This article was initially published in Spear’s supplement “The future for family offices”.
Since the financial crisis, many commentators have reported that family offices of both the single and multiple variety are on the increase. A quick comparison of the Sunday Times Rich List 2015 and the FTSE 250 reveals that there is wealth in private hands that exceeds all but the top 35 companies. On 1 December 2015, Glencore sat in 36th in the FTSE 250 with a market capitalisation of £12.35 billion, while Len Blavatnik topped the 2015 Rich List with a personal fortune estimated at £13.17 billion.
The companies making up the FTSE 250 employ tens of thousands and have sophisticated in-house teams managing their finances. Many families, despite the relative size of their wealth, do not. It is not uncommon to come across a family where the Financial Director of the family business has become a quasi-investment adviser for the family’s personal investments and the CEO’s PA is an expert on completing personal tax returns.
While some of the personal wealth of those occupying the top spots on the Rich List derives from shareholdings in listed companies, there is still a huge amount of wealth sitting outside of this. The question is, why isn’t this structured inside a family office? What exactly are they afraid of?
In many cases the answer is costs, and it seems they have plenty to fear in this regard. It does not take much for family office costs to start to spiral, and even a relatively small team of in-house experts can cost a family over £1 million a year. Recent surveys accord with our own experience here. In some cases, larger family offices (ones with complex structures that employ teams of investment professionals in multiple locations), seemingly replicating a small private bank, can cost tens of millions more.
There are also the operational risks to bear in mind. When you take on everything in-house, the buck stops with you. How do you ensure that the family office is properly run and appropriate governance put in place? How do you measure its performance? What about employment and regulatory responsibilities? It is perhaps no wonder that cyber-security often gets put on the too-difficult list.
Regulatory requirements in particular are sometimes missed by family offices, mostly in the investment area. Family office staff should, as a general rule, be FCA-qualified and regulated if they are doing any of the following ‘by way of a business’:
The penalties for breaking the rules can be very severe. There are certain exemptions but if a family office has any doubts it should of course seek advice.