You know when the mystique around something begins to fade. It’s when the mainstream media begins to talk about it. And so it is with the family office. A term few had heard of 20 years ago is now popping up in the mainstream media. A few weeks ago, the UK daily newspaper The Guardian ran a long article about family offices.
Of course, this doesn’t mean new family office won’t be set up in the future. Many more will be - after all, family businesses as Family Capital has argued many times in the past, are still in the ascendancy and show no signs of slowing down as a business concept. And many family offices are started by family businesses. But the boom in their numbers increasing might just be over. Here’s five reasons why:
Cost and performance
It’s difficult to measure cost and performance of single-family offices because of the lack of information. The Campden Global Family Office Report 2015 reckons that costs are around 1% of assets under management. That number is probably irrelevant because very few family offices are the same. What is more relevant, which the study showed, is the fact that costs are going up. Anecdotal evidence, which in the family-office world might be a more reliable indicator, suggests these they are also rising.
Here’s what a head of a family office told Family Capital this week: “The cost of running a family office certainly hasn’t become cheaper in the last few years and I don’t expect it will in the future.”
Family offices say the rise is because of regulation and performance pressures. Regulatory/compliance costs have risen sharply for family offices, particularly in the US, since the financial crisis.
Higher costs aren’t been helped by performance. It’s difficult to rate the performance of family offices as a sector, because of a lack of data, but it’s likely their performance has mirrored that in the world of hedge funds, private equity and asset management. And all of these sectors have suffered as a result of the low returns in equity markets in the last few years.
So, costs and performance isn’t moving in the right direction for family offices. That may change, but for the time being, it’s a challenge for them.
Just as costs and performance present difficulties, single-family offices are facing stiffer competition from multi-family offices and private banks, as mentioned in an earlier article. Banks and multi-family offices are getting their act together after screwing up managing the money of the very wealthy during and immediately after the financial crisis in 2008.
They’ve listened to what the very wealthy want and have responded. Perhaps that would be expected from the big banks, which have the balance sheets to always offer at least something family offices want. But the MFOs have also adapted. MFOs realised if they didn’t reform they’d be out of business. So, families are asking themselves the question, if our needs can be met by a bank and/or a multi-family office, why do I need to set up a family office? Exactly - and expect more of them to ask that question in the future.
The boom in emerging markets appears to be well over, which means what hope there was for the growth in family offices in places like Brazil and China has receded dramatically. To begin with, family offices never really caught on in emerging markets, even when they were booming. Why, asked many very rich families in places like Saudi Arabia and Brazil, should we set up a family office when the family business provides more than enough for our needs. If anything, that attitude is likely to be reinforced with the slowdown in the economic growth of emerging markets.
The incredible pace of wealth creation, particularly for billionaires, looks to be slowing down, and may not pick up any time soon. Well, that’s at least what the experts are saying. A recent report from the luxury property group Knight Frank predicts that the growth in the numbers of ultra-high net worth individuals, including billionaires, is likely to fall in the next ten years. And less billionaires means less demand for family offices.
The continuous advances in technology might actually be a reason to have a family office, particularly if costs come down as a result. But, as Family Capital has said before, technology will most likely be a mixed blessing for family offices. At the very least, technological advances will see family offices change. At worst, technological advances might mean their relevance will fade rapidly.