Why establish a single-family office?Enzo Caputo2021-09-20T18:23:08+02:00
Why establish a single-family office?
The main reasons for a family to establish a single-family office are:
to obtain full control.
to professionally manage their wealth, and
to successfully transfer that wealth to the next generation.
Read further or contact us for more information about how to design a single-family office.
Different families, different objectives
Every family arrives at the decision to start a single-family office from a different starting point. Some families already have an embedded family office and transform it to a stand-alone one. Others have just sold or floated their family business or simply generate a lot of liquidity from their business over time that they want to invest separately. Again, others are more focussed on the next generations or on gaining more control over their assets.
❝ When you have seen one family office,
you have only seen one family office ❞
Although every family has a different angle to the establishment of a single-family office, the drive behind it – the reason ‘why’ – is often comparable.
Below we have listed some of the main drivers for families to decide on setting up a single-family office. Every family is unique so for some only one reason will apply, while for others it is a combination or something completely different that triggers this. One way or the other, an own family office should bring added value to the family.
8 reasons for a single-family office:
Preserving the family legacy
Maintaining the legacy of the patriarch or matriarch of the family wealth and founder of the family business is one of the main reasons why a single-family office is considered (the ‘legacy’ function). Here we do not only talk about maintaining the actual wealth (which could already have changed generations), but also about his/her successful approach and philosophy with respect to the family wealth, the family values and/or strategy for the family business. This can also be referred to as his/her business, human, intellectual and social legacy; how to preserve his/her values and attitude for the generations to come?
Often it is the actual first generation wealth creator him/herself, who starts thinking about a family office strategy in order to control, safeguard or even increase the wealth for the next generation(s).
In case it is the second (or a later) generation that initiates this step, this is often done out of respect for the wealth creator, as they want to preserve his values and safeguard the family traditions – financial gain is not paramount.
❝ From shirtsleeves to shirtsleeves in three generations ❞
It could, however, also be the case that the next generation is of the opinion that the original wealth creator was an opportunist, relatively speaking, and even took irresponsible financial gambles, so they want to implement a more systematic approach. It is not uncommon that the ambition of the second generation to preserve the family values goes hand in hand with a relatively conservative approach to investing, in order to preserve the family fortune.
Control, coordination and consolidation of all family assets
For some international oriented families, the first step towards the establishment of a single-family office is sparked by the fact that they simply lose control and oversight of their numerous assets (the ‘oversight’ function).
The wealthier a family becomes, the more assets it normally owns and the more they are spread all over the globe. One can think of different businesses and participations all over the world and second (third, fourth, …) homes spread over multiple jurisdictions. The family may also have trophy assets such as private planes, yachts, classic cars, art and exclusive jewellery.
On top of that come all private investments: bank accounts for all family members with numerous banks in different jurisdictions, private equity, co-investments and commercial real estate. Just keeping track and safeguarding all these assets is a task on its own. When dealing with several generations the fact that they hold different forms of assets can be an extra complicating factor.
All these assets are often owned through various structures such as companies, trusts or foundations. Establishing, administrating and maintaining such structures can be highly complicated and burdensome, not to mention all the compliance, legal and tax work related to these types of structures.
The task of the single-family office is to document, control, administrate and consolidate all assets, to make sure ownership is legally well documented and all assets are structured and compliant with tax and cross-border legislation. The family office staff often executes transactions and coordinates external lawyers and tax advisors in multiple jurisdictions.
Just ensuring that the family and its assets are insured can be a challenging task in itself. Ultimately the family office becomes a central point of contact for all the family members.
Implementing an institutional approach to family wealth
When it is a family’s objective to preserve the family wealth over several generations it is our strong conviction that this is only feasible through the implementation of an institutional approach. The private wealth of the family should be managed as if it is a business.
Maintaining a family’s wealth is a job, a business as such. This approach is an absolute necessity and is unrelated to the actual size of a family’s wealth. This applies for every family that wants to retain its wealth, independent of its size.
