THE FUTURE 

OF FAMILY 

OFFICES

IN A STATE 

OF FLUX

CONTENTS

L

ast year witnessed family offices opting 
for changes in structure and domicile, 
and the increasing use of niche 

investment choices. There was also a focus 
on improving risk awareness ahead of wide-
ranging regulatory changes that lie ahead. The 
continuing low-yield investment climate has 
led family offices to take a more active role in 
identifying alternative investment opportunities, 
with increased interest in structured finance 
strategies and alternative investment areas 
such as direct lending and fintech investment.

LEGISLATIVE PRESSURES

A global crackdown on the exploitation of 
taxation treaty loopholes by the Organisation 
for Economic Co-operation and Development 
(OECD), and a range of forthcoming 
regulatory changes on trust ownership and 
transparency, have also been front of mind 
for those tasked with creating and preserving 
family wealth. A report released earlier this 
year by consultancy firm Cerulli Associates 
found that there are now more than 6,000 
single and multifamily offices globally, with 
around 200 multifamily offices controlling more 
than $700 billion in assets alone. Traditionally, 
these offices have prided themselves on their 
privacy and discretion. However, increased 
global scrutiny of flows as a result of changes 
to money laundering legislation – including 
the latest European Commission Money 
Laundering Directive – has meant offices now 
need to have a firmer grasp of where they are 
investing as well as their overall risk exposure 
at any one time.

Ashley King-Christopher, partner at Charles 

Russell Speechlys, says family offices can 
sometimes be guilty of reacting too late to 
challenges, rather than anticipating potential 

problems. “Because they are so lean, many 
family offices have fallen into fire-fighting mode 
when it comes to regulatory issues in trying to 
de-risk what are sometimes inherently fragile 
personal/corporate closely held structures,” 
he explains. “Next year, the OECD’s focus 
will turn to closely held private wealth. Family 
offices need to grasp the issues and get out 
ahead, rather than wait to be hit.” 

King-Christopher warns that high-net-worth 

individuals are facing a triple whammy in 2015: 
rising taxation of private wealth around the 
world, strengthening inter-governmental co-
operation on tax transparency and intensified 
targeting of closely held structures by Western 
governments. “National governments need 
money and will not stop at levies like the 
Google tax,” he says. “High net worths should 
be ready for the spotlight to fall on them.”

EVOLVING CLIENT DEMANDS

The challenges in 2015 are not purely 
regulatory, however. The increasingly 
multinational and multigenerational make-up 
of families has meant finding one-stop-
shop outsourcing partners is also proving 
a headache for some, given the evolving 
regulatory environment. Paul Finn, head of 
global wealth management at Clarien Bank, 
says these families are finding it extremely 
difficult to find a wealth management 
organisation that will serve the family 
as a single relationship across multiple 
generations and regardless of nationalities.

Finn adds that these families face the 

additional challenge of finding a provider 
who can help with improving transparency 
and probity as a result of the heightened 
global regulatory scrutiny. On the investment 
side, family offices are once again embracing 
asset allocation strategies, despite many 
having lost confidence in hedge fund 
strategies after the financial crisis.

However, the prospect of strategies that 

offer the benefits of diversifying beyond 
traditional asset classes such as equities 
and bonds appeals to family offices looking 
for predictable growth in uncertain or volatile 
markets. A 2014 survey by investment 
intelligence firm eVestment found around 
60 per cent of family offices planned to 
increase allocations to hedge funds over the 
next two years. 

Additionally, multi-asset strategies that 

generate part of their returns from harvesting 
the risk premium generated between 
different trades are where family offices “by 
far have the largest portion of their traditional 
strategy assets”, according to the report. The 
research found that Global Tactical Asset 
Allocation (GTAA) strategies were those 
favoured most.

03

As governments push to close 
taxation loopholes, the private wealth 
management industry has come under 
sharp scrutiny. Yet keen to remain 
competitive, family offices are innovating 
to better serve their clients, while keeping 
well within the limits of the law.

