The Changing Roles of Family Offices: Family Agents, Financial Planners or Risk Managers?

The world of the family office is changing. While existing family offices are shifting their strategic focus and simultaneously seeking to professionalise structures and platforms, new set-ups are entering the market in various jurisdictions with a multitude of structural facets.

A family office is traditionally established following a liquidity event, like for instance the complete or partial sale of the family business, in preparation of, or in the aftermath of generational succession events. This is still the case today.

However, the increasing complexity of international wealth and owner structures not only calls for professional state-of-the-art family office set-ups, but also results in the fact that families, perhaps single wealth owners and successful entrepreneurs who either may not yet have reached the threshold to establish their own single family office, or simply prefer not to, are in need of efficient and sophisticated ‘family office solutions’.

Moreover, strategic directions are also changing. While the classic family office structure continued to be perceived up until fairly recently as the safe keeper and manager of the family’s ‘nest-egg’, focusing almost entirely on wealth preservation, the majority of family offices today manage with a view to growth and thereby act in a variety of roles, ranging from the strategic adviser on family business and financial matters to risk manager.

The Central Agent to the Family

While a comprehensive asset protection and risk management strategy should aim for a clear separation between the three pillars of business, wealth and family, the family office represents the link between the different dimensions, thereby taking on functions and responsibilities on all three sides.

It is often the family office that is in charge of the selection process of future family business leaders, the information process for the family shareholders on business development, as well as the overseeing and coordinating the internal capital market; in the same way as it is the family office’sresponsibility to advise on strategic direction and planning. The latter may comprise the supervision and monitoring of short- and long-term financial plans as well as overall and individual allocations, including liquid and non-liquid assets, regardless of whether such are held directly by family members, via trust or fund structures.

Further, as the family moves into multi-generational ownership, the family office increasingly takes on a new function, namely sustaining family unity and keeping family branches and members together, while in addition playing a central role in succession planning structures.

Integral Role in Succession Planning

While in a first generation scenario, typically a single wealth owner controls structures and decisions, however, the test for the family office comes with the transfer to the next and all succeeding generations.

Family offices serving multi-generational families not only oversee the ‘pool’ of family assets, but are also in charge of coordinating income and liquidity requirements for individual family members, which may prove challenging, particularly when a multitude of personal and investment preferences, international dispersion as well as the ‘entrepreneur’s bias’ towards investments in non-traditional asset classes, including direct and strategic stakes, comes into play.

Efficiency in terms of costs and functionality is essential in the structural set-up, as is finding the right balance between family and external involvement. Recently ‘hybrid’ family office solutions have been emerging with core vehicles like the traditional trust or family fund combining with an advisory board or investment committee. While such structures typically represent the heart of the family office, operations differ substantially, largely depending on in-house versus external infrastructure and expertise, active versus outsourced investment management.

In the face of recent regulatory and market changes, owners are seeking greater involvement in the set-up, and increasing control with regard to the day-to-day operations of their family office and estate planning structures. The result of this has been that not only are private trust companies attracting increased interest, but the family offices themselves have become an integral part of estate and succession planning set-ups, staffing advisory and investment committees as much as trustees - and this as part of single as well as multi-family office set-ups.

Comprehensive Risk Management

In a family office context, risk management is often perceived as being restricted to the financial side, although its functions extend far beyond. As the strategic advisor to a single business and wealth owner and a family with multiple generations, I know that wealth preservation and asset protection go hand in hand with financial and operational controlling.

As a result of global markets and increasingly international ownership, combined with a multitude of investment opportunities with regard to alternative asset classes and newly-emerging regions, wealth structures today are more complex than ever. Wealth owners therefore are in need of not only best-in-class advice and state-of-the-art structuring, but also a higher level of protection and security.

The family office as the central coordinator has to be equipped with the right tools and infrastructure as well as in-house and outsourced expertise.

Further, the investment style of today’s family offices tends to be as entrepreneurial as the owners they are advising.

In addition to the classic real estate investments commonly found in the portfolios of business families, strategic investments, private equity and co-ventures are also popular. Solid asset/liability as well as cash management and liquidity monitoring are therefore as essential as professional consolidation systems, combined with the respective investment vehicles and holding structures.

Private placement funds are a commonly-used vehicle for professionalising investment processes as part of a family office set-up, providing, a solid governance framework while at the same time giving family members continued flexibility to invest according to their very own risk and return profile and preferences. This vehicle also allows for the possibility of bringing in external investors under a well-structured approach or even simply for the transfer of shares in the case of a succession event occurring on one side of the family and therefore avoiding to the prospect of liquidating at inconvenient times.

While the overseeing of operations and provision of advice are typical day-to-day activities and the core work of family office set-ups, a combination of structures is now common with the classic trust and foundation structures continuously being used for asset protection and tax planning purposes with the overarching aim of wealth preservation. Family funds, commonly set up as umbrella structures, efficiently service alternative and growth portfolios.

The family office today is therefore a true multi-tasker: it is a risk manager, providing solid governance and decision-making frameworks, it is the family’s central coordinator, the link to the business side, while at the same time paving the way for efficient implementation and operation of state-of-the-art investment processes combined with the setting-up of strong estate and financial planning frameworks.