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Inova is a commercial multi-family office platform in the long-standing Swiss tradition
of dedicated wealth management providing investment management services to institutional investors, private wealth clients and financial intermediaries.
Rise of the
A rising number of wealthy individuals has seen a concurrent rise in a specialised form of wealth managers—the Family Office. A family office is a dedicated financial and wealth management entity for Ultra High Net Worth Individuals (UHNWI) and their families. The role of a family office is to manage, build and sustain the wealth of a family for current and future generations.
Family offices offer tailor-made services to their clients which may include wealth and asset management, multigenerational wealth management, record keeping (documentation), tax and legal advisory, compliance and regulatory assistance, risk management, budgeting, insurance planning, philanthropy management, and even fleet management, among others. While no official estimates are available press reports and industry reports suggest there were around 6,000 family offices globally as of 2013, with roughly half in the US, and around 1,000 in Europe. The rise of wealthy individuals is expected to support a rise in the number of family offices and their assets under management.
While single family offices (SFOs) continue to be popular with the ultra-rich, multi-family offices are seeing robust growth. Between 2008 and 2018, the mean size of assets under advice of an SFO remained at USD500 million, whereas the same for MFOs has tripled to USD7 billion. Structurally, MFOs offer greater bandwidth and wider range of services in a cost-effective manner. The annual cost of running an SFO is roughly 0.6–1% of assets under advice; for a client with assets of USD100 million, it translates to USD1 million.
This is nearly 4–5 times the cost of operating a USD100 billion MFO. The ‘value for money’ proposition is enticing wealthy families to benefit from the services of MFOs. Additionally, SFOs are limited to a single family, whereas MFOs are scalable and reap the benefits of leveraging efficiencies of scale. MFOs in-turn are attracting relatively less wealthy families (assets in the range of $30–100 mn) to whom they may offer a narrower spectrum of services. Attracting these families not only broadens the client-base but also ensures MFOs create relationships with these upwardly mobile families fairly early-on.
Family offices as a way of preserving wealth have an edge over private bankers and wealth managers…
Family offices are fast replacing the traditional investment banks and wealth managers for managing the wealth of ultra-rich families. This has become especially true after the financial crisis when the role of bankers garnered negative media coverage. For families, the critical aspects that guide the choice of wealth managers are objectivity, continuity and stability of managers, and an assurance that family wealth would be preserved through successive generations. Compliance with these aspects has helped family offices gain ground.
Better alignment of interest...Family offices are driven solely by the goals and needs of the family. Private banks and wealth managers, on the other hand, may be driven by internal financial targets that are not necessarily aligned with the interests of the clients. Family offices do not need to push the sale of financial products. Private banks or wealth management arms of large listed banks also have to work towards safeguarding shareholder interests, which again may not be in sync with the client’s goals.
Trust and continuity...
Wealth management for HNWIs and UHNWIs is a delicate and sensitive matter. The managing entity is expected to be a trusted advisor on key issues facing the family. Usually, a typical family office (SFO) has a member of the family and/or a family confidant associated with the operational activity. In such a case, the trust factor in (i) disclosing all the business and family information, family goals, etc. and (ii) passing over the responsibility to preserve and grow the family wealth, is high as compared to confiding the same with wealth managers of private banks. In case of MFOs, the turnover of employees is lower vis-à-vis private banks. The employee-client interaction is nurtured for a longer period, leading to better relationship management. On the other hand, in the private banking domain, as the turnover of employees and managers is high, families may not work with the same manager over generations. Also, due to a smaller number of clients (one in case of SFOs and 10–12 in case of MFOs compared with over 100 in private banks), family offices are better suited to offer closer attention and tailor-made solutions to families.
Preservation of family legacy through generations...
Successful wealthy families face a peculiar risk – internal squabbles and family feuds leading to squandering of family wealth by successors. A well-managed family office ushers a fair and fact-based decision making approach in succession planning. Additionally, the independent and objective-oriented perspective improves the process of managing family wealth across generations. As a result, rather than fighting over ownership, distribution and similar issues, the successive generations are cohesively held together with emphasis on preserving and nurturing the family wealth.
barring some limitations...
Although family offices have turned out to be an effective and preferred platform for wealthy families, certain restrictions exist.
Size of organization...
Family offices, in some cases, might not have the critical size to deal with corporate or sovereign bond issues. Also, most often, they lack in-house expertise to analyze financial statements of bond issuers. This becomes a hindrance when debt as an asset class is the apt investment option.
Single family dominating the proceedings...
In case of MFOs (where multiple wealthy families are involved), if one family dictates the operational activities of the MFO, the solutions offered to the entire group might be influenced by the opinions of that family. This risk is more prominent when a major founding family with its own capital base is associated with the office.
About the author(s)
Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.