© 2014 Bloomberg. All rights reserved 

Mapping 
family offices’ 
investment 
portfolios.
 Tracing 
the money trail

08-09

Emerging 
platforms. 
Evolving 
technologies 
are increasing 
data security yet 
challenging family 
offices’ secretive silos

10-11

The future of family 
offices.
 Catherine 
Grum discusses how 
industry consolidation 
will affect family 
offices’ outlook

12-13

A new approach. 
Regulatory 
demands, increasing 
transparency and 
evolving technologies 
means the family 
offices industry  
is poised for  
drastic change

14

Regulation. Family 
offices work to adapt 
to a complex legal 
landscape

04-06

Navigating choppy 
waters.
 Firms are 
pioneering new 
technologies as 
they tighten their 
reporting structures

07

04

05

arrangements with an external investor 
or an SFO suddenly adopting an MFO 
structure, would place them at risk of 
breaching AIFMD requirements. 

As a result, the growth in family office 

collaborations with direct private equity 
investments – which would place SFOs 
co-investing alongside external capital 
under the scope of the AIFMD – is of 
particular concern to SFOs and their 
advisers. Indeed the impact of these 
changes in legislation is far reaching, 
given that four-fifths of family offices 
co-invested in 2013, according to the 
findings of the Global Family Office 
Report 2014 produced by UBS Bank 
and Campden Research.

The hike in numbers of SFOs that 

once fell outside the scope of financial 
controls graduating to MFO structures 
– often in attempts to turn a high-cost 
entity into a revenue-generating one – 
comes at the expense of a heightened 
level of regulatory scrutiny under 
stringent risk-control and governance 
standards. SFOs considering the 
transition to an MFO structure would, 
therefore, need to consider the trade-off 
between more income sources and the 
additional costs and risk exposure that 
emerge with the possibility of breaching 
new regulatory requirements, says Ian 
Morley, chairman at consulting and 
communications specialists, Wentworth 
Hall Consultancy.

CONTROVERSIAL REFORMS

As the legal distinctions between SFOs, 
MFOs and other wealth managers 
become less clear under the AIFMD 
proposals, the Fourth EU Money 
Laundering Directive (MLD4) – first put 
forward by the European Commission 
in February 2014 – is expected to 
place them all under a new legislative 
framework. If the MLD4 is put into force, 
regulators would further curtail family 
offices’ privacy and their data protection 
would be placed under the remit of a new 
EU-wide register. Developed as a way to 
identify and penalise ‘shell companies’, 
‘phantom firms’ and tax avoidance among 
households and individuals with large 
offshore trust accounts, the MLD4 would 
also put more emphasis on making 
transparent stored details of direct and 
non-direct holders of securities. 

Yet the MLD4’s passage has faced 

heavy opposition and its proposal 
has provoked a fierce and continuing 
debate. While some groups – including 
the European Parliament and anti-
corruption lobbyists – argue for full 
public access to an EU-wide registry, 
others – namely the European Council 
– are proposing national registers with 
restricted access. The concern of family 
offices and their advisers is likely to be 
on access rights to the registry and how 
they will differ across member states, 
according to Breedy.

Indeed, tightening regulation has 

historically been poorly received by the 

REGULATION

S

nowballing levels of money laundering 
and terrorist financing risks, coupled 
with growing calls for a tighter 

regulation of financial institutions, have placed 
family offices under increasing legislative 
scrutiny. In the wake of higher compliance 
costs, family offices are now facing contentious 
proposals for an EU-wide beneficial ownership 
register that will be fully accessible to the 
public, among other directives.

Despite such mounting pressures, Rosalyn 

Breedy, partner at UK-based law firm 
Forsters, says family offices remain largely 
unaware of the implications of such legislative 
developments. This is partly due to historical 
reasons, as family offices have hitherto been 
exempt from most regulation, which was 
traditionally applied to mainstream retail and 
wealth management banks.

BLURRED LINES

However, a blurring of the lines of distinction 
between traditional family offices, wealth 
management firms, hedge funds and private 
and investment banking family offices as 
a result of various jurisdictive measures – 
including the 2011 Dodd-Frank Act – and 
the industry’s swelling number of entrants, 
will increasingly lead to more family offices 

falling directly under the remit of regulators.

One such directive threatening to further 

undermine the once clear divide between 
family offices and other fund management 
firms is the Alternative Investment Fund 
Managers Directive (AIFMD). Enforced 
in July 2014, the AIFMD imposes pan-
European obligations on alternative 
investment fund managers to report and 
disclose information to regulators and 
investors. Indeed, the search for better 
returns under difficult market conditions in 
recent years has meant that many family 
offices have incorporated investment funds 
as part of their core strategy. 

