CHAPTER 1
Introduction to the Family Office

Kirby Rosplock, PhD

Family offices serve a vast array of functions for a family and their wealth. Those family office functions are commonly bespoke to the needs of the specific family for whom they were designed; therefore, when asked about the definition of what a family office is, the answers often vary from person to person. Generally speaking, family offices are designed to prepare family members to collectively manage, sustain, and grow their wealth across multiple generations. Family offices can aid families in managing the numerous risks that accompany affluence. In addition to offering a potentially wide array of services, such as tax, fiduciary, and compliance needs; investment management, risk management, estate planning, and trust administration; philanthropic advisement, financial education programs for family members; and family governance and wealth-transfer planning, the family office ideally has a higher purpose to bridge generations in order to create continuity and cohesion for families around their wealth.

The last decade has featured disruptive turbulence in financial markets, impressive technological and medical advancements, and dramatic shifts in the global landscape. Family offices need to respond to these changes with equally dramatic adaptations if they are to remain relevant and effective. For example, in 1918, the average human life expectancy was roughly 39 years.1 One hundred years later, the average expectancy was 80.3,2 and current statistics indicate that approximately 500,000 people around the globe are aged 100 or older. Moreover, the 100-plus population is predicted to almost double with each coming decade.3 Increases in human longevity mean that family offices, which once operated on the assumption of needing to survive 100 years, now need to plan on surviving 500 years and manage the multiple intergenerational wealth transfers and leadership transitions associated with this kind of longevity. Low-return financial market environments inject additional complexities, requiring that family offices and their staff members develop additional strategies, competencies, and skill sets to support the achievement of the family's multiple objectives. Thus, the aim of this volume is to construct a futurist lens of the family office: Rather than focusing primarily on concerns of luxury, buying, and traditional investing, we propose the 500-year view of the family office and introduce the leading-edge perspectives and practices for how family offices and their staff members can support the coming ultra-lifespan of the families they serve.

This second edition updates the first book that demystified the concept of the family office and clarified who should consider starting their own single-family office or joining a multi-family office. The second edition provides context, updates, and improvements to inform family office setup, structure, and design as owners more clearly define their family office's overarching purpose and vision. This book provides expanded coverage regarding the types of family offices in existence, along with who owns them and pays for them, and what services may be rendered by the offices. This guide is designed to be a useful tool for affluent families, individuals, and philanthropists, as well as for practitioners and industry professionals, as it outlines the important functions family offices may render today and for the generations of family members yet to be born.

In this chapter, we review the macro futurist trends in global wealth to provide context for understanding the basis, purpose, and definition of the family office. We then consider the family office's historical roots in Western economies, which is grounded in the growth and proliferation of family enterprise. The roles the family office plays regarding its client families are then discussed.

A Macro View of Global Wealth

Given that family offices exist to help families sustain and grow their wealth and successfully navigate the various risks that come with that endeavor, measuring affluence and understanding affluent families are important first steps. Yet, there is an art and a science to assess affluence, which begins with defining how much you must have to be considered wealthy. While we all have our own definitions, most industry research firms classify individuals with a minimum of $1 million net worth as high net worth (HNW) and individuals with at least $30 million net worth as ultra high net worth (UNHW). Due to the associated costs and complexities, family offices generally do not become a realistic wealth management solution until families enter the UHNW category. To provide some context, the total population of individuals reporting a net worth exceeding $1 million is currently 22.8 million, with these individuals collectively having a combined net worth of $94.1 trillion.4 This wealth tends to be concentrated among the upper strata of ultra-wealthy individuals. For example, the world's top 10 wealthiest individuals retain a combined fortune of more than $743.8 billion (all amounts are in US dollars).5 More telling, the UHNW population collectively holds more than $32 trillion in wealth (34 percent of the total wealth held by individuals with $1 million-plus net worth). This is particularly noteworthy considering that the UHNW population consists of only 265,490 individuals-just 1 percent of all individuals reporting net worth above $1 million.6 Table 1.1 provides the growth of the UHNW population.

Examining the global distribution of the UNHW population reveals that these individuals predominantly live in the US (accounting for 31 percent of UHNW individuals), followed by China (9 percent) and Japan (nearly 7 percent). In 2018, all seven major world regions recorded declines in ultra-wealth, albeit with regional variation. For example, while the Middle East UNHW population grew 6.8 percent, its wealth fell 0.1 percent. Meanwhile, ultra-wealth in Latin America and the Caribbean dropped by 7.1 percent, and its UNHW population fell by 6 percent. Net worth in Asia fell at a faster rate than in both North America and Europe, with Hong Kong dropping by 11 percent. Moreover, plunging stock markets resulted in Asia's high net worth (HNW) population-individuals with net worth of $1 million to $30 million-growing only 0.6 percent in 2018.7

Prominent research firm Wealth-X concentrates solely on understanding the demographics and wealth profile of HNW and UNHW populations. According to Wealth-X, men comprise 86 percent of the UNHW population and retain 90 percent of the wealth, although the proportion of women has trended modestly upward in recent years, to 14.6 percent in 2018. Furthermore, women accounted for nearly 20 percent of the under-50 global ultra-wealthy class, suggesting that shifts in global wealth distribution and intergenerational wealth transfer, cultural attitudes, and tech-driven entrepreneurship have expanded women's opportunities to create wealth.

Asset allocations in 2018 reflected investor caution in the wake of the global financial crisis, tighter monetary policies in some major economies, and slowed growth and tumultuous stock performance around the globe. Specifically, ultra-wealthy portfolios reflected more than one third (36.5 percent) in liquid assets (cash, income, and dividends) as well as an increase in cash-equivalent holdings. Overall shares of private holdings dropped slightly to less than a third (32.1 percent) in recent years, likely due to regional and country variations in entrepreneurship rates, access to finance, economic development, cultural trends, and attitudes to wealth preservation. Meanwhile, public holdings remained steady at one quarter (25.3 percent) of total assets, although a slight dip was noted due to volatile capital markets and fewer IPOs and M&As in 2018. Alternative assets (e.g., real estate, luxury goods, fine art, yachts, private jets) accounted for the remaining 6.2 percent of UHNW portfolios. Wealth-X credits another shift-the increased population of those with a combination of inherited and self-created wealth-to several factors: (a) the rapid increase of UHNW individuals (and subsequent focus on self-made fortune) across Asia and the Middle East, (b) the rise of UHNW women involvement in business and entrepreneurism, and (c) one of the largest-ever intergenerational transfers of wealth, including significant handovers in China. The scale of intergenerational wealth transfer underway emphasizes the need to assure that family offices are established when required and that those in existence are high functioning.

TABLE 1.1 World by Wealth Tier

Source: Wealth-X, World Ultra Wealth Report 2018-2019