The Virtual Family Office is a Game Changer
By Benjamin Vetterli Senior Family Advisor UHNWI at LGT Bank Switzerland
According to a recent report by Deloitte, very wealthy families increasingly rely on the comprehensive services of family offices to manage their assets. As a result, the consultancy firm expects above-average growth to continue in this segment.
The number of family offices worldwide is expected to increase by around 75 percent to almost 11,000 by 2030, and the assets they manage will grow by 73 percent to around $5.4 trillion. Banks cannot ignore this development: Family offices are taking over parts of their value chain and are considered particularly price-sensitive bank clients.
«The trend towards the Virtual Family Office could be a game changer for well-positioned private banks»
In this context, finews.com recently spoke of a «clear warning sign for private banks and asset managers». While the banks’ fears are justified, they do not have to sit back and do nothing. The trend towards the «Virtual Family Office» (VFO) could be a game changer for well-positioned private banks and wealthy families.
A VFO does not rely on its staff, infrastructure, and offices, but on a virtual network of external specialists and services defined by the family.
Comparison of Different FO Models
To better understand the revolutionary nature of the VFO, it is worth taking a brief look at the currently dominant forms of family offices, namely the Single Family Office (SFO), the Multi-Family Office (MFO), and the Embedded Family Office (EFO), each of which has its own strengths and weaknesses.
- A Single Family Office is a separate legal entity established by a wealthy family to manage its financial and personal affairs. Depending on its structure and needs, a dedicated team provides a full range of services to the family, including wealth management, administration, tax, legal and accounting services, coordination of philanthropic engagements, and sometimes even concierge services. The main advantage of an SFO is that it can provide a highly personalized and tailored service. The disadvantage, however, is the very high cost, which usually requires significant assets (typically well over 100 million Swiss Francs) to justify the cost of running an in-house team.
- A Multi-Family Office offers a range of services similar to those of an SFO, but on a shared basis, to several wealthy families at the same time. By pooling resources, MFOs can offer sophisticated wealth management and family office services at a lower cost to individual families. They benefit from economies of scale and access to a broader range of expertise. However, by its very nature, an MFO cannot offer the same level of personalized service as an SFO, and it is difficult for families to find the right provider for their needs among the multitude of providers.
- An Embedded Family Office works within an existing business structure, usually the family business. It uses its resources, staff and infrastructure to provide family office services. For example, the family may ask the CFO to also handle private wealth management. This model can be cost-effective and efficient as it leverages the existing relationships and expertise of the business. However, as the focus remains on the business rather than the wider wealth management needs of the family, there can be a lack of expertise and conflicts of interest. Against this backdrop, the VFO model offers wealthy families for whom an SFO is too expensive a new and innovative approach to holistic management. They can benefit from the following advantages:
- Access to Expertise
By «renting», for example, a Chief Investment Officer and other specialists, the family can benefit from a wide range of expertise tailored to its specific needs. Compared to the MFO, this allows for more personalized support, while ensuring that the family can count on high-quality advice and strategic know-how, without having to bear the overheads of an internal team and without making a long-term commitment. - Flexibility and Scalability
The VFO model gives the family the flexibility to increase or decrease the scope of services. Whether they need services in asset management, tax planning or estate planning, for example, they can call on the appropriate experts as and when they need them. - Cost Efficiency
Unlike an SFO, a VFO does not require the family to bear the full cost of its own office and staff. By utilizing a network of external advisors and leveraging technology, a VFO provides access to traditional family office services at a fraction of the cost.
Structure, Integration and Coordination
For such a virtual network to work for the family, all aspects of their financial affairs must be seamlessly integrated. This includes, for example, consolidated asset reporting, which gives families a comprehensive view of their assets, their performance and their costs across any number of custodians and countries.
This enables the family to monitor their investments. Depending on their specific needs, they can seek advice and support from a virtual network of external specialists in strategic asset allocation, portfolio management, administration, tax and estate planning, philanthropy or family governance.
«If these requirements are met, a private bank is in an excellent position»
Ideally, such a private bank will not only be intimately familiar with the needs of ultra-high-net-worth families but will also usually have the necessary in-house expertise in the various disciplines, a good network of external specialists and a suitable technology platform.
If these requirements are met, the bank is in an excellent position to work with a family to set up a VFO and provide them with centralized services and platforms, either in-house or in a network. I would like to explain how LGT does this using the specific example of a family in the real estate business for whom we recently set up a VFO: first, we conducted a very thorough analysis of their current financial situation.
This included reviewing their existing investments, understanding their return expectations and risk tolerance, and identifying their long-term financial goals. The result of this analysis formed the basis for formulating customized investment guidelines, setting up a family investment committee and defining processes to systematically monitor and manage the investments.
«We also brought in tax specialists, estate planners and other experts»
Next, we helped the family identify and engage a network of advisors tailored to their needs, including a CIO «rented» from LGT to advise the family at quarterly investment committee meetings on their investment strategy and long-term trends, as well as to provide an outlook on the financial markets.
We also brought in tax specialists, estate planners, and other experts to ensure comprehensive and integrated wealth management. Through our consolidated wealth reporting, we were able to provide the family with a centralized system for tracking and reporting on all financial activity, giving them a comprehensive overview of all their investments and the overall financial picture, including a comparison of performance, costs, and risks, to help them make informed decisions.
Conclusions
In this case, the VFO proved to be the ideal solution for the family. By using a network of external advisors and advanced technology, it has access to the same high level of expertise and services typically associated with a traditional family office. However, the running costs are significantly lower.
It is likely that as more families look for efficient and flexible ways to manage their wealth, the virtual family office model will grow in popularity. Those private banks that have a broad range of expertise in the UHNWI sector, as well as the appropriate technology and access to the right networks, will therefore be well placed to compete for the growing segment of the super-rich.
Benjamin Vetterli has been Senior Family Advisor UHNWI at LGT Bank Switzerland for four years. He has been advising companies and entrepreneurs on tax, governance, and legal issues for over 25 years. After studying law at the University of Zurich, passing the bar exam, and qualifying as a Swiss Certified Tax Expert, he joined the tax department of a major Swiss bank via PwC, where he held various management positions and was responsible for advising clients in Switzerland on tax, financial and succession planning.
