The increasingly complex personal, family and business-related issues being faced by high net-worth and ultra-high net-worth individuals and families require equally sophisticated solutions. A family office, as discussed in our previous series, is well positioned to attend to issues and needs of wealthy individuals and families. A family office is an organization consisting of a group of professionals who are responsible for the management and administration of a wealthy individual or wealthy family's investments/ businesses. A family office affords its users access to bouquet of specialized services from various professionals in different fields under a "single roof."
The rise in the number of wealthy individuals and families across the globe has provided a landscape filled with opportunities for various types of family offices to thrive. In the United States of America only, the number of family offices has grown to at least 3,000 single family offices, with assets under management between $1 trillion and $1.2 trillion, while there are also about 150 multi-family offices having assets under management between $400 billion to $450 billion. In Africa, it is believed that there are about 150,000 high net-worth individuals with a combined wealth of about $800 billion.
There are very few family offices in Africa, in contrast to the rest of the world. Only a handful of high net-worth and ultra-high net-worth individuals and families in Africa employ the services of a family office, many still relying heavily on the traditional asset management outfits. Family offices are a major improvement on the conventional wealth management firms as family offices' service offerings are more robust and all-encompassing, ranging from daily administrative needs of the family to management of family investments.
In this series, we will be evaluating both single and multi-family offices, growth of family offices globally and why wealthy individuals in Nigeria and the rest of Africa should start considering engaging family offices, like their global counterparts.
Single Family Office (SFO) and Multi- Family Office (MFO)
An SFO is a private company or organization that manages investments and trusts for a single ultra-affluent family. The company's assets are the family's own wealth, often accumulated over many family generations. In many jurisdictions across the world, given its setup and running costs, the threshold of investable asset in an SFO is typically around $100 million. It therefore appeals to only ultra-high net-worth individuals. The SFO channels all of its attention and resources towards the exclusive benefits of a single wealthy family with the provision of tailored services to such family.
On the other hand, an MFO manages the wealth and personal affairs of a group of wealthy individuals and families. It is usually a firm of professionals offering their services to wealthy individuals and families in general. It can cater to the needs of individuals and families whose investable assets is lower than the threshold typically accepted by single family offices, and this could be as low as $20 million investable assets. SFOs are costly to set-up. It may cost as much as 0.6% of the net asset of the family business to set up an SFO. This is another reason why it appeals to mainly the ultra-high net-worth families, who are able to maximize the use of family office, given their net-worth and different family and business needs. MFOs are, however, able to achieve higher cost and investment efficiencies by spreading its cost over larger asset base from various wealthy individuals and families. Keying into the service offerings of an MFO is also cheaper as new families are simply added to already existing platform.
The functions of the SFO and MFO are very similar and can be classified based on the range of services they provide. These functions include:
- Assistance with risk management through in depth evaluation of each potential investment and by diversifying their clients' investments
- Educating family members on succession and wealth planning periodically
- Provision of cost-efficient administrative support to the family, from travel coordination to managing household staff
- Keeping of records of internal family meetings, property title deeds, trust and company documentation
- Provision of daily periodic book-keeping services and assistance with preparation and filing of financial accounts and tax returns
- Development of families' philanthropic goals
- Physical and electronic collation and storage of key family documentation
- Administration of charitable functions of the family
Need for More Family Offices in Africa
Reports from different sources show that there has been an increase in the number of wealthy and ultra-wealthy families across the globe in the last 10 years. According to a recent report by the Credit Suisse Research Institute, the number of millionaires in the world has increased by 155%, while the number of ultra-high net worth individuals (defined in the report as people with a net worth above US $50 million) increased by 216%.
In Africa, there has been approximately 19% increase in the number of multi-millionaires living in the continent, with individual wealth grossing over $2 trillion. A number of these families are beginning to see the need for family offices as a means of ensuring wealth sustainability. Some have even gone a step further by forming their own very single family offices for that purpose. Interestingly in Nigeria, despite the economic hardship and recession, the country has the highest growth of millionaires (about 5,000) over the last decade. In the recently released Forbes wealth reports, there are 15 Nigerians with combined wealth of over N7.2 trillion.
Unfortunately, there are less than 10 family offices in Nigeria. It is therefore no surprise that an estimated 90% of wealthy Nigerian families lose their wealth by the second generation. Presently, only one or two families have transferred their wealth to the third generation. This trend is easily traced to the absence of and non-usage of family offices in the country, who would have assisted these wealthy families setup and maintain family governance structures that will ensure that the families' wealth and assets are preserved, improved upon and also transitioned to subsequent generations in an efficient manner, while at the same time seeing to the successful running of the families.
It is therefore important for wealthy families in Nigeria and across Africa embrace family office as a very crucial part of the family and family businesses. At the very least, the services of an MFO ought to be engaged to help maintain a sustainable pipeline of family wealth for present and future generations. Amongst other things, MFOs can help review investment proposals to ensure funds are utilised on only viable projects. They can also assist to put investment holding structures in appropriate jurisdictions to ensure maximum returns to the families in a tax efficient manner.
With respect to their MFO needs, wealthy families should engage only seasoned family wealth advisers with global track records and acclaim. Many families, especially in this part of the world, have lost their investments through the wrong choice of advisers. A professional firm with private/ family wealth practice with global standing will be able to properly guide the family towards achieving its objectives.
Making money is as important as keeping it in the family. Keeping wealth within the family and growing the family business is more assured with the use of SFO and MFO, as demonstrated in various parts of the world. Wealthy families in Africa are encourage to employ the services of professionals with adequate knowledge and skill for their SFO and MFO needs. Andersen Tax is a global firm with wealth of knowledge in various areas cutting across Family Wealth Management, Private Client Services, Restructuring, Tax Advisory and Regulatory Service amidst others. We will be happy to advise on family office services to you and your family to ensure family and business goals are successfully met across generations.
Originally published by Business Day, October 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.