The family office market has become crowded and muddled. Once the domain of easily understood private offices, each dedicated to the needs of a single, very wealthy family, the family office market now includes financial firms of all sizes. The first mutation occurred when traditional single-family offices decided, as an overhead-sharing strategy, to add additional families as clients. Next came the commercial financial services firms that “rebranded” themselves, either entirely or with respect to an internal division, as multi-family offices. With the confused offerings, what can we expect?

Here are my four predictions:

  1. Global increase — The number of family offices will explode in the next 10 years because the sheer numbers of wealthy families will rise worldwide.

  2. Déjà vu — Families will want to return to the traditional single-family office model, causing a decline in the commercial multi-family offices.

  3. Location, location — Single-family offices will forum shop across the globe, selecting one or more jurisdictions to locate the office.

  4. Hands across the waters — Single-family offices will engage directly in cross-border alliances, at first focusing on investments but later expanding to sharing information on many levels.

BASICS REVISITED

Let's keep in mind what a family office is: It's simply a group of staff (any number) who take care of the needs of a wealthy family. The services provided are directly related to that particular family's needs. A study of Swiss family offices defines a “family office” as “high value wealth management by close advisors based on a relationship characterized by intimate knowledge and trust.”1 Another recent study defines a “family office” as “an entity which takes care of the day-to-day management and administration of the collective assets and business affairs of one or more families.”2 The Family Office Exchange (FOX), the Chicago-based network for family offices, defines a “family office” as “the organization that is created, often after the sale of [a] family business or realization of significant liquidity, to support the financial needs (ranging from strategic asset allocation to recordkeeping and reporting) for a specific family group.”3 Some go beyond financial needs: The Pitcairn Financial Group multi-family office describes itself as “dedicated to helping clients grow and protect their financial assets and family heritage.”4 As I've previously written, the definition of a family office is vague enough to cover “everything from a one-person part-time assistant to a full-service private trust company with a staff of dozens.”5 Let's use the simplest, generic definition: A family office is a group of employees who take care of a family's needs.

CURRENT COUNTS

As with anything, to know what the future may bring, it helps to understand the past. The popular assumption is that family offices were invented in the United States. The John D. Rockefeller office, Rockefeller & Co., created in 1882, often is mentioned as the first.6 But the Rothschilds in Europe had a family office in the generic sense back in the 1700s. And in China, as early as 1600 B.C., servants were buried with the Shang dynasty family, so as to continue caring for their masters in the next life. In ancient Japan, tea makers controlled access to the ruling families. And, of course, in the classic European castles there were, literally, “gatekeepers.”

Because today's single-family offices are very private, no one knows precisely how many there are. FOX estimates there are between 2,500 and 3,000 in the United States but adds that another 6,000 might exist informally within private businesses.7 A Boston Consulting Group report in September 2006 put its estimate at 4,000 to 12,000 family offices globally.8

The United States during the last 10 years has seen the rise of the multi-family office (MFOs). Originally, the MFO was created because the cost of maintaining a single-family office (SFO) was rising while resources fell, both as a result of the natural increase in the number of family members. The thought was that by adding other families, the SFO could share its overhead.9 Some also hoped to gain combined purchasing power and expand the breadth of in-house advisors. Less than five years ago, FOX defined an MFO as a firm that must provide all of these services: integrated tax and estate planning, investment strategy, trusteeship, risk management, lifestyle management, recordkeeping and reporting, family continuity and family philanthropy.10 Today, many MFOs limit themselves to investment management.11 Even FOX acknowledges that today the MFO “is usually run as an investment business.”12

FINANCIAL FIRMS, ETC.

Seeing the amounts of private wealth that MFOs were managing, the nation's financial firms naturally got into the market. Quite a few created their own MFOs.

Merrill Lynch was one of the first, in the 1990s; it still has a “family office services group.”13 Northern Trust offers “Family Office Services.”14 U.S. Trust (at least before its recent acquisition by Bank of America) offered an MFO, claiming: “The multi-family office at U.S. Trust is one of the country's largest, oldest, and most innovative, able to meet the complex needs of multi-generational families with substantial wealth.”15 JPMorgan Chase has taken a somewhat different approach, stating merely that it will work with family offices, rather than act as a family office itself: “Family offices continually face decisions about whether to build capabilities or to buy them. We can work with you and your advisors to help evaluate which services may be more appropriately outsourced.”16

