Choosing Between Multi-Family and Single-Family Offices: VAR Capital’s Guide

When a Multi-Family Office May be Better Than a Single-Family Office. Read this article to understand the differences between single- and multi-family offices and how to decide which to choose.

Creators of great wealth will eventually face the question of how best to transfer ownership and stewardship of assets and funds to the next generation. Starting a family office is a centuries-old, tried and tested way to manage the intergenerational transfer of wealth. A team of professionals running a dedicated office can help a family to define its goals and strategy, and to preserve capital by investing in new assets away from the industry in which the wealth was created.

There are hundreds of family offices around the world. They manage the fortunes of inventive billionaires such as Microsoft cofounder Bill Gates and Google cofounder Sergey Brin, as well as less well-known individuals who prefer to remain anonymous. In its 2023 global family office report, UBS, Switzerland’s biggest bank, counted 230 family offices which collectively manage $495.8 billion. The average net worth of the families who contributed to the UBS report — which is the largest and most comprehensive study of its kind — was $2.2 billion.

Running a family office is expensive. Annual costs are typically measured in the millions of pounds, and the expense is proportionally higher for smaller family offices. A family office which manages $1 billion costs 36.7 basis points of assets annually ($3.67 million), according to UBS, while a single-family office managing $250 million costs 46.6 basis points of assets ($1.17 million) each year. Our own experience shows that setting up a fully-fledged family office often comes with significant people, regulatory, technology and third-party costs, amounting to £1.5 to £2 million per annum.

For families with wealth valued up to $1 billion, it may be wiser to start by joining a multi-family office. A multi-family office is run by a team of financial professionals who manage the wealth of a number of families concurrently, providing expertise for a fraction of the cost of a single-family office.

Some families may have a very clear idea of the direction they want to go in when establishing a single-family office. They may know exactly how they want to invest their money in new ways. But this isn’t usually the case. Appointing a multi-family office can help ensure a clean break is made between the family business and the family wealth at a very sensitive time.

It’s crucial to get this transition right, as a family ventures into uncharted territory. One big risk when starting a single-family office is the tendency for families to retain existing staff for the job — finance directors, accountants, personal assistants and other advisers who they have worked with the family for many years, perhaps decades. While these employees may be experts in the industry which generated the family wealth, they may not have the skills required to create a family office with the governance and risk management structures necessary to preserve capital and diversify investments.

Starting With a Plan

Single- and multi-family offices both start with a plan. This plan needs to establish how four objectives will be met: strong governance; independent oversight; effective asset allocation; and inclusive engagement with all family members.

For a single-family office, the first step is to incorporate a company with an appropriate legal and governance structure to hold assets. The structure should include key decision-making bodies, such as a board of directors and an investment committee. The board of directors may be composed mostly of family members, while the investment committee could be mostly made up of externally recruited investment professionals, led by a chief executive officer.

The second step in creating a single-family office is to recruit external advisors who provide independent oversight. The purpose of these advisors is to guarantee the professionalism of the wealth management operations of the family office. They help ensure decision-making processes are objective, fair and impartial.

The third step is to devise an investment strategy for a well-diversified asset base for the family office. The strategy should be based on a long-term vision which blends active and passive investments. About half of the family’s funds will usually be invested in actively managed assets such as private equity, real estate and hedge funds. The rest of the funds can be invested in passive assets such as cash, income producing real estate and financial investments including exchange traded funds.

Finally, the single-family office should create an information-sharing system to provide regular reviews and timely updates to all family members. Everyone in the family must be fully informed about the activities and performance of the office. Information-sharing is a two-way process — family members should be encouraged to comment on the work of the office if they wish to do so.

A well-run single-family office will generate higher financial returns, cost savings and effective risk management. It will also contribute to maintaining family cohesion. The structure of the office may evolve over time, as the family refines its vision, strategy, commercial model and technology. Offices in new geographies, from Asia to Latin America, may be added. Investment professionals with new competencies – perhaps in digital technology, healthcare, automation, robotics or renewable finance — might join the team.

The Multi-Family Office

At a multi-family office, family clients work closely with professionals to define a plan. A multi-family office may appoint one of their senior team members to serve as a chief executive for each family client. The multi-family office may also establish a governing board for each family, made up of family members. It might also create a board of independent external advisors for each family too. Such a dual governance structure enables the multi-family office to develop understanding, trust and confidence with each family client, as well as ensuring sound execution and strong performance.

Some family offices operate a hybrid model. This means that they manage critical roles in-house, such as strategic investment decisions and core operational functions, including payments and cash management. Then they outsource other roles, such as investment management, to benefit from the scale of professional multi-family office firms.

A strength of the multi-family office model is its flexibility. Investment strategies and operations can be scaled up and down when the need arises. This flexibility is particularly valuable to families during this time of great geopolitical uncertainty and macroeconomic change. The era of low or negative interest rates is ending, and the flood of liquidity which dominated markets in the wake of the 2008 global financial crisis is receding. Multi-family offices can move nimbly and make quick decisions in response to rapidly changing market conditions.

Case study – A multi-jurisdictional family.

A family spanned across three generations and multiple jurisdictions including the UAE, UK and US. As the founder of the family transitioned the operating assets to investments, the next generation were tasked with managing the assets to meet the long-term objectives of all the family members. The next generation hired a number of advisors in the family office based on their personal connections. While the advisors were well aware of the family dynamics and objectives, they were not ready to take on the barrage of investment decision-making based on opportunities presented by various family members as well as various banks they dealt with. Certain investment decisions were made based on connections, as well as pressure from family members, leading to significant losses from the investments.

The family were then introduced to VAR Capital, which provided an independent and rigorous investment analysis support. The VAR Capital team evaluated investments based on their suitability to the overall strategic objectives of the wider family. While the final decision-making remained with the family, VAR Capital facilitated a rigorous and well-governed investment assessment, as well as good governance in making decisions. All the family members felt more engaged in the process. The inclusive process helped to nurture a sense of fairness and trust, and the involvement of an external agency helped maintain discipline in the decision-making process.

Conclusion

Joining a multi-family office can be a straightforward and cost-effective way to manage wealth measured in the tens or hundreds of millions of pounds. If the wealth of a family continues to grow exponentially, there’s nothing to stop the family moving on from the multi-family office and establishing a single-family office. In fact, joining a multi-family office can be the smartest stepping-stone to starting a single-family office. As is always the case in finance, the choice of whether to start a single-family office or to join a multi-family office is about making the right decision at the right time.

Full article published on MPI, read more here

VAR Capital is an independent financial services firm offering asset management, lending and family office services. It was founded by individuals with extensive experience from Banking, Asset Management and Family Offices. Based in Mayfair, London, VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA).

Source: VAR Capital

Media Contact: Vikash Gupta, [email protected]

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VAR Capital Ltd is a limited company incorporated in England and Wales with registration number 09159540. UK registered office 41 & 43, Maddox Street, Mayfair, London W1S 2PD. VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Firm reference number 718558. VAR Capital is a trademark of VAR Capital Limited under the UK intellectual property regulation. Trademark number: UK00003429839

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