The recent and unprecedented spike in the number of millionaires in the US has spurred the creation of ever-more Family Offices (FOs) 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 offices offer a full suite of solutions including investing, budgeting, insurance, charitable giving, tax & legal services, and more.
As happened for hedge & private equity fund managers, FOs (especially MFOs) will need to turn to fund administrators for help. Because many FOs have grown to become complex and sophisticated financial firms, they have the same needs as other private fund managers to do things like:
• Report on investment performance in a digital manner
• Enable transparency of data to adhere to regulatory compliance needs
• Deliver operational efficiencies in areas of investor communications, document distribution, and more
There were almost 11 million millionaires in the US in 2016, which was the most ever recorded, and a 4% increase over 2015. Depending on the source, the number of SFOs in the US is anywhere from 3,000 to 6,000. Big dollars are at stake, as estimates are that FOs control $4 trillion in investment capital worldwide. For context, private equity and hedge fund firms are estimated have a cumulative $5.7 trillion in capital to invest.
MFOs have also experienced growth. Estimates show around 1,500 MFOs with assets under management of nearly $450 billion. Indications are that the number of MFOs will keep growing fast as higher costs, lower margins, and more competition for capital are enabling the creation of new MFOs. 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, FOs are investing in ever-more complicated asset types. Portfolios of SFOs & MFOs often include equities, real estate, fixed income, private equity, hedge, and more. Further, direct investments in these areas have increased dramatically, constituting close to 30% of an average FO portfolio.
As technological capabilities are inexorably linked to their key needs, FOs are realizing the importance of technology to their future success. They are also understanding that going it alone is often a difficult option.
FOs are experiencing the complexity of understanding and managing technology offerings, as well as the need for deeper service capabilities across accounting, tax and more. Small in-house administrative teams at FOs quickly find themselves out-matched, as the combination of complex transactions and regulatory pressures prove too difficult to handle.
These factors will pressure FOs to seek out fund administrators, who 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 assets and performance is also becoming a bigger factor for FOs, and fund administrators are uniquely positioned to be able 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 an FO.
As FOs 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, FOs should give equal importance to the technological experience and capabilities of the fund administrator across areas like investor relations, operations, and compliance.
Any FO 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 & communications, but also with the operational middle and back-end of data preparation, analysis, and distribution.
Written by Chris Andraca, BaseVenture