01 Jul Why the current role of the family office must adapt to survive
No exact blueprint exists for the ideal family office, and many are finding that they need to adapt to the constantly evolving demands of today’s environment.
The combination of increased and more specifically tightened regulations, along with a generally litigious world and all risks associated with a prolonged period of global instability combine to make these challenging times for family offices.
What is the role of the family office in wealth management?
Each family office is individually designed to deal with the client family’s personal needs. However, we do see some trends that have emerged from the previous 20 years that should be take into consideration when setting up a new family office. It’s equally useful for existing family offices to review their operations and work on their role.
In some ways, the enormous changes experienced across the wider socio-economic world are challenging the very concept of the economic viability of traditional family offices. It’s now vital for every family office to define its objectives and to come up with an individual working model. The end goal is, of course, to meet the objectives of the family in question in the most efficient way.
When we think of a traditional family office, it’s obvious that many have evolved over time. So, rather than a purpose-built entity read to take on the economic and political challenges of the world today, many family offices have grown organically. This means that new functionality has been tacked on to the existing model as events have unfurled.
Family offices must review and adapt their services
A large number of traditional family offices may have started life as add-ons to a family estate office or even a family business. Their original role would have been mostly administrative as well as giving advice and communicating expertise to family members.
However, over the last couple of decades the role of the family office has evolved from primarily administrative to something akin to an advisor forming a bridge between the family and professional advisors.
This change may sound subtle but it’s a significantly different position to that of the original family offices. There are various reasons for this change in the role of the family office, including:
- Advice needed from family offices is now highly specialised
One of the biggest evolutions in the functionality of the family office is that families need increasingly complex advice. They need specialist and complex advice from a family office that is able to act as the legal gatekeeper for any issues or challenges they’re facing.
Many families expect their family office to be able to locate the kind of specialists they need and to interpret the advice they’re given by these specialists. In a way the family office can be seen as a translator and a conduit through which other advisors flow their information and advice through to the family.
- Increasingly complex requirements of wealth management in general
Wealth management is almost unrecognisable from its structure 20 or so years ago. Today’s wealth management is complex and includes endless structures, strategies and products. All of these need the expertise to manage and analyse how they’re working to make sure that the best solutions are implemented for the family in question.
It’s highly unusual to rely on a single investment manager, but rather a myriad of different specialists bring something to the table. And a family office must administer, monitor and manage all of these different functions.
- The need for sophisticated risk management
The wider economic environment is unstable and will be so for the foreseeable future. This instability means that family offices must be able to deal with sophisticated and complex risk management across every part of the family’s financial concerns.
- The increased complexity of family units themselves
As families have become more international and more complicated within themselves, this necessitates a higher level of skill and management by the family office. This is also added to through many different business interests from the family, something that was less common 20 or 30 years ago.
Why the current family office model needs to change
Given all of these changes and the need for advice spiralling, it’s not surprising that some of the current family office models don’t fulfil every requirement. The combination of factors described above along with increasingly complex compliance with regulatory changes and tax issues, many family offices are finding that they are struggling to keep up.
So much day-to-day firefighting across these issues leaves little time to plan ahead and think about the overarching strategy and succession planning that are also part of running a family office.
I think that this issue can be highlighted by the looseness of the definition of a family office and the difference between it and any external specialist advisors. This can cause duplication of work, or conversely, that certain areas aren’t pursued or managed in the way they should be.
The main aim and the core responsibility of a family office is to implement the wider wealth strategy for the family in question. Attempting to duplicate asset management roles, for example, can lead to inefficiency and a lack of focus.
Family offices and their role can be tricky to define, particularly as different families want different services. By analysing the family’s needs and the extent to which they want the family office to manage its wealth (as opposed to specialist advisors they have a direct relationship with) this definition should be clearly defined when setting up a new family office or reviewing an existing one.
Defining the exact role of the family office is key
The services provided by a family office depend on various factors, including the history of the family itself. For example, how far does it go back generationally and how many members of the family are involved currently? Other issues to consider include:
- How much involvement the family members have.
- The leadership and authority of family members.
- Any jurisdictional considerations.
- Collective assets owned by the family.
- Collective financial activities of the family, such as property owned, philanthropic activity, investment management etc.
- Overall strategy, which should align with objectives and values of the family.
- The complexity of the asset structures involved.
For example, it’s very different running a family office for a family that goes back six generations and has 200 members located all around the world compared with a first-generation entrepreneur who has three kids. In every area, the precise role of the family office must be fully defined. How is it responsible for investment management, for example? This analysis can then be applied to every other area of collective and individual activities and assets within the family.
Adapting to today’s world means accepting that wealthy families are likely to be subject to more tax in the future. This will mean higher costs for wealth management in order that they avoid any risk. While this may not be what families want to hear, it is realistic and will ensure that their wealth is managed in the most efficient way.
Precisely defining the role of the family office will go along way to ensuring it can manage today’s demands. Each division should be clearly delineated and responsibilities between external advisors, banks and professionals stated. This allows every part of the picture to fulfil their own role and that a complete service is rendered.
Family offices often work best if there is a trusted advisor that the family knows and can work with and that they reside in the office itself. Having someone like that making the key decisions improves every part of the process and will likely save costs and confusion over conflicting advice.