The unprecedented spike in the number of millionaires in the United States has led to a significant increase in family offices as people of wealth are turning to Single Family Offices (SFOs) and Multi-Family Offices (MFOs) to help them manage their wealth. Many of these family offices offer a full suite of solutions including investing, budgeting, insurance, charitable giving and tax and legal services.
As has also happened with hedge and private equity fund managers, family offices (especially MFOs) will need to turn to fund administrators for help. Because many family offices have grown to become complex and sophisticated financial firms in their own right, and they have the same needs as other private fund managers do, including:
- Report on investment performance in a digital format.
- Provide transparency of data to comply with regulatory requirements.
- Deliver operational efficiencies in such areas as investor communications, document distribution and more
There were almost 11 million millionaires in the U.S. in 2016, which was the most ever recorded, and a 4 percent increase over 2015. Depending on the source, the number of SFOs in the U.S. is anywhere from 3,000 to 6,000. Big dollars are at stake, with family offices controlling an estimated $4 trillion in investment capital worldwide. For context, private equity and hedge fund firms are estimated to have $5.7 trillion in investment capital.
Multi-family offices have also experienced strong growth of late. There are an estimated 1,500 MFOs with assets under management of nearly $450 billion, and their number is expected to keep growing as higher costs, lower margins and competition for capital are forcing them to search for operational efficiencies. These factors are also persuading SFOs to merge and become MFOs.
Due in part to the sophistication of the private equity and hedge talent migrating to these offices, along with the increasing deployable capital, family offices are investing more in complicated asset types including equities, real estate, fixed income and private equity, as well as hedge funds. Further, direct investments in these areas have increased dramatically, constituting close to 30 percent of an average family office portfolio.
As technological capabilities are inexorably linked to their key needs, family offices are realizing the importance of technology to their future success. They are also understanding that going it alone is often a difficult option.
Many family offices struggle to understand and manage complex technology offerings, while also meeting the need for deeper service capabilities across accounting, tax and more. Small in-house administrative teams at family offices quickly find themselves over whelmed as the combination of complex transactions and regulatory pressures prove too difficult for them to handle.
These factors will pressure family offices to seek out fund administrators that are best equipped to help address these evolving needs. Over the past few years, fund administrators have been going through a metamorphosis of their own, moving from viewing themselves as offering services focused solely on traditional accounting to becoming a key strategic advisor to private fund managers. This is true across not only accounting services, but also in complicated areas like investor relations, compliance and operations.
The demand for third-party validation of asset values and investment performance is also becoming a bigger factor for family offices, and fund administrators are uniquely positioned to deliver on this need as well.
Lastly, families can sometimes be fickle, and emotions tend to grow more intense as more money is at stake. Family members change through marriages, children, divorces and deaths. A strong and independent voice is critical to not only provide validation and transparency, but also objective guidance that can be taken at face value by family members. This factor increases exponentially with the addition of each family to a family office.
As family offices look to fund administrators to fulfill their needs, they must avoid the common trap of basing their selection mostly on the quality and pricing of the traditional accounting services offered by the fund administrator. Rather, family offices should give equal importance to the technological experience and capabilities of the fund administrator across areas like investor relations, operations and compliance.
Any family office that decides to go it alone will need to make sure to select the right technology provider that can help them not only with the front-end digital performance reporting and communications, but also with the operational middle and back-end of data preparation, analysis, and distribution.