❝ A family should manage their private wealth as if it is a business ❞
In practice, we notice that an increasing number of family businesses are implementing so-called family governance rules in order to realise this objective, but most families still lack a strategy that takes the overall wealth of the family into account. Once a family business has been sold, generates considerable profits or somebody inherits a lot of freely investable assets, we see regularly that an institutional approach to the family’s wealth is not implemented or is quickly forgotten.
Often important assets and activities are not included in this approach, although they should be. Wealth owners are often less interested or connected to their private assets compared to their business assets.
Setting up a single-family office is a way to approach the overall family wealth in an institutional manner, with structure and objectives in place for the wealth owner(s) and all affected family members (the ‘governance’ function). It also means that the family members commit to manage at least the majority of their assets collectively. It can help define purpose for all involved, create a forward vision and clarify responsibilities for all involved, thereby contributing to the preservation of assets and family coherence.
Transforming a private investment approach to an institutional one
The main task of a single-family office is, in most cases, investment management and the professionalisation of investing (the ‘investment’ function). Also in the future we expect investment management to remain the core activity of most family offices.
Establishing a single-family office or private investment office enables a wealthy family to implement an institutionalised independent investment approach, instead of behaving as private investors. The family hires own financial experts – which are completely on their side – to provide objective guidance with respect to the family’s strategic asset allocation, global investments and fees charged by asset managers and banks.
The family’s investment approach can be transformed, in most cases, from ad-hoc investing to one that is professional, systematic, formalised and customised. This results in a higher return on investments, lower costs and professional risk management. The family office may even evolve to become a highly entrepreneurial investment firm or the next generation inspires a change towards impact investing.
By deciding to invest collectively the family automatically creates pricing power due to economies of scale, reducing the overall costs of investments and opening up possibilities to invest in (institutional) alternative types of investment classes and sophisticated investments.
Preserving family wealth over generations
For most families, preserving the family wealth for several generations is a very important objective – if not the most important one – but history and statistics clearly show that not every family is able to pull this off (the ‘succession’ function). Approximately 60% of families will already have lost their wealth by the second generation and almost 90% will have lost it by the end of the third generation.
In order to realise the objective of preserving their wealth, a single-family office can be established to support the family with a wide range of tasks such as drafting family governance rules for the family business, putting proper risk management in place, budgeting, cash flow projections, monitoring and reporting of all the family’s assets and performance, and implementing estate- and succession planning. Wealth education and guidance for the next generation are often important to raise financial and fiscal awareness in the next generation – they need to become responsible stewards of the family wealth.
This combination of services and measures is implemented with the single goal to preserve (and grow) the family wealth over generations with all that time the family office in a coordinator role. The family office creates continuity when the generations change; there are clear rules in place.
Safeguarding the privacy of family members
Wealthy families cherish their privacy. Setting up a single-family office can support in maintaining a sense of privacy (the ‘privacy’ function) to a certain extent. Once a single-family office takes over a number of tasks from family members and represents them in the outside world, this is beneficial from a privacy point of view.
The fact that individual family members no longer are the main contact person for all types of investment decisions can be a relief for the family. In most cases the family office is also the confidant of the family. The privacy function is therefore often referred to as the ‘gatekeeper’ function.
The privacy of the family increases further when family members no longer hold assets, such as (second) homes, yachts and bank accounts personally, but the family office manages these assets and structures them suitably.
Wealth protection and stability for family members
In some – if not most – parts of the world, an important function of a single-family office is to protect the family, the wealth of the family and to safeguard the family members and assets in case of political, economic, geographic or religious instability (the ‘risk’ function).
There are multiple facets to consider in such risk management:
spreading assets over numerous jurisdictions;
only using safe and well-capitalised custodian banks;
acquiring second homes abroad for family members;
applying for and second citizenships in foreign jurisdictions;
organising proper insurance coverage (such as kidnap and ransom insurance); and
monitoring social media activity of young family members.
As every family is unique, ultimately every family has its own reasons for starting a single-family office. A combination of the above is often the case, but other reasons can also be considered. There are no wrong reasons. The single-family office should bring value to the family, make financial sense and be implemented professionally.