Family Offices – What investors should know about them

by | May 5, 2020

The Family Office can help if the private wealth has become extensive and complex. Finding a suitable partner is essential. To enable successful, i.e. profitable, management of assets, Family Offices must meet specific quality requirements such as personal integrity, high professional standards and service orientation. Due to increasing complexity and internationalization, advice from independent external legal advisors is indispensable in order to guarantee high-level expertise. Mandating large law firms can be advantageous for liability reasons.

The Family Office concept

Depending on the context in which it is used, the term “Family Office” can have very different meanings. Some talk of it in a quite derogatory manner as “butler of the rich”, others as “high-level secretarial services”.  It is true that Family Office services are rendered in the context of mostly large fortunes. Here, the term Family Office should be understood as an organizational unit in which all services relating to the management of private wealth will be managed externally in a business structure.

Nowadays, Family Offices are in operation all around the world. Previously, Family Offices were common particularly in the United States and Europe. Today, Family Offices are also gaining increasing importance in Asia (Hong Kong, Singapore). In Europe, Switzerland must be regarded as the centre of Family Offices alongside London. Although there are no precise figures, 300 to 500 Family Offices are supposedly engaged in the Family Office business in Switzerland.

One assumes that all over Europe there are about 4,000 firms each with assets of at least 100 million USD under management. Of these, approximately 750 are organized as Single Family Offices, i.e. as corporations set up to render services for one particular family. The remainder are so-called Multi Family Offices, i.e. units in which the services are bundled for the assets of several individuals.

Where does the concept of Family Offices come from?

The stewardship itself is not a phenomenon of modernity. Rather, the roots date back to the 6th century when the major-domo took over the management of the assets for his dominion. The modern concept of Family Offices was developed in the 19th century. In 1838, the family JP Morgan founded the House of Morgan for the administration of the family’s assets. In 1882, the Rockefeller family set up a comparable entity.

Why have Family Offices enjoyed such a boom in recent years?

A major reason for this is the general increase in the concentration of wealth, followed by all needs arising from this in terms of the protection and growth of a large fortune.

At the same time, many wealthy investors had very negative experience with conventional investment advice from their banks during the last financial crisis. Consequently, they have been looking for independent investment advice and have found an option in the concept of Family Offices.

Additionally, this form of organization meets the increasing need of most investors for discretion. Not only externally, but also vis-à-vis the banks involved and investment providers, they do not want to disclose their financial circumstances fully and in detail. Here, a Family Office offers a shielding or at least filtering effect.

Finally, the legal and administrative requirements for investors have increased enormously in recent years. Firstly, because investors are increasingly focusing on real assets whose management is more complex than the mere holding of an indirect investment through a financial product. Secondly, this is a consequence of the generally increasing internationalization of investments.

What services offered by Family Offices can investors benefit from?

Classically, professional Family Office services include aspects such as asset planning, asset management, asset controlling, asset protection as well as legal and tax compliance.

The range of possible supplementary services is extremely wide and limited only by the individual needs of the asset owners. Such services can comprise administrative support, providing personnel, managing selective private matters, through to the complete lifestyle management of the asset holder.

At what point does a Family Office make sense?

In simple terms, working with a Family Office is always worthwhile if the private wealth has become so large and complex that neither the time nor the know-how for its self- administration are available.

However, the operational costs of running a Family Office can be significant. The reason is that the team of specialists is kept exclusively for the purpose of the asset owner. Therefore, as a general rule, the establishment of a Family Office only makes sense economically for really large fortunes. Fixed limits can hardly be defined, since the individual needs of the asset holder and the individual demands resulting from the asset structure vary to a large extent. As a basic rule, however, one can say that in Switzerland a fortune of between 400 and 500 million CHF is considered to be the minimum amount for setting up a Single Family Office.

But even without the full exclusivity of (and control over) a Single Family Office, wealthy investors can benefit from Family Office services by pooling their interests in Multi Family Offices. This form of pooling may include benchmarking, better investment terms or access to investment opportunities / high-profiling networks through higher investment volumes. In Europe, Multi Family Offices serve an average of 10 to 15 clients with total assets under management of some 25 to 50 million USD.

However, the success of this type of bundling depends to a crucial extent on the assumption that the specific client profiles are comparable to each other. Managing assets that are mainly invested in Asian financial market instruments will hardly generate synergies for managing European real assets.

Success factors – what makes a Family Office a good Family Office?

The decision in favour of a Family Office – whether a Single or a Multi Family Office – is a significant and mostly far-reaching decision. There are numerous companies that offer Family Office services. The problem is that “Family Office” is not a protected term and thus anyone can offer Family Office services without having any specific qualification or experience.

Based on the demands in terms of the successful, i.e. profitable, management of larger assets, the following skills are of particular importance.

  • Personal Integrity: A Family Office is not only an asset manager but also a close intimate of the client with a deep insight into highly personal matters. Thus, personal integrity and confidentiality are indispensable.
  • High Professional Standards and Expertise: Decisive for the quality of the consulting services is a high level of competence on the part of the Family Office employees such as attorneys, tax consultants, asset managers etc.
  • Service Orientation: One of the major reasons for holders of considerable assets to mandate a Family Office is severe time restraints. Given this situation, they expect a very high degree of flexibility from their advisors. Whether or not the collaboration turns out to be successful depends very much on each advisor’s ability to comply with the client’s needs and preferences.
  • Network: The quality of the services rendered also depends on how well the Family Office is networked to experts advising within comparable settings. Consequently, it is most helpful to have a network comprising advisors of other Family Offices, thus enabling the advisors to benefit from each other’s expertise or networks.
  • External Expertise: Mainly because of the increasing complexity and internationalization of investments, it is important that the Family Office consultants realize when it is advantageous or even necessary to mandate an external consultant. Smaller entities in particular cannot afford to employ several specialists within the same department.  In legal departments, for example, it would be very difficult for one single person to constantly monitor legal changes in all relevant fields and to react proactively to future changes. Here, large law firms that provide highly specialized services can be of assistance, especially those focused on private clients. These teams can offer all required legal advice on civil law, corporate law, tax planning, asset protection etc. They can contribute not only high-level expertise but are also very familiar with this market segment and its specific rules. Most effectively, they can provide solutions they have already developed for other clients in comparable situations and that turned out to be helpful. Finally, the advice of a large external law firm can be advantageous for liability reasons as well, since such law firms tend to have higher levels of insurance cover.

Dirk W. Kolvenbach is a German attorney at law and Senior Partner with HEUKING KÜHN LÜER WOJTEK in Zurich and Dusseldorf. Further, he is the head of the Practice Group “Private Clients” and a renowned specialist in all Private Clients matters (e.g. succession, asset protection and transaction).

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek