Picture the successful company founder who, after having spent a lifetime building a family enterprise, experiences a major liquidity event. Or the serial entrepreneur who has amassed substantial wealth over just a few years with his fasting moving successes.
By 2030, more than USD15 trillion of global wealth will be passed on to the next generation, according to research firm Wealth-X. An estimated 18,500 individuals with a net worth of at least USD100 million will account for more than half of this amount.1
Alongside this transition, multi-generational families are getting bigger, more sophisticated and global, with assets and family members spanning the world. They are increasingly looking for a formalised structure to preserve, manage and pass on their wealth to the next generation, and to create and sustain lasting legacies. Enter the family office.
There are approximately 7,300 single family offices globally, up 38 per cent since 2017, according to Campden Research. Collectively, they represent USD5.9 trillion in wealth.2 While family offices are already well established in some locations around the world – there are 3,100 and 2,300 in North America and Europe, respectively, the model is growing in other regions. Asia, for example, saw a staggering 44 per cent increase during the same period and now accounts for 1,300 family offices, Campden's research shows. The family office concept is also starting to gain significant traction in Mainland China due to the explosive growth in wealth in recent years. China is now home to 878 dollar billionaires, according to the Hurun Rich List 2020, an increase of 257 from the previous year.3
Regardless of where a wealthy family is based, there are common threads connecting the decision to establish a family office. Beyond managing investments, a professionally run and structured family office can achieve your family legacy and philanthropic objectives in line with your family's values so that your wealth can endure for many generations.
That said, a family office may not be for everyone. There are important choices to be made and potential challenges to think about.
Knowing the goals of your family office
"Setting up a family office is like building a completely new business," says Aik-Ping Ng, Co-Head, Family Office Advisory Asia Pacific and Senior Family Governance Advisor, Wealth Planning and Advisory at HSBC Private Banking.
First, it is important for the family to understand the overarching goal and the scope of the family office and who – immediate family members or beyond – it plans to serve. Family offices come in many different structures and sizes, and each has different offerings tailored to the needs of the individuals it serves. There are generally two main types of family office: a single family office and a multi-family office. As the names imply, a single family office is a dedicated structure to look after the financial and family affairs of one family, while a multi-family office manages the wealth of several families. Choosing between the two will depend on the specific needs of the family, the size of wealth to be managed and the wide array of functions the family office is to perform.
There are also costs involved. "Setting up a family office involves costs which must be intelligently managed," says Ng. A family office that manages wealth in excess of USD100 million can achieve significant economies of scale.
Other considerations include legal structure and location. Multiple jurisdictions offer benefits to international families. Due to the geographic mobility of many wealthy families, some choose a multi-jurisdictional and hub-satellite approach when managing their wealth, leveraging the local strengths of several locations that match the needs of the family.
Involving family and non-family members in the family office
Retaining and attracting talent is always a major consideration when setting up a family office. Choices need to be made as to who will fill key roles – family members or non-family professionals – as well as when to hire outside third-party service providers for necessary services such as accounting, tax and legal advice, investment specialities, philanthropy advice and trusteeships.
Who takes on each role will depend on a clear understanding of individual skills and expertise. Managing a traditional investment portfolio requires a different skill set than managing an operating business. Managing a direct private equity fund will require yet another skill set encompassing deal sourcing, due diligence and execution, as well as an extensive knowledge of private markets. The successful company founder who just underwent a major liquidity event might be well-advised to take the helm of the family office, but hire an experienced Chief Investment Officer to oversee the investments.
Additionally, there are generational considerations. The younger generation of a family might have a different mentality or skill set than their parents, and they may choose to pursue different educational and career paths, including their interest in eventual roles within the family office. A younger family member with a different educational background and professional experience might help to diversify wealth beyond the industry that created the family's fortune, or they could step up to run the family office as opposed to managing the family business.
Strategic planning made your business a success. Do the same for your family office
Equally important to the nuts and bolts of setting up a family office is creating a clear vision of your family's values and purpose for your wealth. When establishing a family office, goals need to be spelled out for the next 5, 10, 25 or even 100 years, Ng explains. This long-term view – alongside clear communication within the family – will help to ensure a family's future success as the family office is built and family wealth is managed over time, thus creating an enduring legacy.
A family office can help families professionalise the management of wealth and family affairs, and HSBC Private Banking can support families to shape a legacy for generations to come. Our Family Office Advisory team can help you understand the range of family office options, and guide you through the process of assessing, planning, establishing and operating a bespoke family office structure tailored to your needs. Where necessary, we can work with you and your independent legal and tax advisers. Please contact us or your Relationship Manager about how we can help you reach the outcome that's best for you and your family.
1 A Generational Shift: Family Wealth Transfer Report, Wealth-X, June 2019
2 Global Family Office Growth Soars, Manages USD5.9 Trillion, Campden Research, July 2019
3 Hurun China Rich List 2020, Hurun Research Institute, October 2020