Several accounting firms rebranded themselves as family offices. Deloitte tries to cover all possible bases, stating in its materials: “We serve both as a unique full-service multifamily office and as advisors to newly formed and mature family offices. We can help you manage and grow family wealth over multiple generations. We also serve the business and organizational needs of the family office.”17 The New York accounting firm of Mahoney Cohen now offers itself as a family office: “From sophisticated professional advice and planning to routine bill paying, Mahoney Cohen Family Office Services can function as a ‘one stop shop’ for clients.”18

Another, parallel, trend is for financial institutions to buy family offices; witness the recent acquisition by City National Corporation of Lydian Wealth Management, which is now being rebranded as “Convergent Wealth Advisors.” Harris Private Bank bought assets of MyCFO, which had started as an expensive attempt to be a “virtual” family office. Credit-Suisse bought the Frye-Louis Capital Management office. SunTrust Banks, Inc. bought 70 percent of Asset Management Advisors (AMA). Wachovia bought the Calibre office, and explains that “Calibre is a strategic and objective practice within Wachovia Corporation. This allows us to offer clients our very best independent thinking, while confirming that we have the capital and resources to deliver on our commitments.”19

The result of all this feverish activity is that the entire MFO industry is “in disarray,” according to leading consultants.20 From the perspective of many wealthy families, financial firms are offering MFO services largely because they want the family's assets and hope that the investment fees will cover the other MFO services. This growing perception — that firms lack interest in covering the high-maintenance, less lucrative “concierge” services that true family offices supposedly provide — has created an opening for Aston Pearl, an innovative firm that pledges to be “The family office for everything except money.”21

No wonder families are confused.

GLOBAL INCREASE

So that's the backdrop. Now, how does that lead to my four predictions?

(1) The number of family offices will explode in the next 10 years.

The numbers of the ultra-wealthy are projected to increase dramatically. Estimates are that over 10,000 individuals have more than $100 million, and that their combined assets will reach $5.5 trillion by 2010.22 The 2007 World Wealth Report by Capgemini and Merrill Lynch states that, worldwide, there are more than 94,000 individuals who have more than $30 million.23

The management of large amounts of wealth is complicated and time-consuming. Families will continue to look for ways to ensure their holdings are properly organized. The wealthy will continue to seek first-rate service. Bank mergers and staff changes are very disquieting. In my experience, long-term loyalty and privacy are valued by families more than being assured of the highest possible investment returns.

The historic roles filled by the family lawyer, the family notaire in Europe and the small private bank — are largely gone. The commercialization of the professions and the mergers of financial institutions have left a service gap for wealthy families. The result: wealthy families will want to have their own family offices to take care of their needs. Hence, my second prediction.

DÉJÀ VU

(2) Families will want to return to the classic single-family office model, causing a decline in the commercial multi-family offices.

As a given, an MFO is never as dedicated to an individual family and that family's needs as the family's own SFO would be. As families grow wealthier, I predict that increasing numbers will turn to the special care provided by a dedicated SFO.

The traditional SFO is built around the needs of the particular family. There is no expectation that the SFO will act as a revenue-producing profit center. The family pays for all of the costs and hopes to do so efficiently. What the family gains from their dedicated SFO is key advisors they can rely upon, who will organize their holdings, give and obtain independent advice, distill the related information and remain loyal to the family. Privacy is assured.

But we've learned from experience that a fully staffed SFO is expensive — and difficult to maintain. That's why I see families choosing in the next 10 years an SFO based on the model of a very small permanent staff that acts as the coordinator of outsourced services. An alternative would be the original family-based MFO, that is to say, an MFO that established itself as an SFO and later adds other families as clients to defray expenses (rather than to make a profit.) An interesting spin would be if some of the new SFOs actually use family-based MFOs to provide supplementary services. I predict that the losers will be the commercial MFOs, which never had a family focus because they were really, primarily interested in the investment management. Families (or their SFOs) will choose investment managers for their investments.

Commercial MFOs were created for the purpose of generating a profit. But that goal is at odds with the SFO's fundamental service model. Whereas the SFO is viewed as being created to provide a wide array of services, at costs to be managed efficiently, the commercial MFO is viewed as needing to limit any non-investment services, to increase the investment fee profit. Perhaps, in time, the investment firms will stop branding themselves as family offices.

