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Family offices and nightclubs

What is it with family offices these days? They appear to be everywhere. But are they really family offices or just private banks in family offices' clothing? The new vogue for the title "family office" could be undermining the credibility of the model.
Studio 54 – one of the world's most exclusive night clubs in its day
© Tim Lehmann

What is it with family offices these days? They appear to be everywhere. How much so? Well for starters Bloomberg Markets recently ran a big story about the top 50 multi family offices in the world, which was picked up by much of the world’s financial press afterwards.

Then there are the stories about hedge funds turning themselves into family offices. Some of these have been big, like George Soros’s legendary Quantum hedge fund becoming a family office after it dumped money from investors not connected to the family. Others, lesser-known offices but nonetheless big, have also converted to family offices, like New York-based Covepoint Capital and Brencourt Advisors.

And then there are the private banks adding and enhancing their family office businesses, like Deutsche Bank ambitiously marketing its recently created Deutsche Oppenheim Family Office – the largest family office in Germany in terms of assets under management.

When it comes to finance and investing, family offices would appear to be the most fashionable thing since the start of the hedge fund boom 20 years ago.

But is all this hype justified? And what’s driving all the attention family offices are getting? The obvious reason is that they have a lot of money – and sometimes need outside help to manage this money. Do the sums and it’s easy to see why the moneymen and moneywomen are so excited.

It’s difficult to know how many family offices there are in the world, but conservative estimates put the total at around 3,000. And if the average assets they are managing are around $300 million (€226.2 million), again probably a conservative estimate, then they control just under $1 trillion of assets. Just imagine the fees on $1 trillion of assets – at 1% of assets under management that would be $10 billion.

But despite all their money, family offices – at least single family offices – don’t want everyone to know about them. That’s why no one really knows how many exist. But their mystique and exclusivity makes them more desirable to everyone else. It’s like the aura around a nightclub that only the coolest people can gain access to – for those selling services to the rich, family offices are the coolest of all “nightclubs”.

But just like the coolest nightclubs, there are many imitations in the world of family offices. You only have to look at the Bloomberg Markets list to see this phenomena and how the term “family office” gets distorted. Bloomberg says the top family office in the world is a firm known as HSBC Private Wealth Solutions. It doesn’t sound particularly family office-like – or at least it doesn’t sound a kind of nightclub the movers and shakers would like to go to. But it’s pretty cool when it comes to the money it manages. It has, according to Bloomberg, $137 billion under management and works with 340 families. That’s an average account of around $400 million – that’s a lot of money and a pretty legitimate reason to call itself a multi family office.

But HSBC and every other firm on the list are multi family offices. That is, they all accept money, some as little as $5 million, from outside investors. In many ways, they are really just top-end private banks and wealth managers. But all of them like to be seen as family offices because of the status this confers on the users of the service.

Of course, like HSBC, many of these businesses might have some legitimate reasons to use the family office moniker. A lot of them started out as single family offices, or like HSBC, manage money that is of family office size – that is, accounts of more than $100 million. But the Bloomberg list highlights the problem with using the family office title too readily.

The danger of the overly free use of the term family office is that the more widely it is used – and in many cases wrongly used – the less credible it will become. As someone once said: “So soon as a fashion is universal, it is out of date.” So too is it with family offices?

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