This post originally appeared on Francois Botha.
Family offices often are the obvious wealth preservation vehicle of choice and numbers are growing steadily. Until recently, two forms of the family office have dominated – single-family offices, which are set up to serve a single individual and their family, and multi-family offices, which are consultancies that serve a select handful of clients, offering a broad array of services.
While many single-family offices have been highly successful, relatively few families can afford to set up and run these types of organizations, which are, by nature, cost-intensive. For those that can, the oversight requirements involved are hefty and not always attractive. For these reasons, the majority of ultra-wealthy individuals favor multi-family offices. However, multi-family offices also present wealthy individuals with unique challenges and disadvantages that cannot be overlooked. These, along with the advent of the digital age, have given rise to a new form of the family office – the virtual family office.
Challenges within traditional multi-family offices
While multi-family offices offer a host of benefits to their clients, they do present some challenges to those considering them, especially at the outset.
Thousands of multi-family offices exist. New players seem to be cropping up daily as traditional wealth managers rebrand and call themselves multi-family offices. It's a lucrative market and everyone wants a piece.
With so many multi-family offices touting their services, it is time-consuming and labor-intensive to size them all up, accurately assess their levels of sophistication and select the right one. This makes differentiating between serious players and the more sophisticated lightweights a significant challenge.
Another challenge lies in the fact that many family offices offer a host of professionals within each segment, all with different ways of working, making for disjointed teams. Also, because these professionals only consult within their field expertise, they don't always see the organization's bigger picture. Those that do will often refer clients to other consultants within their team, but then fail to collaborate successfully with them. This leads to contradictory directives and conflict.
The family office's unique financial needs
True family offices are structured around the individual needs and preferences of the family involved. At a fundamental level, these organizations function as an in-house wealth management consultancy, handling all financial functions from basic accounting and tax planning to philanthropy and investment oversight.
As family offices professionalize and grow in sophistication, they can be expanded to handle a range of more complex functions from private banking to tax compliance, governance and even family education and support services. Some customized personal services may also be included to cater to each family member's individual needs.
Depending on what is included in the cost estimation, most benchmarks indicate that The cost of running a basic family office is around 1% - 1.5% of Assets Under Management (AUM). With most of the benchmark reports referencing operations over $100million in AUM it's safe to assume that there could be a premium for operations servicing a lower levels of wealth. Therefore, with an investable wealth of around $50mil, costs easily start at $500,000 in salaries, fees and external services annually (depending on what's included). The issue facing the wealthy and executives alike is the need for this type of a support structure and to customize teams to manage the family office's unique business and financial requirements.
Enter the virtual family office
Thanks to technological advancements and some exceptionally talented professionals, virtual family offices are rapidly proving to be a superior alternative to traditional multi-family offices. This is primarily due to three key differentiators, namely, the human element involved, the ability of the professionals involved to work collaboratively and the implementation of systematic processes.
Like single-family offices, virtual ones are structured around the wealthy individual or family, offering a range of bespoke, client-centered services built on validated methodologies. One of the main benefits of this decentralized, technology-driven approach is that there could be considerable cost savings.
The independent advisors who run virtual family offices work collaboratively with professionals in every field. The human element involved in both client relationships and inter-professional ones ensures that the client's needs and "bigger picture" factored into all recommendations and services. This is also communicated across the virtual office's network of professionals. Every consultant involved considers these within their function, no matter how far removed it may seem.
As part of this systematic process, each consultant brings their expert ideas to the table for critique, vetting and strength testing. Only the best ideas survive, and agile strategies are formulated to drive unique, strategic solutions for the individual client. This is done for every issue family offices face and strategies continue to be tested and adjusted to make improvements.
While multi-family offices traditionally focus heavily on the financial side of family office business, virtual family offices often also consider soft assets. Therefore, in addition to investment, wealth management and general support services, some even offer unique services like impact investment advisors, reputation managers, family dynamics consultants, digital transformation specialists, architects, event planners and more.
This means that virtual family offices not only offer mainstream financial and business services but many times idiosyncratic ones too, affording clients access to the world's best professionals in each vertical, state-of-the-art services and preferential agreements. All of which makes for a superior all-in-one service offering that optimizes efficiency and ultimately, profitability.
Opportunities for current players and service providers.
Banks are another example of trusted partner that can support families on this level. By designing platforms that can support families behind their financial needs, banks are in the unique position where they are able to find new niches or mandates from families and deliver superior financial services.
As the investment landscape shifts, the face of the Family Office changes. With the rise of the virtual family office, more affluent individuals and families will have access to the benefits of having a family office; the best-of-the-best global consultants, consolidated reporting, efficient team management. All while being more cost-effective and agile than previously on offer from the more traditional forms of office. The best part, its more likely to appeal to the upcoming generation as they start to come into the fold, reducing the rate of potential redundancy down the line.