In sum, the SFO offers a family guaranteed loyalty, a tailor-made array of services, as well as tax coordination and oversight by trusted advisors who are actually employees. Indeed, the single most important asset is family office staff that can be trusted completely. Disadvantages are the ability to attract and retain “best in breed” staffers (which can be overcome by outsourcing or establishing an alliance with a family MFO), an insularity of staff (hence my prediction that there'll be an increase in alliances among SFOs and with family MFOs) and costs (though the amount of scalability in tailor-made services may not be significant.)

An added benefit of the SFO model is the flexibility to take care of the family's multi-generational legacy, often to provide the glue that will keep a family together (and off the front pages.) There's an increasing awareness of how important it is to create an effective family governance system — a method of ensuring that group decisions will be made in a sound and lasting manner.24 Such service is not easy to provide: “You're talking about a very high-touch deliverable, and you can't scale it,” says Linda Mack, of Mack International, a Chicago-based executive search firm.25

LOCATION, LOCATION

(3) SFOs will forum shop across the globe, choosing one or more locations to set up shop.

Not so very long ago, members of wealthy families tended to live their whole lives within fairly close range of each other. Naturally, then, the residence of the patriarch or other key family members determined the location of the family office.

Today, even within the United States, families often are dispersed geographically. Non-U.S. families, meanwhile, are becoming ever-more global. And when members are scattered about a country or the world, it is usually important to have a family office central location that is convenient to most.

When a single location is not obviously convenient, families will need to select a jurisdiction based on a variety of other criteria. For example, one family could not decide between Zurich and London, so it chose both: Its general office administration will be in Zurich; its investment operation will be in London. A number of families living throughout the Gulf Cooperation Council (GCC) region use The Family Office Co. in Bahrain, which is familiar with Shariah-compliant investing. Several times, I have proposed that Bermuda might serve as the family office jurisdiction for global families wanting a settled legal jurisdiction with an established financial infrastructure. Here's another, recent example of a split office: The Marcuard Family Office began based in Zurich, developed a United Kingdom-Bermuda arm, recently was bought by management, renamed itself Magdalene Family Office and now is administered in London.26

Choosing a jurisdiction for family offices is like choosing a situs for offshore trusts: tax treatment is an important, deciding factor. Unlike choosing an offshore trust jurisdiction, however, a family generally will want its family office jurisdiction to be physically and/or culturally appealing, because it also serves as a place where the family will meet. Competition among jurisdictions for private trust companies also may lead families to locate their family offices in the same location, particularly if it is an appealing vacation spot.

Indeed, the competition among jurisdictions for family offices is heating up. One of the latest entrants is Dubai. In April 2006, the Dubai International Financial Centre (DIFC) created a family office. The firm announced that one of its objectives is to create the infrastructure for full wealth management services.27 In late 2006, there already was a conference in India that covered the “Family Office and the Dubai International Financial Centre.”28 Singapore is a new competitor as well, recently amending its trust law as part of a concerted effort to become the leading investment jurisdiction. In fact, during the 2006 conference in India, there was a presentation entitled “How can India learn from Singapore.”

Of course, political risks skew preferences for locating the management of family wealth in jurisdictions perceived as safe. This is part of the explanation for Switzerland's long-serving as the home of so many family offices for non-Swiss families.

Expect a visible increase in jurisdictional competition. For family offices at least, the world is becoming flat.29

ACROSS THE WATERS

(4) Single-family offices will engage in cross-border alliances, at first focusing on investments but later expanding to share information on many levels.

Many SFOs need to access information from and about their peers around the world. Often, because of family offices' extreme privacy, attempts to create public associations meet with little success.

In the United States, a few organizations act as networks for family offices. FOX was the first, established in 1989. Shortly after, in 1991, Charlotte Beyer formed the Institute for Private Investors in New York. Two families formed the CCC Alliance, in Boston, in 1995, as a private forum for families to share information. The Metropolitan Circle of Private Investment Companies, in New York, has frequent meetings on investment-related topics. There are several additional examples in the United States.

The Wharton Global Family Alliance is undertaking a global study of SFOs. It predicts that family offices will increase their joint investment opportunities, on a global basis. For example, a family office in Country A might make a direct investment in a business owned by a family office in Country B.30

Today, there are occasional ad hoc relationships between a few family offices in different countries. But I predict that this sort of teamwork will become a major trend. This is not a radical prediction, as the need is so evidently there, with the interest in family offices increasing globally and families becoming more global. It may even happen that an SFO will use a core service center in a different jurisdiction for some of its services or that SFOs will combine (perhaps even with family MFOs) to share other core services in a variety of jurisdictions. It will be interesting to see if the direct alliances will happen without the impetus of third-party organizations.

