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Horizons: Family Office & Investor Magazine

Trends – Globalisation and professionalisation of family offices are two separate yet interlinked trends

Monday, March 04, 2019

According to expert Peter Brock, family offices are no longer small entities operating locally. They are growing in scale and in sophistication, as well as prominence.

Brock is executive director and leader of family office services in EMEIA and GSA at EY.

Opalesque: What do you see as the most obvious trend among family offices?

Peter Brock: We see a greater globalisation and professionalisation of family offices (FOs), i.e. global tech compliance, good risk management procedures, cyber security. That’s on the background of a total change in the world of wealth and asset management. Private banking isn’t what it used to be. Products have to change. So the hurdle for FOs is very high.

Opalesque: Tell us more about the globalisation of FOs

Peter Brock: The investment world focuses more on global geopolitical and financial risks. At the same time, families with their own single-family office (those with at least tree-digit million’s worth of capital) have to have a global view of asset allocation - and a global strategic asset allocation.

“In my view and also in many family officers’ view, one should buy on the ground in the local market.”

Global products can be bought from the home country; but in my view and also in many family officers’ view, one should buy on the ground in the local market, e.g. buy Asian products in Asia. So families should invest within the currency regions they want to be invested in.

Setting up a family office overseas, once a certain level of investment has been reached, will benefit from economies of scale. More and more family offices being set up both in the developed world nowadays but also in growth markets; at the same time, more international subsidiaries of those family offices are being set up too.

Meanwhile, more and more rich entrepreneurial family offices have their next generation studying abroad and generally spreading around the world. That can also lead to international subsidiaries, in order to service those more global family members.

Globalised investments and/or subsidiaries can help hedge local risks. For example, many UK FOs have set up an office outside the UK ahead of Brexit, but also vice-versa non-UK FOs are setting up in the UK to continue their presence in the currency region of the British Pound.

Family offices that set up a subsidiary in a foreign country should make sure they are very professionally set up so as to avoid making mistakes in any remote region. Local legal, compliance and tax know-how are of utmost importance. Also, the office needs to make sure which decisions the local operation can take and what level of authorisations it may have. The local staff needs to be integrated into the overall operations and to be controlled in an efficient way.

Opalesque: Tell us more about the professionalisation of FOs

Peter Brock: In general, the FO sector is growing in size and in professionalism. The latter characteristic is driven by more diversified portfolios, which must be better managed than ever in light of the Financial Crisis and the interest rate environment. Also more complicated compliance regulations demand a greater level of professionalisation.

“More and more families take a do-it-yourself, self-contained wealth management approach.”

People are investing in direct investments, in start- ups, in real estate, in many different products. As part of that, reporting, cost-controls, manager selection, digitalisation get more complex and more professionally demanding and sophisticated, in tandem with the rest of the financial services world.

More and more families very often do not trust banks and want to manage their wealth themselves; they take a do-it-yourself, self-contained wealth management approach. This – combined with the search for privacy and confidentiality – is one of the reasons why the FO industry is increasing in size.

As an aside, this should also lead entrepreneurial families to gather more financial knowledge. Financial training is essential for next-gens and for entrepreneurial families if they want to manage their wealth themselves. Indeed, some of the banks are struggling as all they do is offer products rather than supplying independent advice. There is more need for families to gather more financial knowledge for themselves, but also to involve more independent advisors on certain matters or on a holistic basis to push towards the professionalisation of their office.

A good and easy solution is to invite mentors on different subjects to get involved with the next-gens. This often helps - independent of the family members - to both increase the knowledge and create a greater level of involvement within the family office. On top of the normal ways of education, additional coaching and practical training modules specifically for the family matters on governance and wealth management will add increasing value to the family fortunes.

Opalesque: What changes often take place when the next generation takes over?

Peter Brock: Families historically tend to own one business. Normally, the whole business stays in the family, with the next generations taking over. But more and more often, next-gens don’t want to go into their parents’ business – for many different reasons, like different interests or their own start- ups. That means the family’s next-gen becomes shareholder / owner of the business, without having a managerial role. When that happens, the family offices often diversifies into owning different businesses, either in the same industry or in a different industry, to reap the benefits of diversification. That happens quite a lot and a lot of serious research is being done about it.

More and more families and next-gens look at the families’ business activities as a portfolio of investments rather than a family tradition focused on just the one business. Either families decide to focus their knowledge on one or a few sectors and thus be specialists, or they intend to diversify away from the single business into different sectors?and activities in order to hedge their investments through this approach.

In short, more families now have a portfolio of entrepreneurial holdings instead of just the one family business.



 
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