Family offices have come a long way since they were the sole domains of the families for whom they were created. The business segment has grown in recent years and strived to become more comprehensive and holistic in its approach. In addition to their core mission of managing and protecting wealth, family offices now provide administrative tasks, advanced planning, lifestyle support and a variety of other services for their very wealthy clients.
The global financial meltdown, however, has caused family offices to change course.
Recently, we've noticed an abrupt change in the priorities and focus among family offices. In response to lagging investment performance and poor market conditions, many family offices are returning to their roots and concentrating their efforts on the investment process to protect family wealth and reduce operating costs.
About The Research
We conducted a survey with 186 single-family offices in November 2008 that met the following screening criteria:
They provided investment management and administrative services to one family unit.
Their services could be delivered by office employees, through an outsourcing partner or a combination.
The size and composition of the families they served ranged from
immediate (i.e., parents and children) to extended and
multigenerational (i.e., nieces, cousins, in-laws,
great-grandchildren).
Almost 60% of the single-family offices we spoke to represented assets in excess of $400 million (Figure 1). These figures help shed light on the "wealth threshold" that must be exceeded to warrant the complexity and expense of this business approach.
Investments At The Core
Like
many financially oriented firms, family offices are re-evaluating their
structure to eliminate unnecessary costs and fine-tune their most
critical functions to better weather the difficult economic climate.
When asked how they plan to handle their range of key services, the
large majority of offices, regardless of size, said they would explore
ways to restructure or outsource the administrative and lifestyle
components of their business (Figure 2). This is not surprising, as
centralized services are convenient, but not mandatory to achieving
long-term wealth management goals. By contrast, less than a quarter of
family offices will make changes to their advanced planning areas and
even fewer will cede aspects of the investment process, as these
functions are often closely linked to one another and can deliver
measurable results.
Partnering For Opportunity
As
part of the re-engineering process, some firms are evaluating how to
partner with other single-family offices and multifamily offices to
minimize operating costs and get the added benefit of a wider range of
products and services. At the broadest level, about four in ten family
offices are considering a full-scale merger with another entity (Figure
3). A much larger percentage of respondents see the potential of
cooperating with other family offices for specific capabilities. For
instance, about 80% of single-family offices plan to source investments
and tax strategies from other firms. A similar number say they will
rely less on "brand name" asset managers and 91% are seeking unique and
exclusive investment opportunities to bolster their portfolios.
As before, far fewer have prioritized operational support (36%) and lifestyle services (24%) in their search for stronger resources, further indicating a focus on investments and related issues. It's worth noting that smaller firms diverge from larger firms in a few areas. More than twice as many small firms than larger firms are considering a cost-saving merger. Almost three times as many smaller firms will turn to partners for back-office support, and almost four times as many will do so for lifestyle services.
As the research shows, an increasing number of single-family offices are turning to experienced third-party organizations and professionals with specific expertise to help them be more effective. There are a host of reasons to consider a merger or partnership with another organization. Chief among them are the opportunity to partner with professionals who have a similar mindset and investment perspective, access to high-quality investment capabilities and more flexibility (Figure 4). Decisions of this magnitude can be tremendously beneficial to an office and its family members, but must be planned and executed carefully to avoid problems.