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SFOs Adapt to a Shifting Landscape

A different environment has emerged, replete with new possibilities for single-family offices.

By nature, each single-family office (SFO) is unique, serving a range of functions from investment strategy and implementation to family management and more. However, SFOs currently face a transformational time as they try to maintain the scale as a family grows to provide additional and more sophisticated services amid a sea of compliance requirements and the rising cost of attracting and maintaining talent.

In the past, the go-to solution for most SFOs facing such problems was to convert to a multifamily office. Although a number of SFO-to-MFO conversions took place, in many cases, the transformation took much longer and was more disruptive than anticipated. The rather straightforward solution came dotted with pitfalls.

Converting an SFO to an MFO has the obvious trials of adding staff, infrastructure and formal reporting procedures, along with required registration with the Securities and Exchange Commission as an investment advisor. But a less easily apparent hurdle is a change to the culture of the SFO. For some family members, going from an SFO to an MFO environment can feel a lot like spending the weekend with a group of strangers in bad weather. Additionally, few SFOs have cultures conducive to working with diverse, non-family clients. Existing personnel often lack the experience needed to handle multiple families. 

Fast-forward to today. A different environment has emerged, replete with new possibilities for SFOs concerned with making the shift from simply cost-cutting to obtaining services for the ever-increasing number of family members.

A Different Direction

Today’s evolving SFOs are taking a different direction from those of the past by looking for options other than converting to MFOs. For example, they’re forming joint ventures, taking on other clients in limited areas such as private equity investments, merging into private-banking divisions with “family office” services groups, and sometimes simply handing over the keys to the SFO to a commercial MFO.

Some notable trends include:  

Consortia of SFOs. A 2016 article in Bloomberg reported on a consortia of SFOs working together, such as Bill Gates’ family office, Cascade Investment. Cascade has joined with two other family offices to back a group of New York–based buyout specialists to source deals for them.

This move to partner with other family offices is an emerging trend and is handled in one of three ways: 

  1. An SFO partners with another family as a co-investor in this family’s legacy business; 
  2. An SFO teams with another SFO on a new investment; or 
  3. An SFO leads a syndicate offering a direct investment to other families. 

Investment expertise, particularly in private direct investments, has even led some families to adopt a hybrid SFO/MFO approach.

Global wealth management firms. Global wealth management (GWM) firms have emerged to serve multi-jurisdictional families looking for global investment and wealth management solutions. 

These families may have their own local SFOs, but they aren’t able to attract or afford the investment talent needed for the investing solutions they wish. The global, multi-jurisdictional climate, for example, is much more restricted and regulated and requires knowledge, experience and money to navigate. Or, these families may not be interested in managing or operating a fully staffed family-office business and would consider having a GWM firm do that for them. 

While a GWM firm can be a full-service family office, it doesn’t intend to encourage or solicit concierge services or pay bills. Its focus will be on attracting families interested in leveraging its global investment and wealth management expertise. 

Some Final Thoughts

Most SFOs face the issue of viability/sustainability at some point. Luckily, converting to an MFO isn’t the only option today. There are many alternatives if the family and the family-office executive assess needs carefully and think creatively.  

It’s hard to say what new directions SFOs will take in the quest for sustainability. We know that SFOs face a more rapidly changing internal and external environment than they did a dozen years ago. We’re confident that there will be many more and better solutions than before. Beyond this, we’ll all have to wait and see.

 

This is an adapted version of the author's original article in the August 2017 issue of Trusts & Estates.

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