How do I start a family office
Family office: five advantages over traditional banks
Ralf Kretzschmar, April 30th, 2021
Until twenty years ago, family offices were only known to a small group of financial experts. Since then, and intensified by the financial crisis of 2007, there has been a start-up boom: there are now over 400 family offices in Germany.
Read here what exactly a family office is and why they are becoming increasingly popular.
What is a family office?
The term family office describes an institution whose task is the individual and long-term management and protection of the wealth of a wealthy family.
What does a family office do?
In order to fulfill this purpose, family offices are active in very different fields, which are tailored to the wishes of the respective family. They perform among other things
- cross-generational wealth and succession planning,
- Mediation between family members,
- Tax and legal advice,
- Investment risk management.
According to the individual needs of the family or the asset owner, family offices employ differently specialized employees and build a network of experts. It is not uncommon for family offices to also take on other personal services, such as travel planning for family members, individual help with formalities such as the power of attorney, household and real estate management or tasks in the family foundation.
Single and multi family offices
There is no legal definition for the term “family office”. The organizational forms in which family offices are structured are correspondingly different.
Single family office
At Single family offices (SFO), which look after a family's assets, can be divided into two forms. Most of the time they are either
- as embedded SFO integrated into the family business, or become
- as society such as a GmbH managed separately from it.
The establishment of a single family office is only worthwhile from a very large family fortune of around € 250 million due to the high personnel costs.
Multi family office
From a lower minimum wealth of € 15 million, wealthy families can withdraw their wealth from a so-called Multi family office (MFO) can be managed.
Multi-family offices often emerge from a single-family office that has opened up to other asset owners after a certain period of time. They offer their accumulated experience and expert knowledge to various wealthy families.
Family offices were also created independently of a family or an asset owner. They are then service providers who specialize in managing the wealth of wealthy families. In contrast to single family offices, the support provided by multi family offices does not achieve the same level of individual advice.
Why are family offices so popular?
There are several reasons for the increasing popularity of family offices. It can be explained, among other things, by the general concentration of assets and better regulation of family disputes within the framework of a common society.
An important factor is undoubtedly that Loss of confidence in banks and their asset management, especially after the financial crisis from 2007 to 2009. As a result, wealthy families wanted to tie their finances closer to themselves. The bank-independent asset management also promises further advantages.
Advantages of family offices over banks
- Better control over the assets to be managed
- No hidden fees and often lower costs
- No competing interests between the bank and the family when investing
- Promotion of family cohesion and long-term concentration of capital
- More efficient and more individual management of assets
Conflict between family offices and banks
Due to the lack of a legal definition, more and more banks and financial service providers have recently been using the term “family office” and offering wealth management for wealthy families.
This development is a thorn in the side of some single family offices, which is why they founded the Association of Independent Family Offices (Vufo) in 2014. They fear that banks, as well as economic and tax consultants, will primarily want to sell their own products under the “Family Office” label.
The association would like to avoid the resulting conflicts of interest by understanding family offices as independent and not as part of a larger institution. Family offices should only accept commission payments from third parties in exceptional cases and instead work solely on a fee basis.
How do family offices invest?
As part of the Global Family Office Report from 2020, 121 family offices around the world were surveyed about their investment behavior. The following overview shows proportionally the most common asset classes:
The most popular family office investments
Source: Global Family Office Report 2020, as of September 2020
According to this, family offices invest a large part of their assets, almost a third, in stocks from industrialized and emerging countries. Shares are followed by investments in fixed-rate bonds, closely followed by over-the-counter equity (private equity). Globally, private equity accounts for 16% of family office investments, including 7% in private equity funds.
Family offices are increasingly turning to young founders in order to invest in startups with venture capital. The investing entrepreneurial families often have an advantage here because they can assess the market well from their own experience. It is also in their interest to be involved in technological innovations in their industry early on.
In addition to stocks and private equity, real estate for family offices is one of the most important asset classes with an average of 14%. There is a tendency for family offices to move away from office properties to residential properties. Despite the competitive market in good metropolitan areas, the latter are increasingly popular with family offices.
Investing in residential real estate is also possible with crowd investing. Investors can invest up to € 25,000 in a real estate project on our BERGFÜRST platform. From the investment options, you receive a fixed rate of interest between 5.0% and 7.0% p.a. for terms between one and five years.
Image copyright: Marian Weyo / shutterstock.com
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