Last year a fourth generation US family quietly shut down their 15-year-old family office, despite having $600 million in assets. With rising costs, staff turnover and family disagreements, the operation had come to feel ‘more like running a small corporation than stewarding family wealth’. Their story is increasingly common.
Family offices are meant to make a family’s life easier. When they are well structured and professionally run, they can be one of the most powerful tools for family cohesion, wealth management, governance and succession planning. They have long been considered a must-have for families with substantial wealth and, more recently, have become rather fashionable to boot.
This is partly why the tally of family offices around the world has grown considerably over the past decade. Research by Deloitte (one of the sector’s leading chroniclers) suggests there are now at least 8,030 single family offices overseeing assets of $100 million or more, up from 6,130 in 2019, and it projects the total will reach 10,720 by 2030.
[See also: What is a family office and do you need one?]
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And yet, at the same time, a rising number are either closing, consolidating or shifting to outsourced models.
As you’d expect, there are various factors at play, but some common themes emerge. The trend is most obvious in the US. The global mobility of family members (and the fiscal complications that ensue), family conflict, escalating costs, governance failures, regulatory pressures and succession gaps can mean that trying to fulfil all the family’s requirements with an in-house team feels like an increasingly compromised solution. In some cases it presents an insurmountable challenge.
Cost is often at the heart of the issue. J. P. Morgan Private Bank estimates that the average cost of a family office managing $1 billion is $6.6 million and rising, but it’s the family offices overseeing between $250 million and $750 million that are often under most pressure. Indeed, one mid-sized office I spoke to (with assets of $450 million) told me they realised that regulatory, legal, accounting and investment staff alone consumed nearly 70 per cent of its annual budget – before any technology upgrades, cybersecurity or property oversight.
[See also: How family offices are becoming the new investors in capital markets]
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The financial commitment is not much lower for smaller family offices and can mean annual running costs are above 2 per cent of the wealth being overseen. Doris Meister, former chair of Wilmington Trust, explains: ‘There are increasing numbers closing. A lot of families form family offices without fully understanding what it is going to take to run it from a cost perspective.’
Important as it is, cost is not the only factor. The Wharton Global Family Alliance reports low next-gen involvement, with only 12 per cent expected to work in the family office in the future, making governance the top challenge for 86 per cent of family office executives and signalling a structural vulnerability.
When governance structures fail to evolve, conflict becomes inevitable. One advisory firm I know recounted a case where two siblings, living in different US states with opposing tax residencies, couldn’t agree on investment policy or trustee appointments. The stalemate soon paralysed the office’s decision-making, and the family dissolved the structure rather than escalate the conflict. ‘When it’s the fourth generation… it depends how much the kids hate each other by then,’ notes Andrew Apfelberg, a partner at Greenberg Glusker.
[See also: Family offices still struggling to bridge generation gap]
What fills the vacuum? One solution is known as ‘hybridisation’, making use of outsourced services where applicable and shrinking the old family office to a core unit that handles governance. One family reduced their 18-person office to a three-person governance core: a trusted adviser, an analyst and a bookkeeper. Investment management was outsourced to two institutional partners; property and lifestyle management were kept in house. Costs dropped by 60 per cent, reporting quality improved, and the principal expressed relief that the ‘new architecture feels more agile and less political’.
Other key parts of the equation – which make hybridisation more attractive still – include the changing investment landscape, market dynamics and preferences of the next gen. According to Citi Private Bank, family offices are moving away from self-sourced, direct investments. Increasingly, a preferred option is a professionally advised co-investment.
Taking the decision to close or scale back is in no way a sign of failure. Instead, it can often be better understood as a healthy evolution: a recalibration by pragmatic families who are asking all the right questions about their three Ps: purpose, people (family members) and platform (operating model). As one family office principal said to me: ‘We are just becoming leaner, wiser and more intentional.’
This article first appeared in Spear’s Magazine Issue 99. Click here to subscribe
