Family offices are gaining visibility, but remain tricky to define. Here's how an HSBC private bank exec explains the term to ultra-rich clients.
Ruobing Su/Business Insider
- The family office space isn't well understood, particularly for a segment that's grown in visibility in recent years.
- The US Securities and Exchange Commission defines a family office as entities affluent families establish to manage their wealth and provide services like tax and estate planning to family members.
- Carly Doshi, the head of philanthropy and family office governance at HSBC's private bank for the Americas, spoke with us about family offices and how she's advising her client base.
- "It's almost meaningless for me to tell you - 'this is what a family office does.' It's more important for you to come back to me," Doshi told us in a recent interview.
- Visit BI Prime for more wealth management stories.
When it comes to overseeing the wealthiest families' complicated financial lives, executives toss around the phrase "if you've met one family office, you've met one family office." In other words, no two family offices are the same, because no two families are the same.
And in general, the term "family office" - defined by the Securities and Exchange Commission as entities affluent families establish to manage their wealth and provide services like tax and estate planning to family members - isn't well understood, particularly for a segment that's grown in recent years.
The number of single-family offices has risen by 38% globally over the past two years, according to a July Reuters report citing data tracked by advisory group Campden Wealth. Campden's research director, Rebecca Gooch, estimated there are 7,300 single-family offices globally, with 42% housed in North America and 32% in Europe. Those firms oversaw some $5.9 trillion as of July.
Pinpointing the precise size of the single- and multi-family office universe is difficult given the secrecy with which many of them operate - and they're not necessarily beholden to the same filing requirements as, say, public financial services institutions like banks, or investment products like mutual funds.
Carly Doshi, the head of philanthropy and family office governance at HSBC's private bank for the Americas, recently spoke with Business Insider about the state of the space and how she's advising the firm's client base.
Doshi, who is based in New York but whose team members work around the world - "my boss's boss is in Hong Kong" - told us that defining these offices' parameters and facilitating communication helps avoid conflict within families many years down the line.
Having wealth siphoned off to pay to sort out intergenerational squabbles is a danger for wealthy families in general, she said. "It's the litigation risk, where they end up fighting to the death," she said.
Once a family agrees on terms and purpose of a family office, they can put a structure in place around that, she said. That can include hiring a legal team, accountants, and other professionals. It might also involve certain types of registrations, which could include signing up as a registered investment adviser if the office is serving multiple families.
All in the family
Business Insider has previously reported that family offices, historically an opaque corner of the wealth universe, are seeing slightly more light than in the past. That's thanks in part to the desire to partake in more direct deals (the practice of investing directly in a company rather than through a vehicle like a fund.)
Doshi, an attorney by training whose role was newly created when she joined HSBC last year from a registered investment adviser, works in part with families in the process of setting up family offices and "defining the terms" of the firms. Often, that means having conversations about the family's wealth with different generations.
"Established family offices that are going through that generational shift, and saying that the structure and functionality that was built by an older generation; maybe they're feeling some pressure points like that same structure or function doesn't continue to serve a younger generation," she said.
If the structure of a family office - whether that includes a tiny staff or a sprawling set of professionals including a chief investment officer, a president, and other experts - isn't quite right, Doshi said, she helps families figure out how to fix that and how to define "what a family office is, and what a family office isn't."
She said clients have to answer two questions before leaping to create a structure to manage their finances. First: decide what it is the family wants the office to do, and who they want it to serve.
"It's almost meaningless for me to tell you - this is what a family office does. It's more important for you to come back to me. And without using the words 'family office,' say you want consolidated reporting, we want a centralized accounting function, we want an investment professional dedicated to looking at the totality of our liquid portfolio," she said, giving examples of services family offices employ.
Doshi said it's important to think about who, precisely, is going to be involved in decision-making and the office itself.
"Is it you, your immediate family, and your children - and their spouses and their spouses' families? Is it ex-spouses' families? Is it your spouse's extended family? Is it the guy you met on the subway last week? How big or small does this thing get?"
HSBC Private Bank caters to clients with a minimum of $5 million to invest, and oversees $338 billion in global client assets as of September 30, with most of that wealth concentrated in Europe and Asia.
Global private banking operations comprise a small part of the firm's overall revenue relative to retail banking and wealth management operations. The two units generated some $1.4 billion and $17 billion, respectively, in revenue as of the nine months through September 30.
The London-based firm is meanwhile undergoing a broader restructuring as it aims to improve returns in areas like Europe and the US, executives detailed on its October earnings call with analysts. HSBC's former chief executive, John Flint, stepped down in August and is being led by interim chief Noel Quinn.
Doshi's thinking underscores the nature of advising family offices with complex financial situations that only the wealthiest actually have to deal with. There's no "one-size-fits-all approach," she said.
Family offices are growing in sophistication, too, as far as the types of investments in their portfolios.
On average, private equity now comprises 19%, or the second-largest share of family offices' portfolios after global equities, UBS and Campden Wealth estimated in an October report. That allocation is up from 8% five years ago, when it constituted the sixth-largest share of the average family office portfolio.
The younger generation, too - often called in the industry the "next generation," or "next gen," is shifting in its approach to investing.
"Sometimes what I see among families is, it's the younger family members teaching the older family members about impact because for Gen Y, Gen Z, millennials even - the notion of impact, of putting your values to work through not just traditional giving and donation, but with your commerce," is growing, she said.
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