Family Offices: An Industry Overview with a Deep Dive into Banking Needs [whitepaper]
A Comprehensive Guide for Family Office Managers
There are now more than 10,000 family offices worldwide, and the sector has seen massive growth over the last ten years, especially in Asia. How many families does one entity tend to serve, and how does the growth of the vertical correlate with the number of ultra-wealthy people in the world? The lack of a regulatory framework and the global nature of family office wealth means that obtaining banking services can be tricky — what is the solution? Find out the answers to these questions here.Download the full whitepaper (pdf) via the link below — no email required:
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Table of Contents
Introduction to Family Offices and Market Overview- Family Office Structures
- Market Trends and Growth
- Strategic Asset Allocation
- Private Markets
- Crypto Assets
- Unique Factors
- Geographical Distribution of Family Offices
- AML
- MIFID II
- Succession Planning
- Cyber Risks
- Banking Issues and Solutions for Family Offices
- Benefits of Narvi’s Digital Onboarding and Compliance Solutions
Introduction to Family Offices and Market Overview
Family offices emerged in the US in the 19th century as the newly minted super rich looked for ways to manage their wealth. Legendary American banker JP Morgan is widely credited with inventing the concept when he founded the House of Morgan in 1838.Fast forward 180 years, and the family office sector is going from strength to strength – this time, however, powered by the digital industrial revolution. The amorphous nature of family offices means it’s difficult to provide exact figures on the size of the sector but according to the Economist Intelligence Unit, following a recent boom in numbers there are now over 10,000 worldwide. “Four out of ten family offices globally have been created in the past decade. The number of new entrants is really amazing,” said Kirby Rosplock, researcher at Tamarind Partners, a consultancy for US-based family offices. But what exactly are family offices? They vary widely by size, location, and investment approach but roughly speaking these entities are set-up to manage the wealth and interests of ultra high net worth individuals and families, often for multiple generations. Family offices are not just about managing money. They also support the education and involvement of family members, assist in succession planning and philanthropic goals.Despite the rapid recent expansion of the family office sector, more growth is expected for the rest of this decade, with Deloitte Private’s 2024 family office report predicting the number of family offices will increase by 75% to reach nearly 11,000 by 2030. The amount of assets under management (AUM) by family offices is also slated to rocket, with Deloitte predicting it will increase from $3.1 trillion today to $5.4 trillion by 2030.“If the International Monetary Authority’s prediction that the global economy will have a ‘soft landing’ in 2024 is correct given moderating inflation and steady economic growth, family offices are well positioned to withstand the economic currents,” Deloitte said.Family Office Structures
While family offices are typically small scale affairs with Campden Wealth estimating they employ just ten staff on average, more than one-quarter (28%) of family offices now have multiple branches. Typically, these secondary branches are set up close to home. When setting up their secondary branch, nine in 10 family offices in North America and Europe stick to their own region. In contrast, Asia Pacific family offices have broader horizons with 61%, setting up secondary branches in North America (38%) and Europe (23%). The two main structures for family offices are single and multi, depending whether they serve one family or several. In essence both perform the same function, with the difference between the two in mainly cost related – multi family offices offer economies of scale and potentially a broader range of investments. The advantage of a single family office is it can be constructed exactly to the needs of the family.“This control allows for a highly personalised approach to managing wealth, with the flexibility to adapt strategies quickly to meet the family’s evolving needs,” according to family office platform provider Aleta.Market Trends and Growth
The rich are getting richer. When Forbes published its 2024 Billionaires List, it declared the previous 12 months had been a banner year for the mega-wealthy after counting 2,781 billionaires around the globe for its annual ranking — 141 more than in 2023 and 26 more than the previous record, set in 2021. The super rich aren’t just more numerous; their wealth is also increasing. Forbes calculated these group’s combined wealth hit $14.2 trillion in 2023, a $2 trillion upswing in just 12 months and $1.1 trillion over the previous record, also set in 2021.The combination of more than a decade of low interest rates and the vertiginous rise in technology firms' valuations has seen the creation of an elite group of mega wealthy people. Forbes said there are now a record 14 people who are members of the $100 Billion Club, up from just one four years earlier in this group and are worth a combined $2 trillion.It’s not just the mega wealthy cohort which is expanding - there are now 29,350 individuals worldwide with liquid investable assets of $100 million or more, according to the investment migration advisors Henley & Partners, which said the group’s numbers had increased by 54% over a decade. “The number of family offices has exploded over the last decade because the amount of super wealthy people has increased off the back of factors such as rising property values, and the expansion of the tech sector. And this trend has increased post-Covid,” said Neil Ambikar, CFO at neobank Narvi.Strategic Asset Allocation
According to JP Morgan’s 2024 Family Office report, the median AUM of family offices is $1.2 billion, with a mean value of $444 million. While the total assets of the associated families have a median and mean value of $1.4 billion and $813 million respectively. But those funds are invested in a different way to the 60:40 equity/fixed income split that is typically recommended for the retail investors. UBS, the world’s largest private bank by AUM, 2024 Family Office Report said that a typical strategic asset allocation (SAA) for a Swiss family office in 2023 saw 31% of their portfolio in equities.The next largest category was private equity (18%), with fixed income exposures at 10%, below both cash (14%) and real estate (13%).Despite family offices being a prime target of hedge fund sales teams, the sector appears agnostic about the asset class, with Swiss entities allocating just 4% to absolute return strategies, less than their exposure to gold and precious metals (6%) and only slightly ahead of art and antiques (2%). Both commodities and private debt had 1% each. UBS research showed that family offices in Europe followed a SAA that was broadly in line with Switzerland with the main difference being a greater allocation to fixed income (19%). There was, however, a more marked trans-Atlantic split.US family offices allocate 35% to private equity and 8% to hedge funds, although they mirror their Swiss peers in putting 1% of their cash into art and antiques. “Family office portfolios appear to be moving back into balance. Strategic asset allocations for 2023 show material shifts, as portfolios appear to adjust for a world of moderating inflation and declining policy rates,’ UBS said.Private Markets
One factor which links all family offices in terms of asset allocation is a large allocation to the private market. Retail investors typically allocate around 5% of their portfolio to private markets, although a number of market commentators suggest this should increase, in comparison the global average by family offices is 24% (comprising 22% private equity, and 2% private debt). According to family officer services provider, Simple, private markets are particularly suited to family offices and their long term time horizons, which fit with a sector that often requires capital is locked up for extended periods., “Family offices and their patient capital is one good synergy, with the lower liquidity being less of a downside for them. Another strong synergy outlined in the World Economic Forum report on capital markets include their financial sophistication, based on better knowledge and greater experience and risk tolerance, particularly when compared to retail investors,” Simple said.Crypto Assets
There is a lack of clarity over family offices' crypto exposures, neither UBS or JP Morgan, the world's fifth largest private bank by AUM, mentioned digital currencies in their 2024 analysis of family office asset allocation. Others are more bullish on the sector. BNY Wealth Management, the private banking arm of the US bank, said in its 2024 sector analysis that family offices are split over the role of cryptocurrencies. According to BNY's research, 33% of family office professionals say that they are actively investing in crypto and may increase their holdings, while 38% report having no current exposure to or interest in the asset class. “The remaining 30% fall somewhere in between, reporting either limited exposure or that they are exploring cryptocurrencies,” BNY Mellon said.Unique Factors
Henley & Partners research showed that 60% of centi-millionaires were entrepreneurs or company founders and one unique factor of the family office sector which serves the super wealthy was the relationship between the SAA and the related business which underpins that wealth. According to UBS more than three quarters (77%) of family offices still have a related operating business, and almost two thirds (62%) of family offices with related operating businesses state that they consider the main business’ exposure when setting strategic asset allocation.Geographical Distribution of Family Offices
Traditionally, family offices have been located in the jurisdictions where the funds originated from and the greatest concentration of high net worth individuals is found in North America, principally the US. The continuous expansion of Asian economies over the last two and half decades has seen the second place on the global regional rich list move East from Europe, according to insurance firm, Swiss Re. “The value of global high net worth financial wealth has been on an upward trajectory for many years, rising by a compound annual growth rate of 6.7% between 2008 and 2023. The gap between North America and Europe in terms of HNWI financial wealth was marginal in 2008 but has widened over time, with Europe experiencing slow growth and a decline in domestic demand. Total HNW financial wealth in APAC exceeded that of Europe for the first time in 2009.In 2023, HNW financial wealth in APAC was USD 25.7 trillion (around 30% of the global total), still second to the US (USD 27.5 trillion). Europe ranked third (USD 18.9 trillion),” Swiss Re said in an October 2024 report on the Asia Pac HNW sector. The number of family offices varies widely by region according to Deloitte which said in 2024 there are an estimated 3,180 single family offices in North America, 2,290 in Asia Pacific, 2,020 in Europe, 290 in the Middle East, 190 in South America, and 60 in Africa.Research by McKinsey suggested that the trajectory of family office numbers has followed the increase in the HNWI population in Asia with single-family offices in Hong Kong and Singapore numbers quadrupling since 2020 to about 4,000 across both jurisdictions. This trend is widely expected to continue with Deloitte predicting that single family offices could increase in number by 40% to 3,200 by 2030, compared with a 32 per cent to 4,190 increase in North America. “The pace at which the landscape in North America is expanding is slowing, given its relative maturity, while in Asia Pacific it is heating up, given its more recent emergence in family offices,” Deloitte said.Family Office Costs and Remuneration
Because family offices essentially serve the people who own the structure, they don’t charge fees in the way a traditional fund manager would for a retail client. But they do have costs, according to Campden Wealth in 2023 the global average pure cost of operating a family office in 2023 was 39.8 basis points of assets under management.While this was an increase in the 38.1 basis points recorded in 2022 it compares favourably with the retail fund management sector, according to the Investment Company Institute In 2023, the average expense ratio for equity mutual funds was 42 basis points in 2023.Scale brings cost benefits for family offices, according to Campden Wealth which said costs fall when the AUM increases from the $100 million to $250 million range to over $1 billion. At the lower end of the scale average costs in 2023 were 43.2 basis points, whereas for the billion dollar plus outfits it dropped to 35.2 basis points. Given that family offices' prime role is to manage investments it's not surprising that this function is typically responsible for roughly half of their costs, according to Campden Wealth. Executive pay levels are linked closely to the size of the underlying family office, with average compensation for a Chief Investment Officer of $337,000 for small entities versus $821,000 for large family offices. Despite the higher pay available in larger family offices investment management makes up roughly a quarter of the total costs which enables these entities to build out additional services to support the family, such as succession planning. Campden Wealth’s data was based on a survey of 98 mostly single family offices and the weighted average operational costs, not including third party asset management fees, was $5.2 million. But this average hides a wide variety of costs, with respondents to Campden Wealth’s survey reporting expenses running from $0.7 million to $24 million.“This analysis confirms that smaller family offices prioritise investment management, whereas midsize family offices expand their scope to incorporate administrative services such as bill payments, accounting, investment reporting, and HR,” said Campden Wealth.Regulation
As family offices don’t offer investment services to third parties they are free from a specific regulatory framework, such as the European Union’s AIFM directive which applies to alternative fund managers. But it doesn’t mean the sector is unregulated. “Very few jurisdictions regulate family offices. But depending on the services offered, they usually fall into one or more categories of regulated financial services and/or financial service providers such as portfolio managers, investment advisors or trustees,” Swiss private bank Julius Baer said in a report.AML
According to Julius Baer, in the key European family office hub of Switzerland family offices were subject to The Swiss Anti-Money Laundering Act (AMLA). The AMLA requires all intermediaries which hold assets on behalf of someone else to register with a self-regulatory organisation, and it imposes a suite of identification, clarification, due diligence, KYC and notification obligations.Julius Baer said that while it was debatable whether single family offices actually pass the threshold for AMLA regulations, Swiss authorities have yet to exempt them and in principle the anti-money laundering rules apply to family offices which are either based in the Alpine state or have an on-the ground presence there.MIFID II
In principle, Family offices in the broader European Economic Area are subject to the Markets in Financial Instruments Directive (MIFID II), which came into force in 2018 and applies to institutions which provide financial services professionally to clients based in the EEA. While a number of EU member states including Italy, Cyprus and Liechtenstein exempt financial services provided within a group of companies, only a handful such as Germany, have a specific carve out for family offices.Julius Bair said that ‘in principle,’ MiFID II applies to family offices that are either located in or have a factual presence in the EEA. The situation is more opaque for multi-family offices. “It seems fair to state that multi-family offices lend themselves to a more complicated regulatory treatment than single family offices. They have more regulations to comply with and licences to obtain for the regulated services they offer,” said Julius Baer.Industry Challenges and Risks
According to UBS, given family offices focus on providing multi-generational returns on investments, the key risks faced by the sector are financial, and this is reflected in the processes they have in place to deal with risks. Of the family offices surveyed by UBS an average of 59% say they have procedures in place to deal with financial risk and 40% economic risk. But only 24% focus on reputational risks, and 14% address medical risks and travel emergencies for the family. “There is some evidence of inadequate planning for “key person risk.” Almost four in 10 (39%) of family offices say that they currently have key person risk within the family office, yet only around a quarter (26%) have a succession plan in place for the family office to deal with business risks such as continuity of staff and services,” UBS said.Succession Planning
Succession planning also highlighted a potential issue for family offices, which in the next decade will deal with the greatest wealth transfer in history. UBS estimates that over the next 20 years more than 1,000 billionaires will pass an estimated $1.2 trillion to their children.“Yet, on average, just 47% of family offices say that they currently have a wealth succession plan in place for family members, showing the potential for starting to plan how wealth will pass to the next generation,” UBS said.Cyber Risks
Another emerging risk is cyber. With family offices being small organisations managing large pools of assets they are attractive targets for cyber criminals. The risk of cyber attacks and online fraud scams has been turbocharged by the advent of AI, with LexisNexis Risk Solutions reporting in November that 2023 saw a 19% year-on-year increase in global fraud attacks, largely driven by AI technology. According to JP Morgan the cost of cybercrime is worth $6 trillion and if it were a standalone economy, it would be the third largest in the world after the US and China. Crucially for family offices 75% of these attacks are directed at small businesses.“With these figures in mind, it is no surprise our research indicates that 40% of all family offices report cybersecurity as a top gap. In addition, approximately one out of four surveyed family offices (24%) said they have been exposed to a cybersecurity breach or financial fraud,” JP Morgan said. Despite the rising tide of cybercrime, family offices have been slow to respond, a survey of North American family offices by law firm Dentons suggested that the sector was lagging in its attempts to defend against hackers.“Despite the clear and obvious threats, only 31% have robust cyber risk capabilities and just 29% say staff training programs are sufficient. This uncovers an alarming gap between levels of cyber concern and preparedness, highlighting the need for outside firms to conduct regular cybersecurity audits and potentially simulate attacks to better prepare for actual cyber-criminal behaviour”, Dentons said.Banking Issues and Solutions for Family Offices
Counterintuitively another problem for family offices comes from the lack of regulation around the sector, all that is really required to set one up is the cash to invest. The lack of transparency around who the founders of the family office are and crucially where they got their funds can be problematic when it comes to obtaining banking services, explains Narvi’s Ambikar.“Family offices struggle with banking, especially the smaller ones. Not everyone in the family office sector is a member of the Porsche family. A lot of new family office money is coming from digital entrepreneurs with roots in Russia, Cyprus and Brazil, and the banks will look at these people with suspicion. The banks need to know the source of this wealth and decide if serving this family office will pose a reputational risk to the bank,” said Ambikar. Family offices don’t just pose a reputational risk for banks. Regulators are actively fining lenders for lax AML procedures. This year has seen a number of high profile actions by supervisors over AML failures such as Nordea Bank’s $35 million fine to settle a probe into compliance failures linked to the 2016 Panama Papers. The New York’s Department of Financial Services (NYDFS) investigation found that Nordea had inadequate AML controls and failed to properly vet its customers and partners which meant the Helsinki-headquartered bank allowed high-risk transactions with funds linked to Russia and Azerbaijan, between 2008 and 2019.Nordea’s statement announcing the fine pointedly said that it was a’ different bank today,’ which has invested heavily in compliance systems and staff training to ensure it didn’t repeat the failings which led it to channel billions of dollars of illicit funds through its systems.It’s not just the banks which have changed, next year sees a strengthened EU anti-money laundering regime come into force which will place an even greater emphasis on combating the flows of illicit monies by financial institutions.The upshot of this increased focus on AML means that family offices will find it more difficult to obtain the basic banking service that is needed to manage their activities, particularly given the cross jurisdictional nature of family offices. “A lot of people will set up a family office in their own country but the reality is that once you get to a certain level of wealth, you will consider more tax efficient jurisdictions such as Luxembourg, Cyprus, Dubai, or Hong Kong. And, for example, if a Brazilian person wants to set up a family office in Luxembourg, they are going to face problems because a local bank won’t want to serve them,” said Ambikar. To make things more complex for family offices, Ambikar said the nature of the underlying portfolios will also cause concern, with the sector’s focus on private markets and potential dalliances with crypto a potential sticking point. “The third issue for family offices are the underlying transactions they make. These will include private equity transactions, large real estate deals. And they might be buying crypto. Again, this brings reputational risk, which the banks don't want to take,” he said.Benefits of Narvi’s Digital Onboarding and Compliance Solutions
