Family Offices Grow on Greater Wealth Accumulation
The ranks of the world’s ultra rich swelled to 8 million last year as the wealthy sidestepped the brunt of the credit crunch. According to the 2008 World Wealth Report compiled by Merrill Lynch & Co. and consulting firm Capgemini Group, the rich have been affected by the credit crisis (since their ownership of financial assets is so disproportionate) but the “smart money” avoided the worst of the crisis, scaling back their exposure to property and hedge funds in favor of safer investments. The report notes the wealthy (more than 10 million people globally with financial assets worth more than $1 million) cut back on property trusts and hedge funds and committed more to cash and other liquid deposits. Meanwhile, the “ultra-rich - those with $30 million or more to invest,” grew even more rapidly than mere millionaires.
Although the number of high net worth individuals grew around the world, the United States still leads the pack when it comes to fat wallets, according to Merrill Lynch and Capgemini. The greater wealth accumulation in the U.S. has resulted in a significant increase in the creation of family offices. That’s because the concept of managing wealth like a business has become deep-rooted in American culture and a growing number of wealthy families have established these separate companies or offices to manage their family’s wealth. As a result, executive search firm, A.E. Feldman, who is currently working with high net worth individuals, CPA firms and law firms, says demand is on the rise for Tax CPAs, Tax Attorneys and other experienced professionals who have proven they can identify all risks.
U.S. Home to Most of the World’s Ultra-Rich
There was a 4.5% jump last year in so-called “high net worth individuals”- those with investable assets of more than $1 million excluding primary residence, according to the FT, citing the 2008 wealth report compiled by Citi Private Bank and Knight Frank. Meanwhile, Merrill Lynch and Capgemini’s 2008 World Wealth Report reveals the combined wealth of the globe’s millionaires grew to nearly $41 trillion last year, an increase of 9% from the year before. According to the report, there were about 600,000 more millionaires in the world last year – a 6% increase from the year before. The report adds, however, the United States still reigns supreme when it comes to deep pockets.
One in every three millionaires in the world lives in America, according to Merrill Lynch and Capgemini. Moreover, the FT adds that among the Organization for Economic Cooperation and Development (OECD), the U.S. leads the pack in high net worth individuals. In fact, the wealthiest 10% of Americans are the richest in the entire 30-nation organization. The FT concludes, “The U.S. is still home to most of the world’s truly rich. High net worth individuals make up 1% of the U.S. population, with 3.1 million people claiming to be millionaires, and 460 to be billionaires.”
Family Offices on the Rise
In recent years, the greater wealth accumulation in the United States has resulted in a significant increase in the creation of family offices. The modern family office came of age in the 19th century in the U.S. when the industrial revolution created dynasties with enormous wealth, according to the Family Firm Institute (FFI). The group explains that Tycoons such as Rockefeller, Carnegie, and DuPont set up offices which managed their personal financial affairs.
Today, a growing number of wealthy families have established a separate company or office to manage their family’s wealth. This is the family office. Family Office Exchange, a Chicago-based association of investors and family offices, estimates that there are as many as 3,000 family offices in the United States and the numbers are increasing.
Larry Goldstein, an Attorney, CPA and former CFO of a family office, says the family office is essentially a vehicle for centralizing the management of a family’s financial affairs. One big motivating factor for the creation of a family office is when a family business is sold and a wealthy family is dealing with a large inflow of cash. Typically, a family office is not established with less than $100 million.
Goldstein explains that a family office can range from single-family to multi-family set-ups. The scale of the set-up depends on the size of the family, the number of generations to whom the office caters, and the types and amount of wealth held by the family.
Goldstein notes that one of the benefits derived from the family office is the ability to build purchasing power. A single family office is typically appealing to large, multigenerational families. For instance, a family of 10 individuals with $10m each is going to gain leverage when it comes to management fees which can eat into rates of return. A founding family, however, can also opt to gain purchasing power by sharing with other families in a multi-family office.
Another advantage of the family office is that there is a consolidated group of people your family can contact for a wide-variety of services including tax and estate planning, financial planning, charitable foundation management, and legal advice. Goldstein also points out that some family offices also offer concierge-level services which include making appointments, buying luxury goods…just about anything.
The family office will determine investment policy – which doesn’t need to be uniform across the family. Based on the age of family members, amount of their wealth and style of living, the family office will establish and monitor a plan designed to produce required income and also ensure a certain amount to pass on to future generations and/or charity – typically a key concern for high net worth families.
If a family office operates on a larger-scale, it will typically be staffed by accountants, lawyers, investment advisers as well as tax and real estate specialists. These professionals are brought together by the head of the family office. Often times the President of a family office is a family member, but not always. According to Goldstein, it is the job of whoever is hired to run the family office to present the results of operation to the family. It is imperative, Goldstein says, that the head of a family office allow family members to ask questions, express their needs and ensure that those hired to run the office are more than voices behind the telephone.
The family office must also be aware of a family’s attitudes towards money - attitudes that may differ across generations. Although a family office can be run by any number of qualified professionals – such as an attorney or investment advisor, Goldstein says the head of a family office must be savvy enough to do what’s necessary and also bring together the best talent – both internal and external advisors.
Are you a CPA, Attorney or Investment Professional? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
