More stringent regulations, a need to reduce costs and an unstable economy are some of the challenges that family offices will contend with in the coming year, according to those who work with these exclusive firms.
A primary concern for family offices is their focus on privacy, one consultant said. They do not want the public to know what is taking place within their firms, how they are managing their money or how much money they have.
“People know they have money, [but] they may not know just how much money they have,” said Tommy Wright, private client services and national tax leader for family offices at Chicago-based RSM US.
When this information gets out, it can make the family members the targets of fraud attempts or even kidnapping plots, according to Wright.
But recent trends have been slowly lifting the veil of secrecy that has existed in the family office sector.
Lawmakers within the U.S. and around the globe are scrutinizing these institutions, partly in reaction fo the 2021 release of the so-called "Pandora Papers," which was a leak of classified documents that revealed how billionaires and celebrities kept their money in off-shore accounts to avoid having to pay taxes.
Also that year, family office Archegos Capital Management lost billions of dollars in just over a week when it failed to make a margin call.
A significant amount of assets has been moving into family offices over the past few years, resulting in the transfer of millions of dollars of wealth into more private and secretive structures.
Congress considered shedding more light on family offices with the proposed Family Office Registration Act. The bill called for family offices with more than $750 million in assets under management to register with the SEC. The bill has languished in Congress for a year, however.
“While the regulatory environment has cooled off, I think family offices should prepare themselves to be able to operate in that environment should we get more stringent regulations,” Wright said.
Tp prepare for that possibility he suggested that family offices take a deep dive into how they conduct business and make decisions. They need to document everything, he said, including who they invest with, what they invest in, their job functions, and their insurance policies.
Internationally, the Middle East and other jurisdictions are ramping up their scrutiny of family offices, observers noted.
“Regulation is only going to go one way and that is going to be an increase,” said Lucia Perchard, head of family office at Bermuda-based Apex Group. “We are seeing greater and greater drive in terms of changes in the law, legislation and regulation around family offices and I don’t think that is going to stop.”
She added that increased restrictions and other requirements can make it more cumbersome for those who are operating in multiple jurisdictions.
“They need to make sure that in every jurisdiction that they are working in, that they understand exactly what those requirements are and what they must do to ensure that they meet them and do not breach them,” she said.
In addition, family offices have been struggling to find qualified people to fill various roles such as chief executive officers, chief financial officers, chief investment officers and lawyers.
John Elmes, head of single-family offices at Los Angeles-based Pathstone, said family offices are looking for people with the right experience for these positions.
Another problem with family offices is that, because of long relationships among staff and family, loyalty can sometimes get in the way of best business practices, Wright said. There have been cases of family office employees taking advantage of loyalties to steal money, he said.
“That’s the downside of relying on loyalty instead of using astute business practices,” he said.