Narvi Payments offers 10-minute digital onboarding, so when clients are approved by the compliance department, they are quickly set-up with a bank account. This account is configured to have three or four admin users, and as many IBANs as the business needs to separately manage all investments. According to Ambikar, multiple IBANS per account means that not only are all assets totally segregated, each IBAN also functions as a separate bank account. Narvi also provides users with an API so clients can automate the bank account into their platform.Narvi is headquartered in Finland, part of the 20-member Euro Zone, allowing for seamless money transfer throughout the single market and all accounts can receive funds in euros, dollars and pounds. Accounts are also able to make payments in 60 different currencies and over 100 different countries. Each account also comes with its own relationship manager, which Ambikar said enabled compliance issues to be resolved easily, a process which is smoothed given Narvi Payment’s familiarity with the family office sector. “Our compliance team has extensive knowledge of international people’s source of wealth and is able to manage the risk of onboard family office clients who could be rejected by traditional banks because they don't fit within lenders’ risk-averse framework,” Ambikar added. Narvi also offers bank accounts to private individuals meaning the backer of a family office can keep all their accounts with one entity and move funds seamlessly between the two. “The benefit of this is, for example, when a family office decides it wants to pay a dividend. If they also hold a private account with Narvi, they pay it out and instantly hold the funds there. Or if they want to buy a house in their own name. There are lots of scenarios where holding a private account in the same place as the family office banking is helpful,” Ambikar said.Actionable Recommendations when Selecting a Banking Partner for Family Offices
For CFOs/CIOs:1. Consult Legal and Accounting Departments: ● Action: Consult your legal or accounting department to ensure that the potential business banking service is suitable for your AIF in terms of location, jurisdiction, and licensing requirements. ● Benefit: This ensures that the banking service aligns with your regulatory and operational needs, avoiding potential compliance issues. 2. Conduct Thorough Due Diligence: ● Action: Conduct thorough due diligence on potential banking providers to assess their financial stability, regulatory compliance, and service reliability. ● Benefit: This ensures that you choose a banking provider that is reliable and meets your operational and compliance needs. 3. Assess Integration Capabilities: ● Action: Evaluate the integration capabilities of potential banking providers to ensure they can seamlessly integrate with your existing financial systems and processes. ● Benefit: This improves operational efficiency and reduces the risk of disruptions in financial operations. For Chief Investment Officers: 1. Diversify Banking Relationships: ● Action: Consider diversifying your banking relationships to include both traditional banks and neobanks to mitigate risks and enhance flexibility. ● Benefit: This provides a safety net and allows you to leverage the strengths of different banking providers. 2. Align Banking Services with Investment Strategies: ● Action: Ensure that your banking providers support your chosen investment strategy and provide the services you need. ● Benefit: This ensures that your investment strategies are optimized and that you are taking full advantage of the banking services available to you.3. Engage with Regulatory Bodies: ● Action: Engage with regulatory bodies and industry associations to stay informed about upcoming regulatory changes and industry trends.● Benefit: This helps in proactively addressing regulatory challenges and staying ahead of industry developments. For Operations and Compliance Officers: 1. Implement Robust Compliance Frameworks: ● Action: Implement robust compliance frameworks to ensure adherence to regulatory requirements and maintain operational integrity. ● Benefit: This helps in avoiding regulatory penalties and maintaining the trust of investors and stakeholders. 2. Monitor Regulatory Changes: ● Action: Continuously monitor regulatory changes and updates to ensure that your banking providers and internal processes remain compliant. ● Benefit: This ensures that you are always in compliance with the latest regulatory requirements and can adapt quickly to changes. 3. Enhance Data Security Measures: ● Action: Enhance data security measures by implementing advanced security protocols, conducting regular security audits, and choosing a business banking service that has robust security features developed. ● Benefit: This protects sensitive financial data and ensures the security of your banking operations.
Published December 18, 2024. Sources checked November 28, 2024.Author:
Aaron Woolner is a financial journalist with over a decade of experience covering banking, insurance, fintech, and regulatory topics. Having led editorial teams at prominent publications like Capital.com and Asia Risk, Aaron delivers informed and compelling insights from across Asia and Europe.
Aaron Woolner is a financial journalist with over a decade of experience covering banking, insurance, fintech, and regulatory topics. Having led editorial teams at prominent publications like Capital.com and Asia Risk, Aaron delivers informed and compelling insights from across Asia and Europe.
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