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Beyond the hype: navigating the intricacies of family offices
From the rise of wealth creation in Asia to the challenges posed by volatile financial sectors – the complexities, strategies, and considerations for families venturing into the world of specialized wealth management.
In recent years, there has been a noticeable upswing in global interest surrounding family offices – a trend driven by a confluence of factors. Thanks to a surge in overall wealth, the increasing number of individuals qualifying for family offices globally has turned the spotlight onto this specialized form of wealth management. Since 2000, net worth has tripled – and, despite dipping in 2022, UBS predicts that global wealth is on track to rise by another 38% in the next five years.
The numbers game is particularly evident in countries like Singapore, Hong Kong, and Dubai in the UAE, which are aggressively positioning themselves as leading global family office hubs. The impetus behind this momentum stems from a notable wealth transfer to the next generation, prompting families to explore innovative approaches to asset management beyond traditional legacy companies. Approximately $100 trillion is being transferred from the baby boomer generation to their descendants and charitable organizations over the next 25 years.
However, the path to establishing and managing a family office is not without its challenges. The complexities of modern family systems, characterized by global dispersion and exposure to diverse jurisdictions, tax systems, and legal environments, add layers of intricacy to this form of cross-border asset management. Families seeking bespoke financial services in this dynamic landscape face the challenge of navigating a highly volatile and, at times, opaque financial and investment environment.
Financial sector risks: a complex landscape
Recent turmoil in the financial sector, exemplified by global conflicts and a disparity between stock market trends and real-world events, poses additional complexities. Defying gloom over the conflict in the Middle East, stock markets have staged a recent rally, sparked by a sense that the central banks’ campaign to tighten monetary policy is drawing to a close.
The allure of private venture funding, meanwhile, has led to high valuations, but risks underscore the need for a cautious approach, exemplified by SoftBank’s unexpected $62bn second-quarter net loss following the bankruptcy of WeWork, one of its biggest investments. WeWork went public through a special purpose acquisition company (SPAC), but concerns have arisen regarding the possibility of a decline in the values of private assets following the sudden reversal of over a decade of low interest rates.
A diligent strategy review, coupled with a focus on governance that aligns with the broader family enterprise system, ensures continued relevance.
As families venture into the investment arena, driven by the next generation’s appetite for more direct and diverse types of investments, they face the dual challenge of understanding this complex world and assessing various risk factors. The rise of trendy and intriguing asset classes, including cryptocurrency and SPACs, further complicates the landscape, prompting families to strategize on how to navigate these new terrains effectively. The SPAC boom in particular, which saw companies merge with shell entities to go public, has fizzled out following a record-breaking year in 2021, underscoring the risk of these newer asset classes.
Demystifying family offices: common misconceptions
Amid the interest in family offices, there is a certain glorification that can lead families to consider establishing one without a clear understanding of whether it aligns with their needs. Demystifying the concept becomes crucial, and families are encouraged to reflect on whether they genuinely require a family office and, if so, in what form. I have developed toolkits to aid families in this introspection process.
When demystifying the concept of a family office, it’s essential to address common misconceptions. Family offices can take various forms and shapes, from highly structured and formalized to more flexible and modern iterations. Those include “hybrid” family offices that combine elements of both a single-family office (SFO) and a multi-family office (MFO).
An SFO is established to exclusively serve the financial needs of a single wealthy family, while an MFO serves the needs of multiple families. A hybrid family office combines the best of both worlds by serving a family with core services that sit within the family office and an array of satellite services that are brought in from outside partners. This blend allows for cost efficiency and economies of scale while still providing some level of personalized service.
Critical decision points: establishing a family office
For those considering the establishment of a family office, careful consideration of not only structure but also services (they typically provide a range, such as investment management, estate planning, tax advisory, or philanthropy, and can also include an array of other services to help manage the family and other affairs in their system) and long-term goals is paramount. Rushing into this decision after a liquidity event like an asset sale or IPO delivers a capital windfall can lead to costly mistakes – investments that don’t deliver a return.
Family offices must also be thoughtfully integrated into the wider family ecosystem, with governance aligned to overarching family strategies to avoid issues down the line, such as family conflict. Sometimes, one or two family members – perhaps those with a financial background – can push ahead with investments without taking the rest of the family with them without proper alignment around their wishes, needs, or risk profiles, leading to conflict.
The challenge extends to choosing the right individuals to manage the family office. The decision to hire external managers or run an internal family office depends on factors such as the family’s financial goals, the complexity of their affairs, and their preferences. Running a single-family office can offer greater control and customization, with direct access to tailored services, but can be costly and operationally challenging.
On the other hand, working with multi-family offices can give access to specialized expertise, potential cost efficiency, and access to global resources, but may result in less control and personalization. Consulting with experts is crucial in making an informed decision based on the family’s unique circumstances and priorities.
Frameworks for optimization: ensuring continued relevance
For families who already have a family office in place, frameworks also exist for optimizing its performance, adapting to changing circumstances, and ensuring its continued relevance over generations. For instance, regular strategy reviews are crucial, particularly during generational transitions or significant ecosystem shifts. A diligent strategy review, coupled with a focus on governance that aligns with the broader family enterprise system, ensures continued relevance.
Lastly, equipping the next generation with the right tools further contributes to the success and longevity of family offices in this ever-evolving landscape. This includes providing a comprehensive education in financial literacy and encouraging ongoing professional development. Mentorship from experienced individuals within and outside the family office, along with hands-on experience through internships and real-world projects, is essential.
Fostering adaptability and innovation, instilling family values and governance principles, and promoting philanthropy and social responsibility may contribute to a well-rounded preparation, too. Additionally, communication and conflict resolution skills are crucial in navigating family dynamics.
In essence, the journey to creating and sustaining a family office is a nuanced one, demanding careful consideration, strategic planning, and adaptability to thrive in this complex world of specialized wealth management.
Family Office Navigator: Your Guide to Building a Multigenerational Family Office by Peter Vogel and Mario Marconi is published by IMD International on 1 December. Pre-order the book.
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