According to Breedy, mounting legislative 

pressure across multiple geographic 
jurisdictions means that family offices must 
now ensure that their EU funds are not 
perceived as ‘alternative’. In turn, alternative 
fund managers marketing alternative 
investment funds in the EU face the “hard-
edged test” of qualifying family offices as 
‘professional investors’ – as defined by the 
Markets in Financial Instruments Directive 
(MiFID). Thus while single-family offices 
(SFOs) – unlike multifamily offices (MFOs) 
– are specifically exempt from the full 
repercussions of the AIFMD, a number of 
factors, such as SFOs entering co-investment 

THE RISE IN COMPLIANCE COSTS 
AND REQUIREMENTS DUE TO 
NEW LEGISLATION WILL REQUIRE 
FAMILY OFFICES TO REASSESS 
THEIR INVESTMENT MODELS 
AND STRATEGIES

F

A

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LY

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E

S

A plethora of new laws in the 
European Union and the US are 
forcing family offices to reassess 
their investment strategies. This is 
giving way to a new model office.

wealth management sector. A growing sticking 
point has centred on a lack of clarity on the 
storage of and access to private information 
relating to the accounts and investment 
vehicles of high-net-worth individuals. Many 
who oppose the changes feel that such 
a public register would not address the 
underlying issues such as tax avoidance 
that prompted such a legislative shake-up 
in the first place. Instead, there is growing 
apprehension that the proposed reforms to 
beneficial ownership requirements could 
place the financial and personal security of 
high-net-worth individuals and their families 
at risk and that that would be “the equivalent 
of publishing their personal bank account 
details,” according to Catherine Grum, 
head of private office at Salamanca Group, 
a merchant banking and operational risk 
management business.

PARTNERSHIPS AND STRATEGY 
OVERHAULS

The inevitable rise in compliance costs and 
requirements of running a family office due 
to new legislative measures will require firms 
to reassess their investment models and 
strategies. For instance, in 2011 George 
Soros famously sidestepped Dodd-Frank 
regulation in the US by restructuring his 
Quantum hedge fund into an SFO and 
returning money to external investors, 
in order to evade the US Securities and 
Exchange Commission’s registration and 
disclosure. This move prompted a slew of 
hedge funds to adopt a similar model. The 
family office industry could face further 
systemic changes ranging from moving to 
alternative jurisdictions and a greater use 

of corporate vehicles to engaging in more 
dialogue with legislators and politicians. 

In particular, family offices seeking to 

minimise the financial squeeze of higher 
compliance costs, which can run into the 
millions, are increasingly likely to contribute 
to industry consolidation through mergers 
and acquisitions. According to Grum, 
there is a growing shift towards alternative 
structures and partnerships geared towards 
achieving efficiencies of scale – a trend that 
is likely to gain further momentum in 2015. 

Indeed, the family office industry has 

witnessed increasing consolidation in 
recent years. This has been driven by the 
more bullish MFOs, as well as the larger 
wealth management firms. For instance, 
November 2014 saw a deal agreed between 
Fleming Family & Partners and Stonehage 
to create the largest independent MFO in 
the Europe, Middle East and Africa (EMEA) 
region serving more than 250 families. 
Prior to that, SandAire and Lord North 
Street joined forces in March 2014, and in 
2013 Deutsche Bank merged Oppenheim 
Vermögenstreuhand and Wilhelm von 
Finck Deutsche Family Office to form 
Deutsche Oppenheim Family Office, which 
is Germany’s largest family office with total 
assets under management worth $10 billion.

Regulatory reform is forcing change in 

the family office industry. As a result, more 
SFOs are increasingly grouping to become 
larger players. As legislative pressures for 
transparency and systemic reform weigh 
heavier on the sector, the challenge for 
family offices will be to navigate this new 
regulatory landscape while maintaining 
a competitive edge over the industry’s 
emerging breed of players.

06

07

CASE STUDY

NAVIGATING 

CHOPPY  

WATERS

T

he rush to meet the terms of the 
ever-evolving regulatory compliance 
landscape continues to transform 

the wealth management sector. Indeed 
family offices, seeking better oversight of 
their assets, are causing a monumental shift 
in the consolidated reporting outsourcing 
industry as it shifts towards more effective 
risk management. Until recently, consolidated 
global asset reporting was achieved manually 
on Excel spreadsheets by much of the 
industry. However new legal compliance 
measures are steering family offices towards 
sophisticated infrastructure which is better 
suited to aggregating larger and more 
complex volumes of data.

