High-net-worth individuals are typically defined as those individuals with investable finance (financial assets excluding primary residence) of over $1m. A 2013 report found a global population of around 12m high-net-worth individuals with the following distribution1:
Ultra-high-net-worth individuals are defined as having investable finance of greater than $300m and have a global population of around 200,0002. Both high-net-worth and ultra-high-net-worth individuals may use family offices in order to manage their wealth. However, while those with ultra-high net worth may benefit from a single family office, with an average cost of 0.6% of assets under management3, for the majority of affluent individuals a multi-family office makes the most financial sense.
First though let’s start by defining what a family office is: Family offices emerged during the era of European monarchs who required a trusted person to administer the wealth of the crown whilst the king travelled to distant lands to lead wars and conquests. In the modern era, affluent and high net worth families have generally made their fortunes through their family businesses. Usually there is a patriarch or family leader who established the family business decades ago. Often deriving from this initial wealth, the family will establish various other companies and make alternative investments in real-estate, stock markets etc.
As the family’s wealth increases so too does the desire to preserve and develop it for future generations. However, this can only occur with the careful management of the family’s finances. Liquidity events arise when substantial assets are sold, including businesses, lots, farms and properties. It is common to hear of families that sell some important asset and within just a few years some members have already lost much of the capital, as the adage says, “wealthy grandfather, noble son, poor grandson.”
In the interest of preserving family wealth, families need to administer investments in a structured, methodological way. This falls upon employees of the family business or the family office, who assist the family in making optimal decisions in a number of areas including investments, taxes, legal issues, philanthropy, insurance and education. In order to achieve this diverse range of targets, family offices are usually composed of an interdisciplinary group of professionals, including a financial manager who makes investment decisions, lawyers, tax advisors, a secretary and some junior analysts.
Single family offices manage the wealth and interests of a single affluent family they are ideal for families with very large resources to administer; in Colombia for example we can be talking about families with over 100bn Pesos ($30m) of assets. Famous examples of single family offices include the Rothschild’s and the Rockefellers family offices, however more recently both have become multi-family offices.
Multi-family offices are designed to provide the same service as single family offices but to several families simultaneously, managing resources from 1bn Pesos (300,000) in liquid form to several hundreds of billions and investing it in diversified portfolios (real estate, private companies, local and international companies, stocks, bonds, ETF’s, derivatives, private equity funds and alternative investments).
Multi-family offices typically charge a percentage of the funds managed, some variable or fixed fees in exchange for certain value-added services and bonuses upon achieving targeted returns on these resources.
Some of the services provided by multi-family offices include:
- Creating and managing diversified portfolios of investment at national and international levels.
- Planning of family succession.
- Distribution of resources in the process of succession.
- Creating investment vehicles earmarked (SPVs) such as corporations, foundations and pension trusts.
- Tax planning at national and international levels.
- Financial education, especially aimed at the younger members of the family.
- Executorship, resource management to members of the family unfit or incapable (legally speaking).
- Acquisition of insurance.
- Liquidity management and treasury.
- Destination of resources for philanthropic purposes.
Recent trends have seen the entrance of large banks and hedge funds into the family office market, this stems from a desire to diversify revenue streams following the financial crisis. Many hedge funds, most notably Soros Fund Management, have converted to single family offices in a bid to escape SEC regulations which come as a part of the Dodd-Frank Act4.
In different regions family offices face different challenges and opportunities; in North America the increased regulation of the Dodd-Frank Act has forced multi-family offices to incur heavy costs, while single family offices remain unscathed. US trends have seen family offices become far more aggressive in their investment strategy while maintaining a sharp focus on risk. In Europe, the Eurozone crisis has led to more cautious behaviour due to the volatility currently seen in European economic, political, social, legal and tax environments. European trends have seen family offices diversify their portfolio to include gold, precious metals and farmland. In Asia, there has been an unprecedented growth in the number of high net worth individuals, this should lead to an increased demand for family offices, however, the concept is new to the region and the growth in family offices has so far failed to match the growth in very wealthy families4.
In the United States there are around 3000 family offices with assets under management of between $1 trillion and $1.2 trillion4. Meanwhile Europe and Asia contain around 1000 and 100 family offices respectively3. In addition, many family offices operate in secret and unknown to the general public.
Artika is one of the first multi-family offices created in Colombia.
For more information on our portfolio of services please contact us.
References