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The rise of the family office

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The pandemic has prompted more ultra-high-net-worth-individuals to establish family offices – an investment structure that builds and protects wealth, while creating a long-term legacy.

Family offices are a fast-growing segment of the wealth management industry. A single-family office is an investment structure that manages the money of an ultra-high-net-worth-individual (UHNWI) and their family, while a multifamily office is responsible for the wealth of several families under one umbrella. They are typically established when a pool of wealth grows to a size that the family’s investment needs are best met by a tailor-made institutional setup.

The bespoke nature of family offices means that no two offices are the same. “There’s not one size that fits all. They are really tailored to the beneficial owner,” said Caroline Kitidis, Managing Director, Regional Head of UHNWI clients for EMEA and U.S., HSBC Global Private Banking, who was speaking as part of a Market Insights panel during HSBC’s 2022 Global Emerging Markets Forum.

A family office can be based in one jurisdiction, or it can operate out of multiple cities. In terms of assets under management, family offices typically start at around USD300 million, but can exceed USD1 billion. An office can hire anywhere from ten to 100 professionals – including portfolio managers, accountants and lawyers.

Family offices are a well-established structure in Europe and the US, having helped UHNWIs grow and pass on their wealth over several generations. In emerging markets, especially Asia and the Middle East, the family office is a relatively new structure that is gaining traction among the first-generation founders of successful businesses.

Despite the huge variation in size, structures and geographies, there is one thing that family offices typically have in common – namely, they manage private money. This means that although the money is managed with the professionalism of an institution, there are not the same institutional hurdles that an asset manager might have to adhere to.

This is a real benefit, as they have the ability to make decisions quickly, move capital efficiently, and look at a wide array of investments.

Caroline Kitidis | Managing Director, Regional Head of Ultra High Net Worth clients for EMEA and U.S., HSBC Global Private Banking

Leaving a legacy

A key part of a family office’s formal structure is its governance framework – a set of rules that act as checks and balances on how the wealth is handled. These rules are specified when the family office is established, taking into consideration the requirements of stakeholders, the dynamics between different family members, and the relationship between the family to the family business.

But one of the challenges to setting up a private office is that it requires businesspeople to take time out of their busy schedules to put in place a governance framework and build a team of professionals. “Wealth creators may be cash rich, but they are often time poor,” said Jeremy Franks, Managing Director, Head of Wealth Planning and Advisory, UK and EMEA, HSBC Global Private Banking.

He described how the pandemic prompted many UHNWIs to take a step back and ask difficult questions about their wealth, its purpose and its future. COVID-19 highlighted how businesses can be blown off course by unforeseen events, which has led to a demand for family office structures that separate a family’s wealth from the family business or businesses, so that a downturn in one limits the potential impact on the other.

Another impact of the pandemic is that it made many successful businesspeople think about more than their financial situation, with a focus on their legacy – in other words, the long-term mark that they leave on the world.

“When you talk about legacy, is not a discussion just about assets, but about values,” said Mr. Franks. “We are helping many clients address the questions about the purpose of their wealth. For a significant number of clients, part of the answer involves philanthropy.”

A bespoke offering

When a bank services a family office, it is a collaborative effort that brings in professionals from different parts of the organisation to deliver the products and services that meet the client’s very specific needs.

“We have to partner with our colleagues on the private banking side, corporate banking, as well as markets and securities services to provide these customised services,” said Patrick Boumalham, Managing Director, Global Head of Wealth Sales, HSBC Markets & Securities Services.

He described how family offices are looking for a growing range of services typical of institutional investors, and how the financially savvy younger generation of a family tends to take a keen interest in how its money is managed. The increasingly sophisticated services they might use include: insight into institutional flows, electronic execution, repurchase agreement products, hedging, or shorting solutions.

In the current economic environment, concerns of slowing growth, rising rates, and inflationary pressure, are prompting family offices to adopt cautious investment strategies. There is a shift away from credit towards cash, with a focus on value preservation.

“Many family offices are on the sidelines, looking for cash and yield enhancement solutions,” said Mr. Boumalham. “We have also been active in the FX overlay space because these families have international businesses that have cash flows in various currencies and they want to take a systematic approach to manage and optimise their hedging.”

Giving back to society

The pandemic has had a broad impact across economics and finance. At the higher echelons of wealth management, COVID-19 has prompted more UHNWIs to establish tailor-made investment structures that separate the family wealth from the family business and manages it in an institutional manner. But the lasting impact of family offices will be the way that they can allow the most successful businesspeople to leave legacies that are felt for generations, with philanthropy a tool to give back to society.

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