Do You See the Family Office as an Emerging Powerhouse?

Around the 1980s and 1990s, many professionals were skeptical of working in a family office. Originally, many saw the family office as a construct from the past, perpetuating values of preservation and conservative investment practices handled by old gents sitting around a boardroom table contemplating a family’s 100-year plan. Today, many see a family office renaissance occurring in the wealth management space. They see the family office as a game-changer for the future. Sophisticated family offices are now joining forces to co-invest in such new frontiers as space technology, self-powered vehicles or in cutting-edge technologies in ed-tech, pharmaceuticals, medical devices, healthcare interventions, as well as ESG and impact investing, and purpose-driven strategies. As with the image to the right, many people who once perceived the family office industry to be an “old woman,” see it as a “young lady” today.

Family Office Roots

Since I first published The Complete Family Office Handbook in 2014, I have come to realize how the industry has and continues to accelerate. The family office concept is nothing new, in fact, it dates back centuries to the Roman Emperor August Caesar, who ruled from 27 BC-14 AD in the West and Emperor Shenzong (1048-1085) of China’s Song Dynasty in the East. Both rulers required support to manage and steward their vast empires, particularly their vast fortunes, assets and holdings of their conquests.

Current State
Over the last few decades, multi-family offices and the commercialization of the single family office model through institutional service offerings have emerged. With more of family offices finally identifying as such coupled with their increase in financial transaction capabilities (originally reserved for big companies or private-equity firms and institutional firms), the family office industry has evolved to become quite an economic powerhouse. Moving forward, family offices are expanding beyond purely the investment and transactional space with their focus to include broader wealth management solutions from family member preparation and education, and family governance training to long-range trust and estate planning to business succession and fiduciary considerations.

Compensation Practices
In order to keep up with the pace and change of the rapidly changing family office domain, compensation practices among family offices have had to modernize to keep up in order to attract, retain, and maintain a competitive edge. A recent study by Morgan Stanley (2019), led by compensation specialist Trish Botoff of Botoff Consulting, LLC, found that 87% of family offices review and adjust compensation annually, and last year 84% awarded bonuses, an 80% increase from the previous year.

Certainly, some of these strides can be attributed to the longest bull market run in history. The reality, however, is that many new, up-and-coming family offices are now setting a pace and have a level of sophistication more in-line with their institutional sisters and brothers. In fact, families seeking to attract the cream of the crop now compete for resources with financial institutions in addition to other family offices. As a result, the use of methodical incentive plans is growing in order to stay competitive in this increasingly competitive market. Offering comprehensive compensation plans means that families not only attract qualified family office employees but also retain them. For other families considering the setup of a family office, the costs for top talent which may be two-thirds to three-quarters of their start-up budget can be a deterrent to building out a full-staffed family office. Progress can be a double-edged sword, and as a result, advancements in technology, systems, infrastructures, and platforms that can help reduce manpower, improve efficiencies, risk controls, and security are also on the rise.

Compensation practices are like “a canary in a coal mine.” They can tell you quite a bit about where an industry is headed. As I see it, change is the only consistent marker for the family office. Yesterday’s “old woman” is now the “young lady” of today and for the foreseeable future.

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Reference: Morgan Stanley Family Office Compensation Benchmark Report prepared by Botoff Consulting, LLC, May 2019