Greater outsourcing demand from family 

offices unable to build their own in-house 
infrastructure has heralded the rise of both 
independent infrastructure providers and 
wealth management firms providing client-
facing tools, says Bertrand Giger, managing 
partner at Bedrock RealTime (BRT), a Swiss 
asset management outsourcing firm and part 
of wealth management group Bedrock.

For instance, BRT has seen a considerable 

rise in requests for consolidated financial 
reporting outsourcing contracts in Switzerland, 
where new reporting requirements under the 
Swiss Financial Market Supervisory Authority 
(FINMA) has caused a growth in the use 
of external portfolio management solutions, 
according to Mr Giger.

BRT’s pool of clients – ranging from 

individuals with 15 million Swiss Francs 
spread across four different custodians, to 
wealth management firms with assets totalling 
more than 2 billon Swiss Francs – benefit from 
its customised reporting infrastructure, as well 
as its suite of back and middle office platforms 
for other operational tasks, says Mr Giger.

Moreover as new market regulation 

increases consolidation within the wealth 
management industry, the trend in small 
independent asset managers regrouping or 
merging with other firms to stay afloat will 
lead larger entities to experience an even 
greater need for a centralized overview of 
their total assets. 

The complexity of the task of 

consolidated reporting can ultimately be 
traced back to the global economic crisis. 
In the aftermath of the credit crunch, the 
financial industry’s subsequent aversion to 
risk intensified the diversification of high 
net worth families and individuals’ assets 
across multiple custodian institutions. 

As a result, the challenge associated with 

building a consolidated overview of capital 
markets, and private equity and alternative 
investment assets of high net worth families 
-across multiple countries, legal jurisdictions 
and institutions- cannot be underestimated, 
according to Daniel Page, managing director 
at Cornerman Limited, an advisory firm for the 
asset management sector. Yet it remains to 
be seen whether family offices will be able to 
adapt rapidly enough, in adopting a data-driven 
approach in their asset allocation and risk 
management services.

As family offices work to earn better 
returns for their clients, some firms 
are looking to the outsourcing 
industry to improve their internal 
reporting structures.

0

10

20

30

40

50

60

70

%

1

st

2

nd

3

rd

4

th

5

th

6

th

7

th

of family offices  

co-invested in 2013

80

%

Source: The Global Family Office Report 2014,  

UBS & Campden Research

GENERATION CURRENTLY  

SERVICED BY FAMILY OFFICE

THE 
COMPLEXITY 
OF THE TASK OF 
CONSOLIDATED 
REPORTING CAN 
ULTIMATELY BE 
TRACED BACK 
TO THE GLOBAL 
ECONOMIC 
CRISIS

F

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09

08

TYPICAL INVESTMENT PORTFOLIO

(nine most likely asset classes), by region, in %

EUROPE

NORTH AMERICA

EM

ASIA-PACIFIC

Equities

23

30

23

18

Real estate  
direct investment

16

12

14

15

Fixed income

14

10

16

17

Cash or  
equivalent

10

7

10

13

Direct venture 
captial / private 
equity

9

8

11

7

Private equity 
funds

8

10

6

5

Hedge funds

5

11

5

12

Co-investing

6

3

6

5

Alternative 
asset classes

9

9

9

8

FAMILY OFFICES REMAIN RELIANT ON 
THE EQUITY RISK PREMIUM

Average family office 

allocation

Scaled model 

portfolio

Higher risk

Lower risk

AVERAGE FAMILY OFFICE AUM
AND TOTAL FAMILY NET WORTH

AUM

Total family new worth

USD 890m
USD 1270m

EUROPE

USD 1180m
USD 1310m

NORTH AMERICA

USD 480m
USD 830m

ASIA-PACIFIC

59

90

58

82

USD 820m
USD 1000m

EM

Eq

uit

y

49

41

C

re

dit

11

13

Li

qui

di

ty

15 14

Ins

ur

anc

e

6

2

C

ur

re

nc

y

6

1

S

ki

ll

24

24

Te

rm

/

Infl

at

io

n

-3

-4

Europe

Asia-Pacific

North America

EM

AVERAGE COSTS OF INVESTMENT ACTIVITIES

in basis points (of AUM)

Preservation

Balanced

Growth

38

38

47

53

42

47 46

53

25

33

41

25

Source: The Global Family Office Report 2014, 

UBS & Campden Research

Source: The Global Family Office Report 2014, UBS & Campden Research

* EM refers to emerging markets, including Africa, Latin America and the Middle East

