Rising rich boost stature, growth of family offices

In Rhona Vogel’s line of work, family comes first.

As CEO and founder of Vogel Consulting, a wealth management firm based in Brookville, Wisc., she manages the personal fortunes and increasingly complex financial lives of about two dozen wealthy American families.

Her 30-person firm — which helps families with investible assets in the tens of millions of dollars select suitable investments, identify future deals worth doing, and make prudent financial moves to ensure the family’s wealth will last generations — is part of the fast-growing family office segment of the financial advice industry.

“I view my role as being the family’s chief financial officer,” Ms. Vogel said. “This is a great space to be in.”

She added two well-heeled families to her client list in 2018 and expects similar growth this year.

“I continue to think there will be more opportunities. These wealthy families need a different level of service,” she said.

Pinpointing the exact number of family offices operating in the U.S. and around the world is difficult since there’s no universal definition of a family office, however, estimates from consulting firms and industry sources show healthy growth.

By one global count, there are about 2,350 family offices that have a minimum of $50 million in assets — including single-family and multifamily businesses — according to FINTRX, a Boston-based family office data and research platform. That’s up 23% from 1,910 a year ago, according to firm founder and CEO Russ D’Argento. The average amount of assets managed in those family offices in the FINTRX platform has grown 38% to $900 million in the past year.

“The family office space continues its clear, upward trend, both in terms of assets and number of offices,” he said.

The family office universe may be even bigger than FINTRX’s database suggests.

Ernst & Young estimates there are “at least 10,000 single-family offices” around the globe, and at least half of them were set up in the past 15 years, according to its Family Office Guide.”

In another sign of growth, assets managed by family offices are “growing at a faster pace” than that of advisers that cater to the more traditional high-net-worth market, or those with $5 million or more in investable assets, according to Cerulli Associates.​

Assets under management at multifamily offices, which Cerulli defines as those managing $100 million-plus in total assets with average family assets of $10 million or more, totaled $668 billion at the end of 2017, up 70% from year-end 2012. That 14% annual growth rate topped the 9.5% gain in the broader high-net-worth space, said Asher Cheses, a research analyst in Cerulli’s high-net-worth practice.

‘Virtual’ family office

One new twist in the sector has been the emergence of the so-called “virtual” family office. While it has the ring of a robo-adviser, a virtual family office is more about doing a few key functions in-house and outsourcing the more complex functions to outside professionals with specific expertise, Mr. Monnier said.

(More: Growing chasm between rich and poor divides country into two Americas)

“There is some automation happening in the family office space, but it’s far from plug-and-play,” he said.

New investment trends are emerging in the family office space as the bull market moves into its record-setting 11th year, and mega-wealthy families look to engage the younger generations in the family business.

Wealthy families are dialing back their exposure to hedge funds, mainly due to subpar performance in recent years and high fees. They are still making sizable investments in traditional private-equity funds that invest in companies with the goal of cashing out with a profit in a five- to seven-year period.

But family offices are increasingly striking out on their own and buying direct stakes in established operating companies, early-stage upstarts and real estate, such as hotels, commercial buildings and apartment buildings.

About 45% of family offices said they plan to invest more in “direct investments” in the next 12 months, according to UBS’ “Global Family Office Report 2018.”

A typical wealthy family, which has a much longer investment time horizon than funds do, evaluates 75 to 100 deals a year, industry experts said. In many cases these direct investments are made in the same businesses that made their family rich.

Wealthy families, prodded in part by younger, socially conscious offspring, are also boosting their stakes in investments that they believe will have a positive impact on their local community and the broader world, said Sara Ferrari, head of the family global family office group at UBS. Investments in education, housing, community development and agriculture top the list of sustainable investments.

About one-third of the family offices in the UBS report said they put money to work in impact investments, up from a quarter a year earlier.

Similarly, there’s been an increased family office focus on “impact investing,” which seeks profit while at the same time investing in environmentally friendly companies or technologies that seek to combat global warming, for instance. One-third of the family offices responding to the UBS study said they are now engaged in impact investing.

Many family offices are also teaming up with other families and pooling their expertise and capital to gain access to deals they might not be able to get done on their own and to gain broader diversification, a trend known as “club investing.”

In addition, some family offices are taking advantage of the 2017 change in the federal tax code by taking part in the Qualified Opportunity Zone program, which provide tax breaks on investments in economically distressed communities, said Robert Konrad, chairman of Socius, a multifamily office in Fort Lauderdale, Fla.

Higher “tax equivalent returns are something a lot of wealthy clients are looking for,” he said.

One explanation for the growth in family offices is that the rich have gotten richer over the past decade, thanks to historically low interest rates, a slow but steady economic recovery and the longest bull market in Wall Street history.

There were 1.35 million “ultra-high-net-worth” U.S. households worth between $5 million and $25 million at the end of 2017, up 7% from a year earlier and 32% more than five years ago, according to Spectrem Group’s Market Insights 2018 report. The number of households worth more than $25 million climbed to 172,000 by the end of 2017, a 50% increase in the past five years.

That greater wealth creates greater financial complexity — and a greater need for families to get professional advice on a wide range of financial issues, including investments, tax and estate planning, the sale of family-owned businesses, as well as decisions tied to family succession, said Alexandre Monnier, president of the Family Office Exchange, a Chicago-based group that provides educational and networking support for roughly 380 families of wealth.

“All this complexity requires delicate solutions,” Mr. Monnier said.

Managing a family’s fortune is just one piece of the ever-expanding responsibilities of the increasingly sophisticated and talent-rich family office.

“There’s the technology, investment and tax and estate planning side. The other piece is helping the families determine what they want to do with their wealth, what they want to achieve and how they want to impact the community,” he said. “Family offices also look for ways to engage the next generation.