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February 20, 2014updated 05 Jun 2017 11:21am

Exclusive: The incoming family office boom

Family offices are the seldom seen little brother of the private banking world. While they play an important role for high net worth individuals and families, their form of wealth management is largely unrepresented in areas of the world. However, with the rise in wealth in emerging markets, added with the increasing level of distrust towards larger private banks, family offices are set to hit a peak in their popularity.

By Patrick Brusnahan

Family offices are the seldom seen little brother of the private banking world. While they play an important role for high net worth individuals and families, their form of wealth management is largely unrepresented in areas of the world. However, with the rise in wealth in emerging markets, added with the increasing level of distrust towards larger private banks, family offices are set to hit a peak in their popularity.

As the high net worth population continues to grow, the potential for family office growth increases as well. The private banking industry is becoming ever more connected worldwide as markets expand, except when considering regulation. Since the 2008 global financial crisis, the issue of trust became vital as reputations and security took a significant hit. These concerns have remained, despite increasing financial transparency. Gay Mitchell, deputy chairman of RBC Wealth Management, sees the situation as a ‘patchwork quilt of differing regulatory changes and constraints with little coordination from one country to another which creates a high level of complexity.’

The rise of the Asia Pacific

One area rapidly gaining momentum is the Asia Pacific. Reasons for this include China announcing private banking reforms in late 2013 and two rising stars of family office establishment, Singapore and Hong Kong. Due to favourable economic, social and tax conditions, these two locations are highly favoured for any form of private banking, not only family offices.

Due to the growing wealth in Asia Pacific, the demand for family offices is increasing. Excluding Australia, there are less than 150 family offices in the APAC region, despite the swift expansion of HNWIs in the region over the last ten years. For example, China now has the second highest concentration of billionaires and centimillionaires in the world after the United States. The problem is the growth of HNWIs and UHNWIs outpacing the increase of experienced wealth and relationship managers. This is becoming a struggle in the wealth management industry.

Despite its growing reputation, the number of family offices with the expertise to provide services of a high standard in Asia is lacking. Countries, such as the United States, are beginning to take advantage of this by offering their services abroad. Methods include establishing offices in emerging markets and forming local partnerships to serve the ultra wealthy in these regions.

On the other hand, the region’s troubles do not overshadow the potential. It is the fastest-growing region in terms of wealth creation in the world. WealthInsight have predicted Asia’s 3.3 million HNWIs will triple to nearly 15.8 million by 2015. Private wealth in the Asia-pacific, excluding Japan, increased by 10.7% to reach $24 trillion in 2011 and this expected to continue growing at a double digit rate and reach $40 trillion by the end of 2016. To deal with this, there are predicted to be another 1,000 new Asian family offices by 2020.

The Asia Pacific is not the only region where family offices are going through a phase of development. The 2008 global financial crisis struck the United States particularly hard, negatively impacting investment returns. On the whole, family offices managed to avoid huge losses, but are still affected by new regulation. The Dodd-Frank Act upholds tougher rules for family offices providing advice to external clients. If they choose to provide this service, they must either register with the Security Exchange Commission or to convert themselves into a single family office model.

European family offices also need a cautionary approach as the eurozone crisis continues. The entire region is surrounded by uncertainty concerning the political, social, economic, and legal environments. Many European family offices are adapting to manage investment risk and conduct due diligence. Trends show that investments are being broadened beyond equities and hedge funds and into alternative asset classes such as gold, precious metals and farmland.

Intergenerational dilemmas

In addition, a rising problem worldwide is the transfer of intergenerational wealth. The need is set to rise as the baby boomer generation’s retirement period is set to arrive within the next ten to fifteen years. The amount of wealth needing to transfer will be substantial. While this is a great opportunity for family office to gain clientèle, it is a treacherous path. Families rarely use traditional methods or review criteria. Much assistance will be needed and the needs and desires can vary wildly between generations. As a result of this, trust and transparency within families is crucial, but not always guaranteed. Proper assessment is required. Moreover, family offices need to train the younger generation in financial planning matters. Jack Garniewski, managing director of Wilmington Trust Family Wealth, one of the largest financial advisory companies in the United States, believes that with inheritance and intergenerational wealth transfer, it is a topic that may be considered ‘taboo’ and leaves a lot of the details ‘unknown.’ He adds: "For better or for worse, the current generation of clients see things very differently to how their parents saw then."

However, some clients believe that they are educated enough in the matters, particularly those from the Asia Pacific region who received Western education. Daniel Pinto, CEO of Stanhope Capital, a global investment office which oversees $8.5 billion on behalf of wealthy families, says: "We have the advantage of focusing on families and in many cases observing their overall wealth which involves us increasingly with the next generation. We encourage our clients to consider their estate planning strategies. We also provide training for the younger family members on investment strategy and implementation."

Strategy reinvention

More traditional asset classes are becoming the most attractive investments for family offices. As the global economy recovers, family offices need to reconsider strategy. Currently, they take a conservative stance, focusing on wealth preservation rather than creation. Evaluating growth opportunities is now crucial. Investments such as equities, real estate, private equity and other alternate asset classes are on the rise. Jonathan Bell, CIO of Stanhope Capital, favours ‘European and emerging market equities over the US on valuation grounds.’ Liquidity needs of families are also changing and these asset allocations can enhance returns on investment. On this topic, Bell adds: "We are finding interesting opportunities in private equity for families prepared to accept illiquidity. We expect equities to make money for our clients this year but with increased volatility."

As the wealthy population of the world increases and develops, family offices are beginning to gain a greater prominence as a wealth management option. Many major hedge fund managers, executives and private bankers are starting to leave their businesses in favour of starting their own family office. In general, there has been an increase in the level of talent involved in this form of wealth management. In terms of industry knowledge and incorporating a global investment approach, the level has never been higher. Industry knowledge is a particularly key element of family offices as they require a large network of like-minded and trustworthy individuals. The ‘availability of top class professionals’ is something which Stanhope Capital feels is crucial and gives the UK market an ‘edge.’ On a similar note, Mitchell says: "Many Family Offices do embrace the need to identify and develop talent within the family members they serve and to do so in tandem with and the support of the family’s governing body. This is very important given the ownership and managerial responsibilities faced in stewarding businesses across multiple generations of family ownership (public or private ownership). It is not sufficient to simply have a focus on developing talent within the Family Office staff base."

Overall, family offices are beginning to gain exposure in the wealth management world. As wealth increases globally, particularly in the Asia Pacific region, the desire for the services provided by family offices also increases. One key element of their approach is the ease in which intergenerational wealth transfer can be achieved in comparison with larger private banks.

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