Virtual unreality

There is much wailing and gnashing of teeth about the use and abuse of the term “family office”, and for good reason. Many institutions that are not strictly family offices tag on the phrase because they are eager for the kudos of being recognised as one.

Just as people recognise the inherent value of a respected brand, particularly luxury brands, family offices have become like the ultimate luxury item — exclusive, elusive and expensive to own. Now a new subset of this elite moniker, virtual family offices (VFO), is evolving.

The term popped up in a recent white paper, The Family Office Dynamic, jointly authored by EY and Credit Suisse. It detailed three types of family offices — single family offices, multi family offices and VFO. The VFO model, apparently developed in the 1990s, is a halfway house for those families with a net worth of between $20 million and $150 million. These families want the services of a top tier family office without having to work with a multi family office locally or establishing a (more costly) single family office. But here’s the problem: virtual private offices are, in their structure and raison d’être, almost diametrically opposed, by design, to many traditional family offices. A chief reason for this is the inherent cost of establishing genuine family offices.

Establishing a family office is often about families taking direct control over their wealth management by customising each facet of the office to suit their own particular needs, size and risk profile. It’s also about the way they want to invest by using a group of in-house specialists to advise the families in realising their vision — from allocations in particular asset classes to designing and implementing governance and succession plans — as well as executing to achieve it. There’s little doubt that a virtual family office would help reduce costs (which appears to be the main draw), but it also looks like a backdoor way for external advisers and banks to ingratiate themselves into the family office space. If costs are an issue to families then they shouldn’t consider the family office model.

My issue is not with the concept. There’s little doubt of the large pool of ultra wealthy families in this $30 million to $150 million range. Research firm Wealth-X estimates there are 155,000 to 165,000 investors globally in this cohort. Any technology platform that delivers the right mix of advisers to these ultra-high net worth individuals at the right price has got to be a good thing. The VFO represents a highly sophisticated digital private investment platform, but it’s not a family office. The issue is that families create family offices to get a more personalised service where their advisers work for no one else. Not a cookie cutter approach. The VFO model creates an online platform for these external advisers to advise their client, albeit in an integrated fashion, but ultimately you’ll be one of only a series of clients. How do you know your advisers are taking your best interests into consideration?

Still it would be foolish to completely ignore the potential of the VFO model, especially where it comes to the next generation. The next wave of wealth owners, from Generation X onwards to the digital native millennials, have less hang-ups about imparting confidential information online and in many cases it is electronic interaction that they reach for first. How this generation engages with the VFO model will decide whether it sinks or swims.