By Bruce Lipnick
In recent years, the world has witnessed the rise of affluent individuals at an unprecedented rate. According to the Capgemini Wealth Management report, the combined wealth of Ultra-High Net Worth Individuals in the world stands at approximately $14.7 trillion.
Against this background, family offices have risen to meet the need for wealth management and the transfer of wealth over generations of rich families. According to James Hughes, lawyer, and expert on wealth management, about 85 percent of the wealth created by rich families is lost by the third generation. In 90 percent of the cases Hughes considered, the lack of proper communication between generations and the inability to make well-informed decisions, especially in younger generations, contributed directly to their losses.
As a founder of a family office business with decades of experience in offering advisory and investment solutions in diverse portfolios to a range of clients, I am well aware of the ongoing trends and best practices within the industry.
Phenomenal Rise of Family Offices
The last decade has witnessed a phenomenal rise in family offices, owing largely to the need for professional wealth management in the aftermath of the global financial crisis. Presently, there are about 3,000 single family and 150 multi-family offices in the US alone. Together they account for an estimated $1.2 trillion and $450 billion in investments, respectively.
Private Banks versus Family Offices
Private banks and other wealth management firms have also taken advantage of this market opportunity and now provide stiff competition for family offices in the race to manage family fortunes. At present, banks are leading the pack and currently top the chart of the richest family offices. In the Bloomberg annual rankings of top family offices in the world, Hong Kong-based HSBC Private Wealth Solutions and Northern Trust in Chicago are ranked 1st and 2nd, respectively.
Despite their recent success, there is still strong demand for family office services, as banks lost the trust of many family clients who suffered serious losses in equity during the recent global financial crisis. The losses sustained by many affluent families caused them to reconsider their investment strategies. Many families reallocated assets to alternative classes and diversified their portfolios in order to mitigate risk. In response, family offices have also changed their business strategies to match the lowered appetite for risk. Family offices also cater to the particular investment preferences of their clients in order to protect their wealth against future losses.
How the Wealthy Allocate Their Assets
Traditionally, a large percentage of the wealth of families is held in equities. However, after the global financial crisis exposed the high volatility of this investment class, many family offices diversified and reallocated their clients’ investments to less volatile asset classes. According to Carmot Capital, an investment management firm, a typical allocation of assets for a wealthy family today could comprise 60% in global equities, 30% in global bonds, and 10% in alternative asset classes such as real estate.
Real Estate: An Alternative Asset Class
Real estate presents one of the best alternative asset classes in which to invest, as it provides clients an opportunity for direct investment with higher yields over the long term and minimal risk. Real estate is a tangible asset that helps investors diversify their portfolios with more consistent cash flows and greater control over returns, in part because real estate is shielded from much of the market volatility that affects equities and bonds.
Family offices across the globe are already directing large percentages of their assets into real estate. According to a report by FOX investment, the average family office invests $46 million in real estate, which represents 12% of its total asset allocation. Geographically, Asian families with low appetite for risk are set to outperform their American and European counterparts in real estate investments.
Leveraging Real Estate Crowdfunding
Some family offices have begun investing in real estate via crowdfunding – gathering relatively small amounts of money from a large number of people. Family offices are not the only ones showing interest – investment banking firm, The Carlton Group, launched its own real estate crowdfunding platform. Crowdfunded real estate shows real promise, as nearly all of the early ventures in this new market have proven successful.
Family offices have several different ways to take advantage of crowdfunded real estate. They can advise their clients to either buy the entire class of assets or simply invest for cash flow purposes. In most cases, however, family offices act like most big investors and prefer to invest directly by acquiring the property because they want greater control over their return on investment.
Looking towards the future
As the rise of ultra-high net worth individuals continues on a global scale, the demand for customized family office solutions to assist in wealth management and preservation is set to increase well into the future.
Note: This article originally published in Family Office Today issue 1