More high-net-worth (HNW) and ultra-high-net-worth (UHNW) families are choosing the family office model as a way to manage their wealth and assets. And over the past few years, more wealthy families have chosen the family office model over external hedge funds or other asset management solutions. The higher degree of flexibility and control is appealing to families who want to set their own course of wealth management, for now and future generations. What can we learn about the resurgence of the family office and its impact on succession planning?
The number of both HNW individuals and family offices has risen considerably over the last few years. The world’s HNWI population grew from 102,600 in 2010 to 200,900 in 20201. In parallel, the number of family offices grew by 38 percent2 between 2017 and 2019 and is now predicted to sit at around 100,000.
However, it is not just that there are more HNWIs across the globe; over the course of a decade, their financial wealth increased by 76 percent3, showing that wealthy individuals are now even more asset- and capital-rich. As a result, these individuals and their well-resourced families are looking for effective ways to manage their wealth, both in the present and for the next generation.
The family office has emerged as a financially efficient way to house and manage the wealth of UHNW families, and make succession planning much simpler. But what is it, and why is it becoming more popular?
What is a family office?
The term ‘family office’ is deceptively quaint, as it does not (necessarily) refer to a business run by related professionals. In fact, it is a professional organisational unit and private advisory firm that allows a family to separate assets from any one individual and manage their assets and investments in a way they choose.
The family office is an alternative to hedge funds and other external investment vehicles, as it allows those involved to retain complete control of how their money is invested and managed. The family can choose to invest in businesses and causes that align with their personal ethics, with complete control over the causes they support at all times.
There is virtually no upper limit to what they can oversee, as the family office of American-Hungarian billionaire and philanthropist George Soros reportedly manages around $25 billion4 (€22 billion) in assets. As there is a significant cost associated with setting up and maintaining a family office, it is typically only worthwhile for UHNWIs with assets totalling more than €35 million.
Family offices across the globe
Attitudes towards family offices differ from region to region. In Asia, family businesses tend to play a larger role in planning and wealth than in the US and Europe, where individuals’ wealth is more likely to be corporate owned. But there is one constant across the globe; the next generation want to ensure the wealth their family has built up is properly managed. A Hubbis5 report stated:
“While the founder generation might hold the bulk of the family wealth and the keys to the ultimate decision making, it is the second generation that appears more determined to promote more detailed and effective legacy and succession planning.”
Additionally, there is a global, well-resourced pool of family-run businesses that must also consider succession planning6. Family companies represent two-thirds of all businesses around the world and generate 70 percent7 of annual global GDP. Even if their wealth does not warrant a dedicated family office to manage it, planning on how to seamlessly transfer a business worth €1, €5 or €10 million is not an insignificant task. It can also be tricky to leave a balanced inheritance to family members who wish to tread their own professional path, and not be involved in running the family business.
Only 34 percent8 of US family businesses have a “robust, documented and communicated” succession plan in place. And those who have experienced a generational transfer often wish they had done things differently, as less than 50 percent9 of Asia’s families report that they achieved the right outcomes for family business succession.
What are the benefits of family offices?
Family offices can be a cost-efficient way for UHNW families to manage their money. They allow those in the direct line of succession to maintain control of their wealth and employ a dedicated team to manage every aspect of their assets and investments, from legal to financial. Considering that 39 percent of HNWIs under 40 are likely to request an ESG score on financial products, the family office model empowers the next generation to put their wealth towards causes that match their ethics.
There is also an aspect of compliance that may incentivise wealthy families to find the right structure to house their wealth. Following the collapse of family office Archegos Capital Management in early 2021, many anticipate that more global regulations will be introduced and increased intergovernmental cooperation will put pressure on family outfits to focus more on governance.
Family offices and succession planning
The challenge of succession planning around family offices is that estate equalisation can be exceptionally tricky. If one child takes over the running of the family business, they may also assume control of the assets it controls, leaving little else for their siblings. Additionally, many of the assets or investments controlled by the family office may be illiquid, meaning the next generation may not be able to use these large, inaccessible cash reserves to fund the lifestyle or career venture of their choosing.
Even smaller businesses, who do not reach the threshold for a family office investment vehicle, must consider formalising the structure of their business so it is easier to pass to the next generation.
As CapGemini’s Wealth Managemenet Top Trends report explains,
“There has been a shift towards professionalising single-family businesses to maximise tax efficiency and set them up as an entity separate to any single individual, making succession planning simpler.”
When looking to the future, trusting robust planning solutions like Swiss Life Generations will give wealthy families confidence that they are building lasting generational wealth. Liquidity planning through high-value variable universal life insurance (VULs) can give families a greater degree of choice and ensure their descendants are getting an equitable share of their inheritable wealth.
Whether they are interested in continuing the family business or using their inheritance funds to drive their own career or personal philanthropy, Swiss Life Generations ensures everyone is able to live a self-determined life.
[1, 2, 3] Top-Trends-in-Wealth-Management 2022
[5, 9] https://www.hubbis.com
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