Top 3 Trends Affecting Private Wealth Management

By Richard Wilson AAA

Family offices are private wealth management advisory firms that serve ultra-high-net-worth clients. According to the Family Office Exchange, there are more than 3,500 family offices based in the United States. By offering a complete outsourced solution to managing finances and investments, including budgeting, insurance, charitable giving, family-owned business, and wealth transfer and tax services, these offices set themselves apart from traditional wealth management firms. Although they vary in their level of service, most typically invest heavily in consultants, databases and analytical tools that help them conduct due diligence on money managers or optimize a portfolio of investments for tax purposes.

In this article, we'll review the top three trends affecting family offices, including the rapid growth of the family office industry, the types of family office services provided, and the increasingly sophisticated use of hedge funds and alternative investments by both single and multifamily offices.

SEE: Investopedia's Net Worth Tracker

Family Office Facts
There are two types of family offices: single-family offices (SFOs) and multifamily offices (MFOs). Single family offices serve one wealthy family, while multifamily offices operate more like traditional private wealth management practices with multiple clients. Multifamily offices are much more common because they can spread heavy investments in technology and consultants among several high-net-worth clients instead of a single individual or family. According to the Greycourt White Paper "Establishing A Family Office: A Few Basics", the minimum size for a family office can vary, because "If the goal is simply to provide family-wide accounting and bookkeeping, a family with as little as $50 million will find it economical to establish an office. On the other hand, a fully integrated family office is probably accessible only to very large families, typically those with more than $1 billion." (Want to attract this type of clientèle? Read Targeting Ideal Customers.)

These high net worth clients can run into a gamut of issues that you need to be prepared to deal with. There are three trends in particular that may change the way you do business with these individuals.

Tackling the Trends
Prominent trends fueling the growth of family offices include:

1. There is a growing number of high-net-worth and ultra-high-net-worth classes around the world.
In most developed nations, the wealthy are accumulating assets more rapidly than the middle class. At the same time, many emerging economies are thriving, with annual growth rates of 4-8%. Many experts have noted that by 2015-2020, China's upper class will be larger than America's middle class. Growth in countries such as China, Brazil, India and Russia will ensure that the family office format of wealth management services continues to grow in popularity over the next five to seven years. (To learn more about emerging economies, see What Is An Emerging Market Economy? and Demographic Trends And The Implications For Investment.)

2. Profitability is a growing challenge for family offices.
As populations amass greater wealth, large wealth management firms are competing on a cost basis and moving a larger portion of their core services online. While the average person might appreciate saving hundreds or even thousands of dollars in fees each year, many affluent individuals would much rather spend $20,000 to $100,000 a year to ensure that experienced professionals are managing their investments and taxes to fit their specific financial goals and risk tolerances. (Keep reading about risk tolerance in Risk Tolerance Only Tells Half The Story.)

Many of these individuals run businesses or have complex wealth management or tax-related needs, and they require a team of experts to help manage their finances. Family offices are becoming the common answer to that demand, remaining highly profitable while also serving the unique needs of the ultra-affluent.

3. Ultra-affluent clients are demanding highly professional financial services.
While there are no set rules on what services a family office can or cannot offer, there are common investment and finance-related services that most of them provide for their clients. Many of these advanced services are not available within a private banking or traditional wealth management setting, simply because they are affordable only for the most affluent clientèle.

Some of these typical services include:

  • Investment portfolio management
  • Tax management and advisory
  • Cash flow management and budgeting
  • Multigenerational wealth transfers
  • Family business and financial advisory
  • Donations to nonprofits and major gift plans
  • Political donations

Family offices also offer superior expertise on constructing or selecting alternative investment portfolios and products. Many have invested heavily in systems, reporting and institutional consultants to help select the most appropriate alternative investment managers and products for their high-net-worth clients.

Conclusion
A complete, well-developed alternative investment platform at a family office is a competitive advantage, and as competition increases among multifamily offices these platforms will be more global, transparent and diverse in their offerings. Knowing these trends and changing your offices to accommodate them can set your firm on solid ground with these often demanding and rewarding families.

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