As wealthy families become multi-generational, multi-jurisdictional and more complex, the family office is evolving to meet their changing needs with a more Sophisticated and multi-disciplinary offer
For most of us, a roof over our head and a good education for our children are the extent of our family financial worries. But for the seriously wealthy, asset management can be complicated and many are now choosing to hand the responsibility over to family offices.
The number of single family offices – which, as the name suggests, look after the wealth of a single family – has increased ten-fold across the globe since 2008 and, according to market intelligence firm Campden Wealth, currently manage assets in excess of $4trn.
There are several reasons for this growth, but the main one is the increase in personal wealth – a trend set to continue. Knight Frank’s 2019 Wealth Report says the number of ultra-high-net-worth individuals – those with wealth in excess of $30m – will grow by 22% over the next five years.
Rebecca Bettany, Senior Director at JTC Private Office in Guernsey, says: “Today, there’s more money in private hands – historically, it would have been held by governments or institutions. As wealth grows, families grow more international, with different branches, so the transactions are bigger. Consequently, families are having to professionalise the way they manage their affairs.”
Roots in royal wealth
The blueprint for the family office can be seen as early as the sixth century when a king steward would be appointed to oversee royal wealth. The aristocracy drew on this idea, recognising the value of the stewardship of family wealth, with family offices commonly being used to run landed estates.
The modern version of the family office was first seen in the 19th century. In 1838, the family of financier and art collector JP Morgan founded the House of Morgan to manage the family assets.
In 1882, the Rockefellers founded their own family office to manage the family assets. The Rockefellers’ family office exists to this day and now provides services to other families.
What is a family office?
The family office has several forms. A family may begin with an embedded family office (EFO), an informal structure linked to the family business, whose chief finance officer is entrusted with family office duties.
For privacy and tax compliance reasons, they may then want to separate their private and business wealth by using an external single family office (SFO). This is a family-owned organisation that manages the investments, fiduciary trusts and estate for one family. Many also offer a lifestyle or concierge-type service.
“When families relocate to Jersey, we’ll do everything from help clear their property through customs through to sitting on the boards of their companies,” says Bettany. “It can be organising the dog walker or organising the intellectual property of a family business. It’s very wide ranging.”
As the generations evolve and branches of the family become more independent, investment activities within the SFO can separate, leading to the emergence of a multi-family office (MFO). Sometimes MFOs will serve a few non-related families.
The high operating cost of a family office – according to EY’s 2016 Family Office Guide, a minimum of $1m a year – is another reason to set up an MFO. Several families can pool their wealth and have assets managed under one umbrella.
Adrian Relph, a Director at trust and corporate services firm New Street Management in Guernsey, says families are looking to these structures not only to protect and enhance their wealth, but because they often want to make a difference in the world, be it through philanthropic causes or impact investing. “These new ventures in unfamiliar areas require specific skills, experience and focus,” he says.
Channel Islands boom
As to why many are choosing to locate their family office in the Channel Islands, Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, believes it’s a response to market forces. “It’s a reflection of the fact that in the decade post-2008, net private wealth doubled in nominal terms compared with GDP,” he says. “Companies are turning to servicing what is an evolving market segment.”
Robert Moore, Business Development Director at Jersey Finance, believes popularity in Jersey is driven by the island’s mature and well-regulated business environment – which is in part the result of the jurisdiction’s forward-thinking response to the global financial crisis 11 years ago.
“Although family offices often fall outside financial services regulation, the activities they undertake are very often subject to it, meaning they may need to adopt internal policies and procedures in relation to matters such as AML, risk and regulatory compliance,” says Moore.
“As a responsible and well-regulated jurisdiction, we are at the forefront when it comes to applying and adopting global regulatory standards. Jersey is one of the best regulated international financial centres globally, having been acknowledged by independent assessments from some of the world’s leading bodies, including the World Bank and IMF, as well as scoring top marks from the Organisation for Economic Co-operation and Development on tax transparency.”
The Channel Islands are also in a prime location geographically, being almost equidistant between the Americas and Asia, says Siobhan Riley, Head of Trusts and Private Wealth at law firm Carey Olsen’s Jersey office. “This maximises investment windows within each of the market time zones and means you can be on call for family members whichever side of the world they happen to live on.”
Family offices are certainly proving useful as a vehicle for attracting inward investment to the Channel Islands – and Jersey is making the most of it.
“Locate Jersey has worked closely with Jersey Finance to raise awareness about the Jersey proposition,” says Paul Burrows, Locate Jersey’s Inward Investment Manager. “This includes being recognised as a centre of excellence for professional services, with globally renowned accountants, bankers and lawyers; having well-developed business links with international markets; and having modern office developments providing a high standard of workspace with island-wide connectivity.”
Trust company vs family office
Whether this preponderance of family offices will push the more traditional trust companies out of the investment space remains to be seen.
Relph says: “There remains a core inter-relation between family offices and trust companies. Specialists in the fiduciary industry have the experience to deal with complex legal and tax needs, and manage diverse asset classes and holding structures.”
However, JTC Private Office’s Bettany says clients might not want a trust, or they might need some help working out who is the best trust provider. Family offices can help with that. “A lot of private individuals are choosing to invest through funds or in their own name,” she adds. “For example, UK property was always held in trusts and now, in most cases, it makes sense to own that property in your own name. Family offices can take away the hassle of handling it all.”
What next?
As to how we’re likely to see the family office developing in the future, Relph maintains that few family offices are large enough or have the skills or desire to cover every facet of wealth management.
He believes a symbiotic relationship will continue to exist between family offices and professional service providers. But he adds: “How the family office market develops in the future may depend upon the views of the regulator and how they look to supervise their activities.”
Guernsey Finance’s Andy Sloan takes a different view, seeing the professionalisation of family offices potentially leading to less use of intermediaries such as investment managers. “You’re seeing this kind of direct investment through the family office, particularly in the private equity space, where they’re finding a faster route. This reflects a sophistication of client requirements and a global, multi-generational, multi-jurisdictional approach to family office services.”
Riley, from Carey Olsen, believes the number of family offices will continue to increase and agrees they will become even more sophisticated. “Some family offices are already starting to look like multi-disciplinary partnerships of expert accountants, lawyers, tax experts, compliance professionals and investment advisers.”
She even sees them morphing into whole lifestyle operations. “Family offices will increasingly help to educate the family’s young and manage non-financial issues such as cybersecurity, wellbeing and the family’s media profile.”