But let's revisit this topic in the future and see if my predictions come true.

Endnotes

  1. Swiss Family Office Survey, Haute Etudes Commerciales, Université de Lausanne, September 2005. The survey was conducted by student's in the school's master of business admistration program.
  2. Joachim Schwass, “Private Wealth: Origin and Destination From Entrepreneurship to Family Offices,” Perspectives for Managers, International Insititute for Management Development, Lausanne, December 2006, at www.imd.ch/research/publications/pfm.cfm.
  3. See www.foxexchange.com/FAQ.
  4. See www.pitcairn.com.
  5. “The Family Office: Insights into Their Development in the U.S., a Proposed Prototype, and Advice for Adaptation in Other Countries,” The Journal of Wealth Management, Fall 2001.
  6. Greycourt & Co., Inc., a Pittsburgh-based investment consulting group says that Judge Thomas Mellon in Pittsburgh established the first family office in 1868. See White Paper No. 10, “Establishing a Family Office: A Few Basics,” September 2001, at p. 1, at www.greycourt.com/whitepapers/White_Paper010-Family_offices-GDC.pdf.
  7. Supra note 3.
  8. Sue Landau, “The very rich pay family retainers to talk to their bankers,” International Herald Tribune, Nov. 20, 2006, at www.iht.com/articles/2006/11/19/business/rwmtopbar.php.
  9. See, for example, Robert Frank, “How to Bank Like a Billionaire,” Wall Street Journal, June 10, 2004, at www.webreprints.djreprints.com/1005380530169.html (“family offices are increasingly inviting in other families to help defray the cost.”)
  10. Sara Hamilton, “The Multi-Family Office Mania,” Trusts & Estates, November 2002.
  11. Notable exceptions include the Pitcairn Financial Group, the Laird Norton Tyee office (“Traditional wealth management focused solely on investing isn't adequate. To truly create a sustainable future, you need a strategic process that regenerates wealth by using great returns as the fulcrum for the human and intellectual aspects of life,” at www.lntyee.com) and Asset Management Advisors, which proclaims, “[Y]our family's success depends on more than sound investing. Much more. Managing family wealth to last across the generations involves bringing people together, finding common goals, managing human and intellectual resources, as well as capital. All well-managed organizations do this, of course - but consensus-building in families is more challenging. We can help.” See www.amaglobal.com. Bessemer Trust (which began as the Phipps' family office) also stresses the impact on the entire family: “Our sole mission is to help you manage your wealth so that it has a positive impact on your life and the lives of generations to come.” See www.bessemer.com.
  12. Supra note 7.
  13. See www.ml.com.
  14. See www.northerntrust.com.
  15. See www.ustrust.com.
  16. See www.jpmorgan.com.
  17. See www.deloitte.com.
  18. See www.mahoneycohen.com.
  19. See www.wachovia.com.
  20. Gregory Taggart, “The multifamily office has grown and changed so much that the wealthy may be left wondering if everyone is playing together,” Wealth Manager, Sept. 1, 2006, quoting Kathryn McCarthy.
  21. See www.astonpearl.com.
  22. Supra note 8.
  23. 2007 World Wealth Report, Capgemini and Merrill Lynch, June 27, 2007, at p. 2, at www.us.capgemini.com/DownloadLibrary/requestfile.asp?ID=564.
  24. Barbara Hauser, “Family Governance: Who, What and How?” Journal of Wealth Management, Fall 2002; see my comparison of “family governance” to political governance, and argument that an inclusive, representative system is more likely to succeed.
  25. Charles Paikert, “‘Soft’ services galvanizing family offices,” Investment News (June 18, 2007), at www.investmentnews.com/apps/pbcs.dll/article?AID=/20070618.
  26. Ian Orton, “London-based multi-family office rebrands,” The Wealth Net (June 20, 2007), at www.thewealthnet.com.
  27. “Dr Omar Bin Sulaiman officially launches Family Office at DIFC,” Press Release, April 1, 2006, at www.ameinfo.com/81935.
  28. Private Banking India 2007, at www.terrapinn.com/2007/pbindia/.
  29. See Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-first Century (Farrar, Straus and Giroux, New York, 2005).
  30. Stephen Martiros and Todd Millay, A Framework for Understanding Family Office Trends, White Paper, CCC Alliance, at www.cccalliance.com/FamilyOfficeTrends.pdf.