According to Campden FB in 2019, the total estimated assets under management of family offices stood at USD5.9 trillion with an estimated wealth of USD9.4 trillion of wealth attributed to families behind such offices. EY estimates there were around 10,000 family offices as at 2022. Recent studies suggest that the increase in wealth amongst the likes of oil families, tech entrepreneurs, and sports and other celebrity personalities is leading to a sharp rise in the number family offices worldwide, to the extent that service providers are flocking to bridge the supply and demand mismatch, and a number of countries are starting to introduce new laws to regulate this growing sector.
As wealth portfolios increase in size and complexity amidst a steady rise in the number of new laws related to tax, transparency, and investor protection, families are establishing dedicated offices to pro-actively manage and organise their financial affairs to ensure the preservation and growth of family wealth both for the benefit of existing members of the family and the next generation. In addition, accessibility to the family office and its network of trusted, diverse and dedicated professional teams is also helping to facilitate opportunities to educate and develop essential skills for the next generation of leaders.
Serving this sector goes beyond the regular service provider approach, necessitating a deeper insight and understanding of the psychology and sensitivity of the family dynamic, its culture and how this drives operations, innovation and future growth.
So, what is a family? ‘La famiglia è tutto’ or ‘family is everything’ as the Italian’s would say! If we put aside definitions applied within a regulatory context, a family might be “a group of one or more parents and their children living together as a unit”, or the “descendants of a common ancestor” or indeed might be extended to include others. The term tends to place an emphasis on privacy, closeness and collaboration, arguably needed in times of an increasingly fragmented society and a culture of individualism. Other factors such as blended families and Gen Z bring new perspectives, attitudes and challenges along with new opportunities.
Within this rapidly changing landscape, a family office should consider it fundamental to carefully understand and formally establish an articulated shared purpose that is revisited regularly to ensure it is consistently aligned across the three circles of: ownership, family and business.
Similarly, the family office will be more likely to adapt to a changing environment where it has struck an appropriate balance between natural (less formal) and formal governance frameworks, noting that traditional approaches to family unity, collaboration, conflict resolution and preservation of core values remain firmly planted in, and are a common theme amongst, many successful family offices. A carefully balanced governance framework gives the family office the flexibility to meet the needs of ownership and yet is robust enough to respond to threats which can have major repercussions for the lives of dependents and future generations.
“The Prophet (ﷺ) said, ‘The best alms is that which is given when one is rich, and a giving hand is better than a taking one, and you should start first to support your dependents.’ Furthermore, it was narrated that ‘Abd-Allah ibn ‘Umar heard the Messenger of Allah (ﷺ) say, “Each of you is a shepherd and is responsible for his flock”. A well-run family office will apply these principles to pool resources and invest family wealth in a manner which takes a measured approach to risk and reward to ensure wealth preservation, growth and the provision of financial and educational support to family members. This ripple effect goes further where family wealth is invested in projects that not only generate yield, to take care of the day to day needs of the family, but also create capital value and opportunities for society and communities as a whole.
Pooling resources and combining the wisdom and experience of senior family members, with the flair drive and ambition of the younger generation, has the potential to create a family office powerhouse that is not afraid to innovate and is able to withstand regular stress testing of its compliance and governance frameworks whilst continuing to create operational efficiencies to scan the horizon for access to growth opportunities. This requires unity of vision and a certain chemistry among the members of the office, some of whom may not strictly fall within the above definition of ‘family’, however, in time may be considered to be part of the ‘family’ in a much wider sense, becoming truly aligned to safeguard the family’s assets and reputation.
Over time certain ‘non-family’ employees will inevitably (and to a varying degree) learn, and become closely familiar with, the principles, dynamics and wider interests of the family and its individual members, for example by being involved in the development of policies, investment products and the provision of bespoke concierge, personal and security services in addition to the pursuit of philanthropic activities. You would, therefore, expect a heightened emphasis on employee screening, due diligence and retention within an appropriate legal framework to encourage the family office to recruit and retain the right people give longevity to the infrastructure of the family office. At the same time, employees should feel free to confidently and comfortably articulate concerns as trusted advisors. Some ‘blue-sky’ thinking is required around recruitment policy and traditional compensation models!
The ambition, strengths and skillsets of the younger generation who want to actively participate in the family office can open up exciting opportunities for new ideas, including the use of innovative tech and the establishment of new business lines, under the guidance and mentorship of seasoned professionals. Family offices are already witnessing a broadening of asset allocations to include investments in the digital economy such as AI, bio-tech and crypto. Tech advancements in the family office space have also led to the development of tailored applications being used by family offices and individual family members to manage and monitor portfolios from a ‘one-stop shop’. Such apps are able to efficiently facilitate NAV reporting, property management matters, concierge services, decision making and record keeping, and the dissemination of know-how.
The family office will have access to traditional ‘tried and tested’ tools to achieve its goals and these tools might include a combination of ‘natural’ and formal processes (as alluded to above) including setting up a family and/or ownership council, tailored trust or foundation arrangements and/or traditional corporate structures to pursue tax efficient investments, ring fencing of assets, income generation, growth and distribution policies. Other goals will no doubt include inheritance and succession planning (bearing in mind conflicts of laws and matters of Shariah), stewardship, education and training for the next generation of family members, in addition to the pursuit of philanthropic causes for ultimate investment in the akhira (hereafter).
Looking ahead, family offices are predicted to grow in number, in size and in sophistication and as such are likely to attract greater regulatory oversight, particular existing multi-family offices or those single-family offices looking to establish a multi-family business offering as their knowledge banks mature. Expect an increase in multi-jurisdictional complexities arising from globally based families and an increase in demand for in-house capabilities including tailor made tech solutions, yet with short term caution over the use of AI.
A family office that can effectively communicate and put in place a well-articulated shared purpose and vision, which includes within it a clear intention to benefit the wider community and society as a whole, is likely to benefit from increased opportunities and incentives that encourage its teams to come together, further strengthening ties of kinship and the family bond.
Gulfam is an English law qualified Solicitor and STEP Affiliate currently working as Legal Director responsible for managing an international investment portfolio for a private investment company. He has over 20 years of experience as a qualified solicitor and his previous roles include acting for the UK Department for Trade and Industry in insolvency related litigation, Legal Counsel at Islamic bank, Kuwait Finance House (Bahrain) and Senior Dispute Resolution Associate at international law firm Norton Rose Fulbright.