Family Office 101

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In this series we will discuss 5 major pitfalls to watch out for when moving from standard wealth management services (provided by a private bank) to dedicated family office services.

According to recent market research, the number of billionaires and Ultra High Net Worth (UHNW) families around the globe continues to grow year after year. This development has clearly affected demand for wealth management services, and more and more families are now turning to family offices to manage their wealth.

There are currently two types of family offices in existence:

  1. Single-family office (hereinafter referred to as “SFO”), which is a private company that manages investments and trusts for a single family.
  2. Multi-family office (“MFO”), which is an organization that supports multiple families to manage their entire wealth.

As a result of this development, all manner of wealth managers, financial advisors, trust companies, consultants and financial service providers are entering the family office market with the aim of getting in on the action, with most of them providing one or several types of MFO service. It is important to note that they are driven not only by increased demand, but that they find the family office environment appealing due to the regulatory demands they face, the consolidation of the private banking industry, cost pressure, the hunt for wealthier clients, and the “hype” surrounding family office services over the last few years.

Family Office 101

Making the transition from wealth management to family office services

One of the most frequently asked questions is what amount of wealth is necessary for it to make sense to set up an SFO or to start using MFO services. This is also the question that many families ask when they first approach us, but there is no one right answer to this.

Before considering an SFO or using an MFO, a family must pinpoint:

  • Its goals
  • What type of family office it aims for
  • What type of services it needs
  • Why a family office would actually be needed
  • Which budget is available
  • Whether it expects family members to be actively involved in the family office.

As there are so many aspects involved in the decision to establish an SFO, this thought process is the only way for a family to choose the right structure for its circumstances and needs.

Most families start thinking about an SFO because they would like to have full control over their family wealth. Furthermore, it enables them to establish the family office according to their exact wishes and to ensure it delivers the precise services they need. But having full control also means having your own, recruit, and manage that staff. Providing the long list of services needed in an SFO requires a large staff and a numerous costs. Furthermore, an SFO needs to develop its services by itself, whereas families selecting an MFO dip into existing set of services and structures. All these aspects are often forgotten at the start of the process.

Now let’s consider the families who might desire the services of an MFO. These families are looking for a provider without any conflict of interest, better services, and more tailored advice. But where an SFO is never commercially driven, MFOs mostly are. Only a small number of MFO providers originate from an existing SFO, having changed to the MFO model just to share costs with other families. The majority of MFOs are out there to make money, just like traditional wealth managers and your current provider. There is absolutely nothing wrong with that, but as a client you need to be well aware of the fact that many of the services are often just a client acquisition tool for MFO providers.

In the next part of this series we talk about which jurisdictions to establish a family office in and why that is such an important element of the process.

Jan van Bueren & Thomas Ming are Co-Founders of FOSS Family Office Services Switzerland & Senior Wealth Planners in Zurich at Union Bancaire Privée, UBP SA.
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