THE AVERAGE FAMILY OFFICE ASSET 
ALLOCATION BY RISK

SERVICES MOST LIKELY TO BE PERFORMED IN-HOUSE

1%

Tangible 

assets

Fixed income

64%

36%

Cash

72

%

28%

25%

Equities

21%

Absolute return/ 

hedge funds

17%

Real 

estate

14%

Private 

equity

7%

Emerging market  

and high yield 

debt

6%

Emerging 

market equity

4%

Com-

modi-

ties

6%

Other

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MAPPING FAMILY  

OFFICES’ INVESTMENT 

PORTFOLIOS

Despite witnessing losses from 
the global economic crisis, family 
offices’ appetites for riskier, high 
yielding assets is on the rise.

GENERAL ADVISORY

Financial 

planning

60%

Trust  

management

35%

Estate  

planning

25%

Legal  

services

5%

Insurance  

planning

12%

Tax  

planning

17%

FAMILY PROFESSIONAL

Support for new 

family business

81%

Family 

governance

69%

Management of 

physical assets

64%

Concierge service 
and security

62%

Family  

counselling

59%

Source: The Global Family Office Report 2014, UBS & Campden Research

Source: The Global Family Office Report 2014, UBS & Campden Research

Source: The Global Family Office Report 2014, UBS & Campden Research

Source: The Global Family Office Report 2014, UBS & Campden Research

*

SLOW UPTAKE

The adoption of innovative wealth management 
software has historically been slow and 
asset managers still have a long way to go 
to recognise and exploit big data and data 
analytics. This is largely due to a growing 
compliance burden and a patchwork of legacy 
systems that distract firms from building new 
platforms that are critical in serving the next 
generation of customers. While there have 
been some changes in the development and 
integration of sophisticated IT platforms, these 
have certainly not been dramatic, according to 
Per Wimmer, CEO of Wimmer Family Office, 
a UK-based single-family office (SFO). For 
instance, a study by US-based SFO Wilson 
Holding Company suggests that while providing 
virtual data room services is identified as a 
critical technological enabler, a surprisingly 
small number of $100 million and $1 billion 
SFOs use data rooms on a day-to-day basis. 

Some firms find it difficult to justify the cost 

of such IT infrastructure, while others struggle 
to identify a system with functions and features 
that match their requirements. For example, the 
Wilson report cited one family, which asked 
to remain anonymous, that admitted being 
willing to spend $5 million on an off-the-shelf 
integrated system able to address all their 

needs, but felt that such a tool did not yet 
exist. Slow adoption can also be tied to a lack 
of industry formalisation, says Wilson’s CEO 
and founder, Richard Wilson. According to his 
company’s report, which is based on interviews 
with 180 family offices from 23 countries, only 
56 per cent of family offices have office spaces. 
Fewer than one in three have a formal family 
charter and only 39 per cent have a formal 
investment committee.

GAINING LOST GROUND

Despite the industry’s historical challenges, late 
adopters playing catch-up have begun working 
towards addressing the IT requirements for their 
digital asset management systems. Some firms 
have adopted social media as a tool to engage 
with their clients, while some have increasingly 
looked at new strategies of harnessing ‘big 
data’ and its analytical capabilities to innovate 
their product offering. Others have developed 
customised platforms and security software to 
bolster their clients’ security systems, as well as 
improve their client experience.  

Faced with mounting competition from newer 

entrants with cutting-edge data and digital 
strategies, legacy players are ramping-up their 
search for customised tools. As well as working 
to develop technologies to better target younger 
clients, they are also attempting to bolster loyalty 
from among their long-standing customers. 
While much software is designed and adopted 
for generic and functional purposes, family 
offices are typically highly individually driven 
and require custom-fit systems that are tailored 

10

11

to the specific needs of a family or group of 
families, according to Wimmer. Demand among 
third-generation clients for customised software 
platforms is growing rapidly with many family 
offices spending upwards of $400,000 on IT 
infrastructure, and families with more than $1 
billion in assets spending more than $1 million, 
says Wilson.

HARNESSING BIG DATA

Much IT expenditure by family offices has 
been focused on harnessing big data to solve 
reporting issues. Indeed a growing number of 
firms have worked to aggregate vast amounts 
of data – on hard assets, real estate securities 
and private equity investments – on a software-
as-a-service (SaaS)-based reporting platform, 
to actively monitor and manage their exposure. 
According to Stefan Kolb, head of financial 
intermediaries and Private Port at Deutsche 
Asset & Wealth Management, technology has 
evolved to enable family offices to actively 
manage their exposures by diversifying asset 
classes, investment vehicles, countries and 
managers. “We are experiencing strong 
demand from single and multifamily offices for 
consolidated reporting solutions – at best as part 
of an easy-to-use digital workplace,” he says. 

