In years past, wealth management and preservation services for affluent individuals and families was, to a large extent, the exclusive purview of single family offices, popularly known as non-bank “boutiques” because of their small size.
Today, however, family office services expanded well over the Family office borders, as big private banks and other wealth management firms have entered the playing field en masse. Family office services are now accessible to a larger spectrum of wealthy individuals and families who previously would not have benefitted from it. This development has various implications for the nature of services offered and profits generated by small “non-bank” family offices. “Non-bank” is an important distinction, as many large banks and financial houses are offering family office-like services.
A nine-year period of ultra-low interest rates has inevitably affected how investors deploy capital. For private family offices, it means shaking off their sleepy reputation. In the search for higher returns, many are taking a more hands-on approach to investment, and increasing their exposure to higher-yielding assets like real estate.
It represents a natural evolution for an investment model that only became widespread in the 1980s, but also follows greater scrutiny of traditional asset managers. Institutional funds and hedge funds have battled against an outflow of investors’ cash as they struggle to justify investment methods and fee structures in markets that have become more difficult to second guess.
Private banks vs. small non-bank boutique family offices
As the number of ultra-high-net-worth individuals (UHNWIs) increased globally, more private banks began to morph into big family offices to meet the growing demand for wealth management in affluent families. According to the Capgemini and RBC Wealth Management Report, ultra-high-net-worth individuals (those with US$30 million or more in investable assets) have worldwide assets that total $14.7 trillion as of 2012, an 11 percent increase from the previous year. Today, many large private banks with global reach have units specially created to offer family office services to the ultra-wealthy. This is making the industry landscape more competitive as it is becoming increasingly difficult for traditional family offices (the small non-bank boutiques) to secure bigger deals and make more profit.
How small non-bank family offices are taking on the challenge
In a bid to secure more clientele and better deals, family offices are beginning to provide more personalized services that represent a departure from the services they traditionally offered. Family offices have diversified their services and now commonly offer travel planning, family historians, and even staff psychologists. While some family offices have resorted to outsourcing certain services to bigger private banks, others have entered into mergers to form multi-family offices. This allows them to secure better deals and to compete effectively with bigger private banks.
Despite these changes, family offices still face challenges. Most family offices do not possess large capital bases like their private banking counterparts, so offering more specialized services can increase their operational cost and lead to lower profits. To solve this dilemma, some family offices have adopted a strategy of charging a fixed annualized fees to cover some operational costs.
Merits of employing the services of a small non-bank family office provider
Notwithstanding the stiff competition from private banks and other wealth management firms, family office owners believe they still represent the best choice for the wealth management needs of affluent families. They argue that they are specifically designed to meet the needs of affluent families by offering personalized services, unlike private banks that entered the marketplace solely for profit.
Nevertheless, the Bank Family Office will never be in condition to satisfy the key conditions that the families are addressing. In fact the investment range and quality are not the fundamental values of a pure FO: banks and third parties asset managers are managing the assets (the FO is only a supervisor and strategic selector of managers). The pure FO is instead the grantor of independency, privacy and continuity. These are all values that a bank cannot guarantee.
How to choose the best service provider
One strategy for finding the best family office provider is to look for one that offers services that meet the family’s unique needs. The FO is the structure able to coordinate the diversified investments across several banks and properly manage the risks and the allocation. A typical issue of the larger clients is to understand the performance of each asset manager or each bank and compare several different approached on a risk-adjusted basis. This is one of the main tasks of the FO, as well as the capability to reassess the asset allocation typically proposed by banks. The banks tend to push the performance at any cost pushed by the clients, which tend to change manager according to the final performance. The client with larger drawdowns than expected undoubtedly pays the cost. The FO has to mitigate and manage this effect.
Moreover, if the family prefers to make alternative and private investments, then it requires personalized services such as financial education and professional advice, that a traditional family office might better provide. When choosing an office, families should consider the years of industry experience a family office provider has under its belt.
The Italian situation
It started no more than 10-15 years ago as an evolution of the private banking service, yet the family office is now also taking hold in Italy, where there are plenty of wealthy entrepreneurial families looking for total control and management of their assets.
In fact, the large entrepreneurial families have started to use services that not only handle asset management, but the other needs of all its members too.
The aim of such a service is essentially the long-term maintenance of the fortune belonging to entrepreneurial families and businesses, with a personal and entrepreneurial risk management and consequent distribution among the various family members.
Out of the 133 structures surveyed in Italy, the Magstat observatory notes that most (110 to be exact) operate as a multi-family office, by providing services to family groups that may or may not be shareholders of the family office itself. Conversely, only 23 fall into the category of a single-family office, which manages the assets of a single family, as sole owners of the organization.
As the family office market evolves, the family offices will continue to offer a unique and specialized service to their clients, as well as strategically collaborate with other professionals, allowing them to fend off stiff competition from private banks while still delivering better value to their clients.
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