of the way in which communications about the family or business are handled.
One of the most important roles of the family office is preparing the next generation for a seamless takeover of the enterprise when the time comes.
Advantages of this model in complicated times
With substantial global disruption, the agility and flexibility of the family office offers an advantage not just in the management of family wealth but in working across different jurisdictions to invest, expand and explore new opportunities.
The increase in virtual meetings and remote working means that family offices can be more effective than ever, bringing in outside help from wherever in the world the necessary expertise can be found and taking a global approach to safeguarding and increasing their wealth for the future.
A survey by Private Equity International found that family offices have a particularly positive attitude to investment, being among the most active investors in private equity as well as being a stable investor group and a significant source of new capital. It is suggested that the entrepreneurial nature of many family offices and foundations makes them a natural match for private equity.
The assets managed by family offices in 2019 was estimated at $5.9 trillion, backed by family wealth totalling $9.4 trillion. New opportunities they are entering into include buyouts and acquisitions, company lending, taking on companies as active shareholders, financing startups and backing innovative real estate and insurance products.
Many family offices operate quietly and without fanfare, however, if they continue to increase in power and openness to opportunity, their disruptive effect will increasingly come to the attention of more traditional financial investors.
By León Fernando del Canto, Head of Chambers, Barrister and spanish abogado.
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