The decision by family offices to harness 

big data as a way of enhancing their reporting 
systems is largely down to the fact that as their 
investments become increasingly complex 
and diversified, across multiple managers and 
jurisdictions, technology becomes critical in 
mitigating associated risks. Therefore, more 
sophisticated tools for aggregating data, coupled 
with increasing levels of regulation, more complex 
portfolio requirements and the growing need for 
clients to access consolidated reports online and 
in real time, have established reporting tools as 
the ‘holy grail’ of wealth management technology, 
according to Catherine Grum, head of private 
office at Salamanca Group, a merchant banking 
and operational risk management business.

 

CYBER SECURITY

At the same time, however, greater adoption 
of these SaaS-based reporting platforms 
and other classes of technology comes with 
stark implications about data security online. 
The complexity of cyber security risks are 
not well understood by the sector and in 
many instances avoiding security breaches 
“starts and finishes with antivirus software,” 
Grum notes, comparing the failure to conduct 
routine security audits on top of antivirus 
software to “installing a sophisticated alarm 
system but then leaving the back door 
unlocked.” Additionally, breaches through 
mobile devices, amid developments in the 
“easily overlooked” internet of things, have 
wide-reaching personal safety implications. 
As Grum points out, private information “can 
be gleaned from the timings of their central 
heating system if it falls into the wrong hands.”  

As family offices customise their offerings 

and navigate the challenges of a new 
digitalised landscape, the use of data and 
technology will play an increasingly crucial 
role in allowing firms to both minimise 
competitive gaps and differentiate their 
services from others.

EMERGING 

PLATFORMS

AS INVESTMENTS 
BECOME INCREASINGLY 
COMPLEX AND 
DIVERSIFIED, 
TECHNOLOGY BECOMES 
CRITICAL IN MITIGATING 
ASSOCIATED RISKS

F

amily offices – which have historically 
operated in highly fragmented and 
secretive silos – have come under 

mounting pressure to leverage new technology, 
as newer players including large retail banks 
expanding their wealth management services 
enter the fray. While national financial regulators 
are placing more pressure on increasing 
transaction transparency, the coming of age 
of highly technologically savvy third-generation 
scions of ultra-high-net-worth families means 
that, as they demand more accessible services 
online, adopting innovative technology has 
taken centre stage as a strategic challenge for 
wealth managers.

FAMILY 
OPERATING 
REVENUE 
(2013)

Source: The Global Family Office Report 2014, UBS & Campden Research

USD 100m-500m

55%

USD 501m-3bn

30%

> USD 3bn

15%

0

20

4

0

60

80

10

0

IMPLEMENTATION OF 
INDEPENDENT CONTROL  
FOR RISK

by region, in %

Europe

Asia-Pacific

North America

EM

A

Key

Investment risk

A

Family data and 

confidentiality

B

Banking/ 

custody risk

C

Family reputation

D

Political/ 

country risk

E

Risk to tangible 

assets

F

Personal security

G

B

C

D

E

F

G

F

A

MI

LY

 O

FF

IC

E

S

The emergence of a new cohort 
of technologically savvy scions, 
coupled with a growing group of 
digitally connected activist investors, 
is forcing more family offices to 
develop efficient IT platforms.

13

REGULATION

This rise of boutiques has coincided with many 
larger institutions refocusing on their core 
market. This has been driven by the increasing 
burden of regulation on both a local and 
international basis. Regulatory changes are 
increasing costs and introducing risks for non-
compliance. As a result, many larger firms have 
become more discerning about whom they 
select as clients. 

Barclays has had a recent review of the 

countries in which it operates and RBC is 
going through a similar process. This means 
family offices representing clients from frontier 
and emerging markets may discover they have 
limited choices in the future, Grum opines. 
“Some are having to find new wealth managers, 
despite quite a long relationship, because the 
managers have taken the view they no longer 
want to look after clients in a particular market. 
This is not because the individual client has 
changed their risk profile, but the firms have 
made a strategic decision to withdraw from 
certain markets because of the costs required 
to understand the regulatory environment in 
those markets.”

