They’re big in the old economies of Europe and America, and about to take the Gulf and Asia by storm. But could family offices really change the financial landscape forever?
Bad luck if you’re merely a person of ‘mass affluence’: you may be about to have your nose put out of joint. Private banks are reportedly preparing the ground for yet another weeding out of lowermargin customers – to sharpen their focus on High Net Worth (HNW) or, even better, Ultra High Net Worth (UHNW) customers.
In recent years, the banks have been scrambling to set up ‘family offices’ to lure this privileged segment of society. Who’s surprised? “It’s where the money is – there’s a huge pool of wealth and they’ve got both the expertise and administrative machinery to handle it,” says Richard Garcia, a senior associate in Stephenson Harwood’s London office. You can see what he means. In 2010, the assets held by the top 20 private banks in the world combined were a whopping US$11 trillion. Useful cash.
When it comes to actual family offices, the banks have made considerable headway and now dominate the rankings in terms of the sheer size of their holdings, notes Bloomberg. At the end of 2011, the largest, HSBC Private Wealth Solutions, had total assets under advisement of US$124 billion – up 21 per cent on 2010. But, while this might be one of the fastestgrowing areas of finance, the banks are increasingly being challenged by a plethora of smaller, nimbler operators – some boasting very fine pedigrees indeed. And nowhere is the battle for family wealth likely to be more intense than in the Middle East and Asia.
Who, what, when?
So what exactly is a family office? Definitions are difficult, says Garcia: “There’s no standard format.” They range from small outfits employing just two or three people administering a family trust (known as private trust companies which are arguably a separate sub-category), to fullyfledged companies combining large investment and professional advisory teams with more traditional concierge duties. The biggest are all-singing, all-dancing one-stop shops. Want someone to open up your summer house, organise the yacht, sort out the philanthropy, hire nannies, educate the kids in finance and manage tax, estate planning and investments? Then clearly you’re in need of a dedicated family office – though it’s generally accepted that you’ll need to be worth at least US$500 million to make the operation viable. Costs for staff alone can run into the millions annually.
The concept of the family office was invented by the Rockefeller family way back in 1882 when the oil baron, John D. Rockefeller, sought to find a means of preserving the family company’s wealth for future generations. Now in its seventh generation, the office has evolved beyond recognition. Indeed, in the 1980s, the Rockefellers threw open its doors to outsiders – thereby inventing a new structure: the ‘multifamily office’, in which the assets of several high-net worth families are managed under one roof to reduce overheads and maximise investment clout. By 2004, it was providing advice to 180 other families.
Those multiplying multis…
Most older multi-family offices deal with ‘old money’. But a new generation of boutiques are attracting newer cash. These independent providers have put together a package of services, touting economies of scale, says Garcia. “They’re a step-up from running your own money and increasingly offer a compelling alternative to going with an established institution.”
So how many exactly are out there? Wharton Global Family Alliance estimates there are around 1,000 families with dedicated single private offices globally. But many think that’s an underestimation. “A more realistic estimate is likely to be closer to 1,000 just in Europe”, says Paul Pratt, of the London branch of Family Office Exchange, with the main centres being London and, that bastion of old money, Switzerland. Multi-family offices, meanwhile, have proliferated so quickly in recent years, that it is difficult to keep tabs on them. On the latest estimate, there were about 3,000 in the US alone.
One thing that’s definitely changed, says Garcia, is “the time-span of evolution” of personal wealth. In Europe, you’ll see family offices that have evolved over the past 200 years. But these days it’s not uncommon for the transition from successful new ventures to a source of independent wealth capable of justifying a family office to take place within a generation: look at Bill Gates or Mark Zuckerberg.
This is particularly the case in the new economies of the Gulf and Asia, where new industrial dynasties are forming at a momentous speed. “But while the momentum to establish family offices is growing quite strongly in Singapore, it is still in its infancy in Hong Kong,” says Ian Devereux, head of wealth management for Stephenson Harwood in Greater China. “Only a handful of the very wealthiest families have set one up.”
No wonder these countries are viewed as prime ‘virgin’ territory by family office providers on an expansion roll – particularly in the aftermath of the financial crisis. Whilst this may be temporary, some families are seeking new models, says Garcia: “In recent years, there’s been somewhat of a pushback. The independent model is growing in importance and popularity.”
Devereux agrees, noting that dynasties that have created their own family office tend to see it as “a much more neutral intermediary” when it comes to taking investment decisions. The sophistication of those managing family assets has never been greater and with this comes greater exposure to risk, litigation and the publicity that necessarily follows the financial elite.
Family offices might be in their infancy in Asia and the Middle- East (the wealth management advisor Scorpio estimates there are currently about 50 professionallymanaged family offices in Asia, outside of Japan). But most expect that number to multiply. Indeed, PriceWaterhouseCoopers forecasts that Singapore will become the world’s top wealth management centre by 2013, overtaking Switzerland and London.
But outside players looking to recruit wealthy Asian families may well find themselves stymied, says Devereux, who identifies “a real Asian flavour” in the style of family offices being set up. For a start, the multi-office model is often treated with suspicion: dynasties can sometimes be “quite jealous of each other”, he says. The last thing they’d want to do is share an office with a rival. “They’d much rather keep their own family office, even if that means sacrificing economies of scale. They’d rather pay more and safeguard their privacy.”
As Garcia points out, the high concentration of UHNWs in the Gulf means there is also huge potential for family offices in regional capitals like Dubai. Given the immense private oil and gas fortunes amassed in neighbouring states like Qatar and Abu Dhabi, these offices, when they come get going, could have a significant impact on the financial landscape. “There are deals out there to be done, but corporates, private equity and hedge funds are struggling to raise money from traditional sources. Other than sovereign wealth funds, which tend to operate only at the very highest level, where does the funding come from? That provides an opportunity for family offices.”
Dodd-Frank to big bank?
Some families who opt to manage their wealth via a private office, “care less about the economics than control”, says Robert C. Elliott of the US Bessemer Trust. Not to mention privacy. But tough new rules, post-crisis, may force them into the limelight. Under the old Securities and Exchange Commission (SEC) rules, family offices were excluded from regulatory scrutiny – on grounds that they acted as private, rather than public, investment advisors. But the new Dodd-Frank Wall Street Reform Act has removed that exemption in all but a very narrow window of cases.
Dodd-Frank has put a lot of rich American families in a spin. But it could prove a watershed, forcing some of the larger family offices either to throw in the towel, or re-emerge as fully-fledged funds or private banks. “Many will see that as an opportunity,” says Garcia. Certainly, in that context, this summer’s transatlantic tie-up between Lord (Jacob) Rothschild’s RIT Capital Partners and the Rockefeller family office (which already has US$34 billion under management) may prove significant. If you want an historic parallel, you might liken the current situation to late 18th century Britain, when Quaker families, notably the Lloyds and Gurneys, ploughed their iron and wool family fortunes into lending funds that later evolved into the first modern banks – Lloyds and Barclays. With the established banking industry in such flux, could some of the modern family offices repeat the trick and emerge as lasting new institutions, necessarily involving themselves in all the risks, politics and disputes that follow? Very possibly, concludes Garcia. “We’ll know in about 100 years.”