This is part of a series of articles examining family offices and the forces shaping the sector around the world.
Operating since 1982, Northern Trust’s Global Family Office (GFO) administers $409 billion in assets for more than 450 families globally. Around a quarter of those are billionaire households which represent 25 per cent of the Forbes 400. GFO president David Fox talked to this news service about what defines family offices and the complex wealth dynamics they serve. He points out that while each structure is unique, depending on ownership, taxation, asset type and other factors, the underlying premise is always the same. He discusses where families are outsourcing or pooling resources to improve their investment outcomes, and the increasing role of technology. He considers cyber threats and fraud two of the most significant risks facing FOs, and says security reviews covering physical, cyber, and travel are becoming more common. The interview continues our coverage of family offices and what trends are shaping the sector. (An earlier version of this item appeared in Family Wealth Report, sister news service to this one. We hope readers find this of value because the insights here are international in scope. See here for a general overview.)
The family office sector is, depending on how one measures it, as large as 10,000 FOs in total (although there is debate about the specific figure). It continues to grow, and hotspots include regions such as Asia. In general, what’s your view on the overall health of the FO sector?
The overall health of the sector is strong; family offices are on the rise. A family office gives a family complete control with less regulatory oversight, and provides a hybrid model – one where the family “insources” the office to themselves but third-party experts provide needed services through a combination of insourcing/outsourcing to advisors. As families become more global and generations proliferate, their needs span multiple jurisdictions/tax environments and their requirements become more complex. This complexity is sometimes better serviced through a third party.
What do you think drives the creation of most family offices and are these drivers changing? If so, how?
The increase of wealth creation and wealth transfer is driving a lot of the family office creation right now. As markets become more developed and the demand for investment both from within and outside those markets grows, family offices have a unique role to play in helping to facilitate and professionalise that.
For most of our clients, the family office serves as a way of keeping multiple generations of family members together. From an investment perspective, they often share a common vision and pool their funds to get better access to investment ideas and competitive pricing. We find that with families with newer wealth and fewer family members, the family office acts more as a private investment office in its initial stages, and grows in its scope as the family grows.
Definitions: what in your view are the essential ingredients of a family office and is the term “family office” used too loosely?
It is critical that a family establish a framework by which they can make decisions regarding their shared assets. This framework often takes the form of a family’s governance structure. While each structure is unique, depending on the ownership, taxation, asset type and other factors, the underlying premise is always the same. In order to successfully transition leadership to future generations, families must develop their framework to provide transparency, build communication, trust and generate family unity.
At Northern Trust, we help clients begin to develop their governance structure by starting with a process of building a “cornerstone statement.” This unique approach consists of three components: values, vision and mission. Developing this statement is a process that begins with a family identifying values they share and actions that express those values. Next, we work with families to define what success looks like for them – their shared vision. Finally, we help them develop the steps, or tactics, to get from the values to the vision, which is embodied in the mission statement.
Technology is also essential in enabling consolidated aggregation/reporting and accurate accounting for family offices. As our clients' portfolios grow, and reporting becomes more complex - resources and budgets remain steady but the need for automation, efficiency and consistency increase. As a result, we introduced an advanced business analytics solution, which provides data visualisation and modelling capabilities and intuitive report authoring tools in order to meet these client goals.
How do you think FOs are changing and adapting in terms of recruitment of non-family members to run things, use of external services, outsourcing of functions such as investment, bill-paying, reporting, other? How much can a family office outsource while keeping track efficiently of what is going on?
A fully built-out family office looks and feels a lot like a boutique investment management/private bank outfit. When they come to Northern Trust, they may choose to either outsource or insource the work that they do. But ultimately, Northern Trust has the capability to service the full spectrum of what a family office does, whether the family office employs two people or 150 people.
While 70 per cent of our clients have either new or established family offices, 30 per cent of our clients do not have a formal family office. For these relationships, we serve as the point of continuity between family members and the family’s trusted advisors. Our role ensures that a cohesive strategy is being followed across all parties and delivered seamlessly to family members and key stakeholders.
Northern Trust plays a central role in bringing together this ecosystem of advisors, ensuring that we are holistically considering the entire financial picture of the family. While maintaining connectivity across all parties, Northern Trust provides customised services that are important to the success of the family.
We have had a few stories about cybersecurity breaches and how FOs are often highly vulnerable, given their relatively tight resources. What is your take on the state of play here?
Cyber threats and fraud are two of the most significant risks to family and private investment offices, and threats are constantly evolving. Offices are evaluating their risks, performing gap analyses and implementing added and enhanced controls to mitigate risks. Holistic (physical, travel, cyber) security reviews are becoming more common. This is a critical component of safeguarding client assets and security.
Because security and confidentiality are of paramount importance to both us and our clients, Northern Trust employs a range of technologically advanced physical and data security measures. While no firm can guarantee total security, Northern Trust takes some of the most extensive precautions to protect our clients' information.