CONSOLIDATION

The costs associated with complying 
with increased regulation in different 
jurisdictions are not only having an effect 
upon the larger institutions. The need 
for specialist knowledge will lead to a 
degree of consolidation within the family 
office sphere, Grum argues. “It won’t be 
revolutionary, but we will see a trend over 
the next three years for consolidation, 
where smaller multifamily offices looking 
after two or three clients will join forces. 

Some single-family offices may look to join with 
other single-family offices as the possibilities of 
scale for splitting the cost of compliance across 
several families makes that model more viable.” 

Grum believes the effect of consolidation 

will be broader than the pooling of resources 
and managing risk. Instead, it will likely result in 
the development of a more institutional type of 
service, where each element – from meeting 
clients to dealing with custody arrangements – 
will become more formalised, like the services 
offered in the US. 

“For instance, US family offices often choose 

a single custodian relationship, even if they have 
relationships with several wealth managers,” 
Grum explains. “This makes it easier to 
compare performance of different providers and 
demonstrate that performance to clients.”

TECHNOLOGY

The ‘institutionalisation’ process is reliant 
upon technology and specialist providers 
have become aware of the opportunity in this 
market. Family offices no longer consider 
it appropriate for risk profile analysis of 
portfolios run by different wealth managers 
to be held in spreadsheets with a couple 
of people in the back office crunching the 
numbers, Grum says. 

“They are now increasingly looking 

for good consolidated reporting tools, 
so that they can manage the risk in-
house themselves. This gives them more 
information and therefore more control.” 
Family offices will increasingly gain access 
to new, flexible systems that will be 
developed in the cloud and delivered via a 
software-as-a-service (SaaS) model. 

Without the arcane legacy systems 

with which many large institutions are 

saddled, family offices will be able to react 
quickly to technological developments and 
take advantage of slick management and 
reporting systems. Most importantly, the 
need to protect clients’ data will hasten the 
move to modern, outsourced technology 
platforms that can offer unprecedented 
levels of security. 

PHILANTHROPY

The new ‘institutional’ approach adopted 
by family offices will affect not only what 
offices can do for the client, but also how 
they can help the client do something 
for others. Philanthropy, a cornerstone 
of wealth management for generations, 
has offered a way of giving those not 
associated with generating the wealth a 
greater understanding of its full potential 
when put to use.

Grum says there will always be 

those who donate, but there is a new 
philanthropic class of what she calls 
‘doers’. These go further than simply 
donating money, or seeking a return on 
their charitable donation. Instead, they 
are forming charities that offer the skills 
they have developed in industry to other 
charities. In effect, their charitable donation 
is not merely money but expertise. 

This is an area in which family offices 

are increasingly helping their clients – not 
just for their clients’ benefit, but for others’. 
“I have seen an example of a charity that 
has a number of private equity investors 
using their skill of managing private equity 
funds to help other charities,” Grum notes. 
“Charities are helping other charities 
through skills and knowledge, and a lot of 
value [is] being created.”

Catherine Grum,

head of the private office  

at The Salamanca Group

THE FUTURE 

ROLE OF 

FAMILY  

OFFICES

N

ot since the Great Depression of the 
1930s has the financial services industry 
experienced such a period of turmoil. 

With US and UK economies now on the brink of 
recovery, there is an opportunity for the wealth 
management industry to return to business as 
usual. But the sector has been changed by the 
events of the last six years and may never be the 
same again, says Catherine Grum, head of private 
office at Salamanca Group, a merchant banking 
and operational risk management business. She 
notes that wealth management – and the UK 
market in particular – remains very fragmented, 
where even the largest players have a relatively 
small overall market share.

Fragmentation has increased since 2008, as 

smaller, boutique wealth managers emerged, partly 
a result of the distrust of, but also loss of confidence 
in, larger banks. “There was a feeling that some 
of the larger operations with asset management 
and investment banking arms were using wealth 
management as a distribution tool for their products,” 
Grum explains. 

The resulting lack of independence of larger 

firms and perceived lack of transparency created an 
environment for smaller wealth managers to emerge, 
she adds, and allowed them space to develop their 
offering. “What the larger providers can offer the 
family offices in terms of institutional capabilities, the 
smaller boutiques have much more freedom and are 
better able to tailor their approach for their clients.”

Although family offices have 
historically operated as exclusive 
and independent entities, big retail 
banks seeking greater returns are 
encroaching in the industry. As 
such, intensifying competition and 
growing consolidation is forcing 
more family offices to diversify 
their services.

