High-net-worth (HNW) individuals have many complex needs, which is why some opt to employ a family office. But what exactly is a family office, and what does it do?
What is a family office?
They are privately held companies that handle a number of advisory services for wealthy families (generally with over $100 million in investable assets).
Generally, its aim is to grow and transfer wealth across the generations. They can also help the family with other things, including their commercial businesses, tax compliance, governance, legal matters, philanthropy and more.
How does a family office work?
Family office services providers can either be in-house, outsourced, or a combination of the two.
‘Some families outsource a lot of their activities, which the family office just coordinates. It can almost be just a secretariat service,’ says Annamaria Koerling, Managing Partner at Delfin Private Office. ‘Alternatively, it can be a fully fledged family business enterprise, where they do everything in house.’
In the second instance, the family office can take care of governance, trusts, corporate services, tax planning, wealth management, philanthropy, operating businesses and any number of other services all under one roof.
What is the difference between a family office and a wealth manager?
Family offices can, of course, manage wealth. So, in this sense, they are a wealth manager to the family that they serve. A wealth manager, however, has lots of different clients, whereas a family office works for just one family.
‘The main difference is the number of clients that they have, rather than the type of service that they provide. A very big family office will typically have its own investment teams,’ says Koerling. This having been said, some wealth managers do badge themselves as ‘multi family offices’, which means that they manage money for a small number of very substantial clients.
Another difference, says Goodchild, is the ‘relatively limited investment and advice’ that wealth managers provide. They only manage investments, whereas an array of duties that can fall under the remit of a family office.
Also, a family office is fully bespoke, whereas wealth managers are suppliers of an investment product that they already have.
Finally, family offices are usually reserved for people with greater amounts of money. This is because of the costs associated with running them. (Although this is not necessarily a direct correlation – see section 5).
How much do family offices charge for their services?
The cost of having a family office is how much the family pays its staff. Added onto this is an applied fee that covers the cost of the services being provided.
‘Some families do that on a flat charge basis – £10,000 per portfolio, or whatever – but the majority do it based on the value of the assets in each portfolio,’ Koerling explains. ‘So they charge a certain percentage fee applied to the assets, which covers the costs of running that family office.’
Traditional wealth managers, who are looking to make money rather than just cover its costs, will typically have a higher fee.
Why do some people choose to use family office service providers rather than have their own family office?
Some families choose to employ just a few staff who coordinate outsourced services. Others bring all of their services in-house and have a fully-fledged family enterprise under one roof. Most do a bit of both.
Generally, this decision is based on what is economically viable. ‘It’s very expensive to do everything in-house,’ says Koerling. ‘The world’s most wealthy families can afford to do that, but the majority are in that in-between space. So they’re looking at a much more flexible resourcing model.’
Whether you outsource or not also depends on how complex your estate is, says Goodchild. ‘Think of an international family with boats, planes, houses in multiple jurisdictions, and children. Hiring people to keep that in good order, and having them all on payroll, is going to be really expensive.’
On the other hand, for a family with just one asset, the cost is going to be lower. Goodchild ‘can think of people whose personal wealth is in the region of £250-300 million who just have a PA’. ‘They don’t need a family office,’ he says.
Other factors that could influence a family’s decision to use service providers rather than do everything in-house include ‘[knowing] a particular sector really well, and they might want to run their own investments,’ says Goodchild. ‘And then for the things they don’t know very well, they outsource that to professional management.’
A family might not be able to ‘maintain the quality of the services through their in-house team’, and therefore choose to take a ‘best in class approach’, adds Koerling. There is also the discretion and control that you have by having everything in house.
How much money do you need for your own family office to be worthwhile?
For the reasons stated above, there is no set amount of money that you need to be able to ‘afford’ a fully in-house family office. There could be multiple reasons for wanting to outsource. However, it is true that to have a fully-fledged family enterprise-type family office you need to be very wealthy.
‘If you were to do a full service, in-house, substantial staff, you’d probably need 1.5 to 2 billion,’ says Koerling. ‘But some people have the money but just don’t want the aggravation of having to manage people. They’d much rather come to businesses like ours and say “can you coordinate everything for me”.’
Goodchild agrees that, although the balancing act between hiring professionals and having staff in-house depends on more than how wealthy a family is, you have to have ‘near billionaire status’ to cover all of your needs in-house. ‘It’s just not worth it otherwise.’
How can I find the right family office adviser?
The Spear’s 500 is a good place to start. The indispensable guide to top private client advisers, wealth managers, lawyers and service providers to high-net-worth individuals (HNWs), at spears500.com.
The website allows users to search and filter the Spear’s database for various attributes, making it easier than ever to find the right private client adviser for their specific requirements.