How to create a successful single family office (SFO): If it was easy everyone would be doing it
The family office concept has been around for a long time, particularly in the US where the entry level to set them up is drilled down to the affluent population, yet the past decade has seen a significant increase in interest in higher value offices from European, Middle Eastern and Asian families driven by rising levels of wealth, a more transparent governmental environment and a need for continuity planning. However, the market has changed. Multi family offices are now rebranded as ‘private investment offices’ offering investment or deal advice only and examples include Stanhope Capital, Sandaire and Hassium. No longer do they help with school runs, getting your children into Eton or with holidays. Single family offices are more the day to day resource for the family that also runs the investments but traditionally this model has not worked well. Many Single family offices open up and within two years, are gone. Why? Expensive to run, they try and lower costs by sharing with another family but often can’t and the patriarch or matriarch loses patience or interest and shuts it down. So how do big families who seriously need help with their day to day lives, run a successful single family office? Citywealth’s April French Furnell spoke to advisors in the space to find out how family offices can avoid the pitfalls and evolve to meet their families challenges.
Family offices have historically been a hallmark of US wealth management, but not anymore, according to Catherine Grum, Head of Family Office Services at KPMG, “there have always been a number of established family offices in the UK and Europe but we have seen an increase in interest in the last 5 to 10 years from more UK and European families and most recently from those in the Middle East and Asia”. Grum believes this trend is due to several factors: “increasing levels of wealth combined with increasing complicated lives brought on by families being more internationally spread, investing and owning a wider range of assets and dealing with more and more tax and regulatory issues,” She adds, “secondly families looking at succession as current wealth holders age and thing about their legacy”.
Andra Ilie, Senior Manager – Family Matters at KPMG observes that there are regional differences in the focus of family offices. For example, she says “Whilst in the US the focus remains on investments European families are keener to leave a legacy, whilst Latin American families focus more on privacy. For Middle Eastern families, a large piece is around developing good governance and the family office is a large part of it. Chinese and Indian families are creating multi-functional offices to cover many purposes”.
Not peas in a pod
Despite the likenesses, it’s important to remember “A family office can mean different things to different people; you will find many varying definitions of a family office. There exists the saying; ‘If you’ve met one family office, you’ve met one family office.’ There is no perfect family office and the approach taken by each family varies enormously”, said Charlotte Filsell, Head of Client Relationship Management at multi-family office Sandaire.
Finding a purpose or objective for the family
Purpose it seems has become a recent wealth management industry ‘buzzword’, Ilie acknowledges but adds that “it is also the driver for the family’s business and emotional decisions. Once the family has determined their shared purpose, this can guide them towards drafting a blueprint that can help them meet their goals”.
David Bowen, head of private office consulting at Deloitte is in agreement: “Purpose is the most important consideration when creating a family office and forms the foundation for strategic objectives. Without a clear understanding of what the money is for, who it will serve, how it will serve them and when, it is very difficult for the family office to support the family effectively and deliver on the family’s objectives over time.”
Interestingly though, a UBS survey ‘Global Family Office Report 2018’ surveying 311 family offices found that only 32 per cent of family offices have a fully documented mission statement in place, demonstrating that 68 percent might not. Which would suggest there is work to be done in the space.
Establishing a family’s purpose and utilising this approach to their planning can mean that families “are far more likely to identify and implement strategies that they connect with and that will still resonate well with them in the medium to long term”, said Grum. Within this process, she adds that family offices can play a helpful role as a catalyst; helping families to understand and identify their purpose and introducing them to expert advisers where they need more support with this process.
Family rows unpick all the knitting
One of these advisors is Emily Griffiths-Hamilton, author of Your Business – Your Family – Their Future, who brings her own experience being the third generation of an entrepreneurial family. She explains “The distinguishing trait of a successful family office is how it organises itself to address not only quantitative, or financially focused, matters but also qualitative factors, the family itself.” She points to research by Roy Williams and Vic Preisser who conducted interviews with 3,250 family business and wealth owners at different points in their succession planning and found that 70% of each generation will involuntarily lose control of their assets through things like inattention, mismanagement, incompetence, foolish expenditures and family feuding. “In other words, no matter the family office structure in place, the primary causes of wealth erosion in each generation lies within the family itself, reflecting less than ideal decision-making in the upcoming generation”, she explains.
It’s therefore best to establish the family’s purpose and ensure it is communicated across generations. Within this, “Family offices are guardians” explains Grum. “They are often best placed to ensure that purposes and values are considered when any planning is undertaken and ensure that everything is consistent.”
In line with this, the culture of the family office is also becoming increasingly important. “While culture is usually driven by the family behind the family office and for many it has therefore been something that has simply been present from the outset, we’re now working with several families where more conscious thought is being put into its preservation and communication”, said Grum.
Bring in your own lawyer. Is it that easy?
Confidential internal communication and the courts
An additional challenge for family offices is the complexity of the global compliance and regulatory framework within which they operate. Robert Blower, a partner at Charles Russell Speechlys observes that “some [family offices] are taking steps to build in-house legal and compliance functions. Lawyers employed within family offices are increasingly having to consider issues such as how to achieve ‘legal professional privilege’ for their advice which means how to manage confidential communication without fear of the information ending up in court. The lawyer will need to be mindful of this when providing internal legal advice, though it seems unlikely that this would deter a family office from setting up a legal function.”.
Furthermore, according to Bowen, family office executives are increasingly recognizing the need for specialist skills and expertise in specific disciplines beyond their typical hard skills in business, finance, or law. “In particular, in IT and HR, as well as a range of ‘softer’ skills to address the often very personal nature of their employers’ issues – particularly for the relationships between different family members”, he said. On top of this, they are also creating their own institutional investment entities. “This institutionalisation has led to an increase in the number of single family offices co-investing alongside each other to compete for the very biggest deal opportunities”, Bowen explained. Families are also having to look more closely at cybersecurity. “Families are opting more for digitalizing their family offices and safeguarding their confidentiality across the world”, said Ilie. Grum adds “There’s much more awareness of outsourcing options now than there was five or 10 years ago so, as well as being a key consideration for newly created family offices, we’re seeing older family offices review their approach”.
According to Blower, “The level of wealth needed to justify the costs of establishing and running a family office is increasing”, yet with the increasing challenges and complexities of global families, the role of the family office is expected to become increasingly pivotal to a family’s success. So, it seems, it is not as easy as it might look, even if it provides ample bragging rights about having a family office. The answer to success then is knuckle down, think it through, realise, like a will, you might have taken a year to get to a final document, but by then you might have to start all over again as children marry or are born, pets die and your philanthropic ideas in life change. It will be a lifelong journey. Good luck.
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