The future of the family office

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Welcome to part two of this mini-series on family offices. You can read part one here. 

Last week, I explained what a family office is and how they are typically set up. I explained what they do, and how over time they might refine and optimize their offering through a process that I call ‘sophistication’. Today we’re going to look at how family offices are evolving — and why you might set up your own family office, even if you aren’t a billionaire. 

Now, let’s talk about the next evolutionary step: how single-family offices open their services up to a wider audience.

Becoming a multi-family office is one way to do this. Take HQ Trust, which was originally founded to serve members of the Quandt industrial family before opening its doors to outside clients in 1988. It has since grown to become one of Germany’s largest multi-family offices, providing clients with a wide array of services, from investment management to consolidated reporting. 

Another option is to open the investment strategy to co-investors. One recent example here is last year’s merger of MSD Partners, the family office of Dell Technologies founder Michael Dell, and Chicago-based merchant bank BDT & Company. Together, the firms plan to expand their strategies in areas such as growth equity and real estate. (I very much recommend listening to Gregg Lemkau, co-CEO of the combined firm, talk through the merger on Capital Allocators.)

While many of the single-family offices I know have considered opening themselves up to outside clients, very few actually take this step. By nature, a single-family office is set up to give all of its attention to a small group of clients from the family. Opening up to new clients, even if the family remains the biggest client, inevitably results in a partial diversion of attention away from them. This can be hard to accept, especially after being used to the other alternative.

Are Scrooge McDuck-levels of riches required to set up your own family office?

The family offices we have looked at in this mini-series have all been set up by exceptionally wealthy individuals. You might wonder what this all means for you — and if you will ever be wealthy enough to set one up for yourself. 

The thing is, you don’t need to be a billionaire to set up a family office.

First, let’s look at the family office as a concierge: a team helping the owners with private matters, such as personal assistance (like scheduling and travel planning) or financial, non-investment topics (such as tax or estate planning). This can be provided with as little as a single family assistant. From my experience, I would estimate that a 3-4 person team, plus related expenses, would cost somewhere in the mid six figures.

Things are more expensive for investment matters. Experienced staff can easily command six-figure salaries, excluding entrepreneurial compensation such as bonuses or carry. As a result, I’ve seen investment teams start at mid six figures, but quickly rise to seven figures per year. Things may look different in smaller structures, such as an angel investor offering a young professional a five- to six-figure salary, but a fully-fledged institutional grade investment team would, of course, be much more expensive.

So with this in mind, what asset base should you have to set up a family office? There’s three approaches I’ve experienced first-hand:

1. There’s a rule of thumb that a family office should cost between 0.5% and 1% of investable assets per year. Assuming you have investable assets between €100M and €200M, that would mean you would spend €1M per year setting up and running the family office of your dreams.  

2. My preferred approach is to look at what the family office can contribute. If you are a billionaire but just want a long-term ETF portfolio, you could probably get by working with a private bank. If you are someone with less than €100M, but you invest in assets where even a small investment team can drive outsized returns (such as real estate or VC), it might make sense to set up a family office that costs you more than the aforementioned 0.5% to 1% per year. In the end, any number can be adequate to set up a family office, so long as the owner(s) feel like the team is generating a sufficient return compared to what they cost.

3. Finally, you can weigh the time and money a family office can save against the cost of setting one up. Understandably, many successful entrepreneurs hire family office staff not just to help them invest, but also to save them time. After many years of hard work and with enough of a nest egg to never have to work full time again, it’s understandable to not want to deal with tax advisors and bookkeeping matters. Even if that’s not the case for you, the time that family office staff can save you (even if they aren’t generating additional returns) means you, the entrepreneur, have more time to focus on new endeavors. In my experience, that time saving is often significantly more valuable than generating an additional 1% return on your liquid assets. So even if your asset base doesn’t pass based on the other two approaches, if you’re willing to pay for a team, you’re free to do it. 

The growing importance of family office - especially if you’re not uber-rich

While I genuinely hope that all my readers will one day contemplate whether a family office makes sense for them, you might think that the topic is less relevant for you today. (Admittedly, I’m also a few steps away from setting up my own.) But if your professional success is in any way dependent on outside capital - whether you are a start-up founder looking to raise funding, a venture capitalist setting up a fund, or a wealth manager looking for a new group of clients - family offices will only become more important to what you do.

And the driving force for this change is the ongoing democratization of finance and capital markets.

First, it’s now easier to set up a family office in the first place. You no longer need to have hundreds of millions to tap into previously hard-to-access investments. Take private equity: While historically only available if you could invest 10M€ or more in a single fund, you can now invest in the asset class through platforms such as Moonfare, through your private bank, or even, if you’re a savvy networker, directly. At the same time, the back-office services required for a family office have become more efficient, and less expensive. As a result, affluent individuals looking to set up family offices today have much broader access to investments, and require a much smaller team than in the past - and as capital and team requirements loosen, lead them to set up their own family office.

Second, and perhaps more important, is that financial information is more accessble than ever today, and how that is leading to disintermediation in the financial industry.

Ten or twenty years ago, an affluent individual looking to invest their hard-earned money would talk to their financial advisor - and end up with one or more, usually not-so-great performing and expensive actively managed funds. Today, an affluent individual is much more likely to go out to buy a simple index fund without consulting their financial advisor. But it’s not like index funds were only invented in the last ten or twenty years. In this case, it’s the democratization of information: Individuals, rich or not, can read online how challenging active management is, and how expensive funds tend to enrich financial advisors rather than the client. 

This new availability of information starts with simple index funds, but can go all the way to highly complex alternative investments. And as this democratization of information continues, the importance of financial advisors and asset managers, especially those selling products rather than providing high-quality advice, shrinks considerably.

Most family offices I know are highly skeptical of the traditional financial industry, particularly banks. They are moving away from advisors and banks with a short-term, revenue-focused mindset. But that doesn’t mean that they are not looking for experienced, impartial advice - in my view, it is quite the opposite. It’s exactly this opportunity that led me to start Cape May Wealth. Ironically, it’s also why the same banks and advisors are now setting up teams focused on family offices, rather than change their business model to fit actual client needs. 

And finally, it is a massive opportunity for anyone dependent on outside capital.: As family offices go through the process of disintermediation and sophistication, they will shift from being niche players in financial markets to one of the most significant sources of capital. And on this journey, they seek individuals that don’t fit the stereotypes of the traditional financial industry, but are equally focused on building trusting relationships.

So, if you know that your professional career, today or in the future, depends on having access to capital, there is no better time to start building relationships with family offices than now. Especially small, one-person family offices — they are looking for individuals they can trust, and that want to build win-win relationships. And because I can’t emphasize it enough, their importance and relevance as a source of capital will only grow over time.

There’s few parties in the world of financial markets that can be such long-term oriented partners - especially where long-term means not years, but decades, or even generations.

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