Ten years ago, hardly anyone had heard of it. Today, every wealthy family seems to have one or want one. A family office. By 2030 there are expected to be almost 11,000 family offices worldwide. So what exactly is a family office? What is it for, and what does it really offer you as a family? And what should you look out for?
It means something different to everyone
The essence of a family office lies in its name. It is the office of the family. Put simply, a family office is a team that, within or outside a formal structure, helps to organise and protect a family’s wealth, wishes and interests, with the aim of carrying them forward. It is the organisational infrastructure through which a family stays in control of its own wealth and its own future.
Originally, it was the very wealthiest business families who needed to organise their wealth, companies and family interests professionally and across generations. In 1882, John D. Rockefeller set up his own organisation to manage his personal and family affairs, separate from his company, Standard Oil. It is regarded as the first family office.
From institution to service
In the second half of the twentieth century, the multi-family office gradually emerged. A provider that served several families by spreading the cost of professionals, infrastructure and specialist knowledge across them. Some original single-family offices also began serving other families in this way. Rockefeller is a well-known example.
The rise of multi-family offices brought economies of scale and professionalisation, but it also changed the relationship between the family and the family office profoundly. A single-family office works exclusively for one family. With a commercial multi-family office, the family is usually a client of an organisation that also serves other families.
Some are increasingly turning into pure asset managers, focused on managing as much money as possible. That is where their business model lies. It is not necessarily in the family’s interest, nor does it necessarily fit the family’s investment policy. Others, by contrast, focus mainly on administration and the management of the family’s companies. The family office landscape has therefore changed considerably: from an institution set up by a family to a service a family can buy in. In itself, that is not a bad development. The risk is that not only the services, but also the knowledge, the policy, the systems, the data and the control end up outside the family.
Why ownership matters so much
A family has a different time horizon from almost any commercial provider. That is where friction increasingly arises. Today, commercial multi-family offices change hands themselves. Even private equity is entering the sector. A family must be able to think in generations. That is, by definition, the ultra-long term.
Advisers, asset managers and staff at a multi-family office come and go. The family stays. If knowledge, policy, systems and data sit entirely with an external provider, without the family retaining enough say, dependency follows. A change of adviser or provider then means a loss of knowledge and operational capability. Moreover, a multi-family office has its own commercial interests. Even when it acts carefully and professionally. Without this being immediately visible, it can create tension. What is attractive for the provider, and what is best for the family?
Family wealth is much more than an investment portfolio. It encompasses the history of the business, past strategic choices, family relationships, agreements, obligations and the reasons behind all these decisions. It is precisely this knowledge that is hard to reconstruct once it is lost or scattered.
What the family keeps in its own hands
Outsourcing work is not the same as outsourcing responsibility. The first is efficient; the second creates dependency. Having your own family office does not mean it has to be a fully staffed single-family office. The family keeps policy, decision-making, data and control ‘in its own hands’. That also means having direct access to the consolidated overview and the documents, being able to export them, and being able to move to another provider without the foundations going with it. Execution can then be outsourced to various external providers.
It is not only the wealth that needs to reach the next generation. So does the knowledge and expertise to make sound decisions about it. Which brings us back to Rockefeller’s original principle. With today’s technology, one family with its own organisation is achievable without the costs of the past. What problem does your family office solve?