THE EFFECT OF CONSOLIDATION 

WILL LIKELY RESULT IN THE 

DEVELOPMENT OF A MORE 

INSTITUTIONAL TYPE OF SERVICE

INTERVIEW

NEW  

APPROACH

F

amily offices head into 2015 in a 
position of strength on regulatory 
matters, with a greater degree of clarity 

of the regulatory headwinds on the horizon 
than they had a year ago. Most will now be 
familiar with their obligations arising from the 
Foreign Account Tax Compliance Act, Dodd-
Frank or the rules on beneficial ownership. 
Regulators in 2015 will continue to pursue 
cross-border taxation policy in addition to 
what has been labelled a ‘global approach’ to 
money laundering. 

CONTINUED CHALLENGES

In terms of investment performance, the low-
yield investment climate looks set to persist 
for some time. Figures on asset allocation 
trends in 2014 from investment intelligence 
firm eVestment show that family offices are 
returning to hedge funds and hedge-fund-
like strategies for returns. However, CIOs 
need to be mindful of the mistakes of the 
past that led to many funds losing heavily in 
the financial crisis.

While risk premia and synthetic factor-based 

investing offer a different way for offices to 
secure alpha, familiarity with the ‘ingredients 
in the secret sauce’ is key. Systems should 
be put in place to fully understand and 
differentiate vulnerabilities in the investment 
strategy from trading strategies.

14

Increased regulatory demands resulting 

from new rules on tax evasion and money 
laundering will mean family offices will need to 
ensure they have a comprehensive reporting 
system that allows them to keep close watch 
of investment performance and risk exposure 
in a real-time environment. The start of 2015 
will therefore be a time for many to begin a 
comprehensive appraisal of their systems if 
they haven’t already begun doing so.

GROWING TRENDS

The shift by family offices – as shown by the 
World Economic Forum’s recent report – away 
from the traditional separation of philanthropy 
and investment towards the blended ‘impact 
investing’ approach, where investors seek 
social or environmental returns alongside 
financial ones, will likely persist throughout 
2015. Research conducted by Campden 
Wealth and UBS found that North American 
family offices currently give philanthropic 
endowments of around $61 million a year, so 
the sums involved are considerable.

Mike Mompi, head of the investor network at 

impact investment firm ClearlySo, says that in 
the past two years he has seen more high-net-
worth individuals entering the space, and that 
family offices need to be ready to offer their 
clients impact investment opportunities – from 
social impact bonds to direct equity or debt 
investments in early-stage companies. “This 
is particularly key for families thinking about 
next-generation engagement, where impact 
investing can be a way for the young people to 
engage with the family money in a way that is 
values-aligned and long-term in its outlook.”

The diversification of capital across regions 

looks set to continue in a similar fashion to 
2014 in response to continuing concerns of 
geopolitical risk in regions such as the Middle 
East. Western European and US real estate 
continues to be a favoured asset class.

Family offices are also likely to continue 

to favour ‘club’ deals in 2015, according to 
those familiar with the sector. These deals – 
where a number of families, sometimes from 
different jurisdictions, club together to invest in 
a trading business or an asset – will become 
increasingly common in 2015. 

A final suggestion for the year ahead from 

consultancy Deloitte is that we may start to 
see families allowing the finance department 
of their own operating businesses invest 
the family’s assets, following a trend which 
originally started to gain in popularity in 
Germany following the financial crisis.

However, Paula Higgleton, Deloitte 

partner who leads the family office 
practice, warns families to think twice 
before adopting this approach. “In some 
jurisdictions, such as the UK, the favourable 
tax reliefs afforded to family businesses 
may be jeopardised if the trading element 
of the balance sheet starts to be diluted 
by non-trading assets, such as investment 
properties and investment portfolios,” she 
explains. “This can potentially have an 
impact on inheritance tax reliefs that need 
to be secured to pass the business down to 
the next generation tax efficiently or reliefs 
needed on sale of the business or indeed 
on reorganisation reliefs.”

Global economic recovery is taking 
hold and the coming year holds 
promise for the wealth management 
industry. Yet new legislation, 
developing technology platforms and 
sector consolidation means family 
offices cannot rest on their laurels.

F

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CONTACT.  Chris Kilbey, 
Bloomberg Family Office Senior Representative,
ckilbey@bloomberg.net