Around every decade the world of finance throws up a new type of institution that captures the imagination of the wider public.
In the 1980s it was investment banks, the 90s gave us private equity firms and the 2000s was the decade of the hedge fund manager. All these types of finance firms had been around longer, but it was in these decades that they entered the wider public’s imagination.
So what about this decade – the 2010s? Is there a new type of financial institution arising? It still might be a little bit early to say, after all the financial world was hit hard by its biggest crisis since the Great Depression in the last few years of the last decade. That’s fed through into this decade with the sector being less confident about itself and less adventurous.
But if there is one institution that might fit the bill it is probably the family office. Family offices have certainly become much more visible in the world of finance, and awareness of them might just be spilling over to the wider pubic as well.
Most people who read Family Capital will know what they are – investment and wealth planning offices set up by very rich families or individuals to manage their money. How much is very wealthy? Well, most analysts say that $100m might get you started with a one-person family office, but realistically you will need at least $250m before you have the funds to run a viable one.
No one knows exactly how many family offices there are. Some say at least 3,000, others are more conservative and say 1,500. Family offices have been set up by billionaires, like Bill Gates and his former business partner Paul Allen. Many of their younger counterparts in Silicon Valley have set them up as well. Most European billionaires have one, although many of these are so discreet it’s difficult to be certain how many actually do. Increasingly, billionaires and multi-millionaires in many of the emerging markets are starting them.
Family offices have blossomed in the last 10 to 15 years for two reasons.
The growth of the super wealthy. Ten years ago there were just 587 billionaires in the world, according to Forbes. Now there are more than 1,600. Given global wealth trends, it’s probably fair to conclude that the numbers of those with wealth between $250m and $1bn have also tripled in the same period. So there are many more families that can afford to set one up.
Greater desire to manage one’s own finances. Many billionaires and multi-millionaires have been disillusioned with the services they have received from many of the banks and asset managers investing their money. Their disillusionment was reinforced by the financial crisis of 2008/09. Consequently, many of the super rich have moved money away from these institutions and set up family offices.
As the number of family offices has grown, so to has interest in them. This has led to a number of trends including banks and asset managers tailoring services for them, and the evolution of asset managers calling themselves multi-family offices. MFOs manage the money of the ultra-high net worth and purport to give the same personalised services as a single-family office might give. But, unlike single-family offices, they are commercial – they try to attract other families to join.
There has been another trend with the evolution of family offices, and this is where the weirdness comes into the sector. This is the tendency for individuals to call themselves family offices when they have nothing like the money needed to be classified as one.
Everyone wants a slice of the rich – and the richer they are the more appealing they become. So, family offices are seen by some as a good way to mix with the very rich and powerful. Access is helped by the fact that the sector isn’t regulated. Anyone can call themselves a family office.
That means the sector attracts a fair amount of fantasists and even fraudsters. Go to any conference on family offices – these have blossomed along with the sector – and among the legitimate family offices will be a sprinkling of these individuals.
Of course, legitimate family offices know this and they might see it as a price to pay to continue being an unregulated part of the financial services sector. Regulation might bring too much transparency, which is obviously good for exposing those pretending to be family offices, but might also reveal a bit too much about the level of assets under management at legitimate family offices.
Nevertheless, some family offices want to see more regulation of their sector. Some say it would help with building relationships with other parts of the financial services sector. These days some asset managers will only do business with regulated managers, so they are pushing for regulation of family offices.
Over the coming years, regulation might just catch up with them. But in the meantime, the weird and wonderful world of family offices will continue, albeit with the public gleaning an increasing awareness of what they do.