As new wealth centers crop up around the world, family offices are opening in diverse venues, prompted in part by a search for security and privacy and by global financial reforms.
In a special report, Family Offices in 2017, Bloomberg identifies several trends in this dynamic landscape through recent research on family offices and Bloomberg’s own reporting.
Bloomberg notes that ultra-high-net-worth assets amounted to $5.1 trillion in 2015, the most recent year for which data were available, and 210 new billionaires joined the ranks of the world’s 1,400 wealthiest families. The family office has become their preferred way to protect and preserve assets for future generations.
Half the estimated 10,000 family offices in the world opened in the past 15 years, according to the report. One driver of this growth is a flight to safety as families in various emerging markets worry about the stability of their economy, currency and government. Confidentiality is another driver. The report finds that many families are moving assets away from big investment management firms, which they fear may not use them appropriately or could have their information systems breached, and forming their own fiduciaries or proxies as advisors.
The report says systemic reforms have dramatically altered the regulatory landscape, forcing family offices to adapt accordingly. Dodd-Frank legislation is prompting families who do not want the exposure of their holdings that would come in a multifamily office to form a single-family office, in which only one group would participate. In addition, the U.S. Bank Secrecy Act, Anti-Money Laundering Act and Foreign Tax Compliance Act may push some families to set up in other tax regimes. Likewise for families in countries around the world when the Common Reporting Standard—whereby jurisdictions collect information from their financial institutions and automatically exchange it with other jurisdictions—goes into effect next year.
A key goal for wealthy families is to find the best location in terms of legal and tax structures, ease of maintaining employees, political and economic climates, filing requirements and flexibility for future restructuring, the report says.
Some tax specialists think that the U.S. may provide foreigners concerned about privacy better protection in such states as Delaware, Nevada and South Dakota. One British lawyer advises his clients to take advantage of the U.K.’s know-your-customer regulations by basing their family office in London, including key personnel. His reasoning: If a family is known to banks and law firms, it will have automatically passed many critical tests.
Family offices, the report says, may comprise two or three generations, with an inevitable shift in mindset and attitudes across age groups. Younger family members may seek more control over their finances, focus on business and see environmental, social and governance investing as better than pure philanthropy to effect social justice and societal change. It is the task of family office executives, the report says, to effect the transition of accumulated wealth through the generations.
The report foresees a significant increase in family offices in the Middle East as the number of rich families grows and their dissatisfaction with low returns prompts them to outsource asset management responsibilities. Succession planning is another concern, particularly among Gulf Corporation Council family offices, which include new sources of wealth whose creators are inexperienced in managing investments.
In Southeast Asia, rising wealth has been attended by a proliferation of family offices and a growing wealth management sector that has begun to evolve from one of wealth accumulation to wealth preservation. Succession planning and passing on wealth to the next generation are becoming more critical.
Some experts expect many families with businesses in emerging markets, where regional stability may be a concern, to domicile their family office in a developed economy. The U.S. is a major destination. Russians like American real estate investments, and appreciate this country’s attorney/client privilege. Some Chinese families seek to invest in the US and establish a base for their children’s education. London beckons to emerging markets families who seek skilled professionals they can trust to protect their interests. Singapore has attracted wealthy Asian family offices, because it is easily accessible, English is spoken and U.K. law followed, the report says.
