X-ray of Family Offices in Spain: eight questions to understand how they work

The success of family offices depends on optimal management that is able to respond to all the financial needs of high-net worth clients, with correct asset allocation in every market scenario.

The ability to personalise the service, with the utmost transparency and fostering a long-lasting relationship of trust, as well as the incorporation of technology and data analysis for to prevent risks and reduce the time spent on paperwork, are also determining factors.

Creand Wealth Management, the private banking specialists, have drawn up a document to unravel the complexities of family office management in today’s financial environment. This guide provides answers to some of the main questions when it comes to understanding how family offices work in Spain, what the preferences of large family-owned companies are, the keys to understanding the best asset allocation strategy, how they can differentiate themselves and provide added value in the service and how to tackle the challenge of generational handover.

1. What is the ideal size for the creation of a family office?

Here we must distinguish between a single-family office and a multi-family office. For a single-family office, from €100 million upwards the structure may make sense, however this would still be an amount where the costs in relation to what the equity generates would be relatively high. In a multi-family office, the costs of the structure are much more spread out, creating economies of scale and allowing for better resources. In a multi-family office, clients can have between €5 and €100 million and receive a similar service or better to what they would have with their own family office, at a significantly lower cost.    

• What do high-net worth clients value most when it comes to working with an entity to form a family office?

The choice of an entity for the management of their assets by a company of these characteristics depends, chiefly, on the ability to personalise services according to specific needs and to build a long-term relationship of trust.

These are families, usually corporate groups and institutions that have to organise and manage a high level of wealth with a very long-term approach. For this reason, honesty in communication, based on maximum transparency in management, is a fundamental value that contributes to establishing a long-lasting, trusting relationship. Stability, consistency in strategy execution and the ability to adapt to cyclical changes are also crucial. The ability to provide access to private investments, specialised investment vehicles and unique opportunities is another increasingly valued element.

With this in mind, it is essential to have teams of qualified professionals with the capacity to offer a complete service that goes beyond pure investment management, covering aspects such as asset planning, succession and philanthropy, which are also highly valued. In short, a holistic approach that addresses the complexities of the family’s financial life is essential.

• How do you set up the ideal team to form a family office? What profiles are needed?

The success of family offices depends on optimal management that is able to respond to all the financial needs of large estates and large family groups, which are very complex to run.  The family office team must offer an all-round service that includes investment professionals, specialists in taxation, product selection, data analysis, and more.

• Is the asset allocation strategy of family offices changing a lot in a scenario of a shifting investment cycle (rising rates, high inflation)? 

An effective asset allocation strategy for family offices, in a changing investor cycle like today’s, entails a balance between the protection of capital and the pursuit of growth opportunities, all in the context of careful risk management and a long-term vision. The rising rates have caused fixed income to once again play an important role in portfolios. After a prolonged period of negative rates, we now have real rates that are attractive. A flexible approach makes it possible to study the capital structure of companies and to see where it is most interesting to invest. The asset allocation strategy is more important in scenarios of uncertainty, which means we must analyse the current trends with a focus on diversification and flexibility when it comes to selecting an investment portfolio, in order to optimise investments and mitigate risks.

Under this premise, family offices also include assets known as safe havens as part of a defensive strategy in periods of economic uncertainty. On the other hand, alternative investments are becoming a key asset for family offices, as increasing their allocation to these assets, due to their good growth prospects and the de-correlation they offer compared to other liquid investments, can help optimise investment portfolios. 

• What are the main risks faced in the current scenario?

Geopolitical risks and regulatory changes are the main risks facing a family office, from an investment selection point of view. For this reason, diversification is key. It not only reflects an adaptation to the new market realities, but also a professionalism of the investment approach. For conservative investors, the market volatility can be more of an opportunity than a risk, as it enables them to take advantage of opportunities at more reasonable valuations. 

One of the most frequent risks relates to preserving the family’s capital over the generations, which often entails great complexity due to many elements that need to be taken into account in order to preserve the family legacy in the long term. However, there are also other legal or tax risks that must be considered when managing a family office.

• Is there room to innovate in this business segment? What role is technology playing in the development of these vehicles?

The adoption of digital platforms, the inclusion of advanced data analysis, the use of artificial intelligence and blockchain, can improve the operational efficiency of a family office. Specifically, the effective management of large volumes of data and real-time analysis can help family offices to make faster and better-informed decisions, resulting in better investment management and avoiding mistakes. Here, predictive analysis can enhance the ability to anticipate trends and risks. In addition, the creation of digital platforms for asset planning can make the services more accessible, efficient and streamlined when it comes to all the bureaucratic procedures required by a family office.

• What are the elements that differentiate the service offered by a family office from general private banking or wealth management services?

While both family offices and wealth management relate to managing large estates, they each involve different approaches and services. A family office offers more holistic and personalised services, while wealth management chiefly focuses on managing investments and financial planning.

A family office is an entity that is dedicated to the complete management of a high-net worth family, offering a variety of services beyond simple investment management, such as asset planning, succession, asset and liability management, family accounting, tax and legal advice, and other personalised services to meet the specific needs of the family. In other words, the importance of a deep understanding of the family’s goals and values is at the core.

On the other hand, wealth management is a broader service that also includes asset management, financial planning, retirement planning, insurance and other aspects related to personal financial management, but it does not cover the non-financial aspects of family life, which is one of the key features of family office management.

• How should family offices face the challenge of generational handover?

The challenge of generational handover entails not only the transition of the assets themselves, but also the transfer of knowledge and adaptation to the preferences of the new generations.

Family offices should carry out an analysis of these new owners of the family wealth—young clients—taking into consideration their current situation, concerns and projects. In addition, they need to review their investment objectives and make a proper selection of assets in which the wealth should be invested. The channels through which these investments are directed also play a key role in this generational handover. The optimal investment vehicles through which to channel the investment must be chosen, taking into account the personal circumstances of the new owners, their view of the world and the company—which is likely to be different from that of the previous generation of owners—their investment profiles, as well as the assets available to them at the time of the wealth transfer.

For example, younger generations may value ESG and impact investments more highly and require a strategy of driving investment flows towards sustainable products, linked to social factors, but mainly related to the environment and climate change.

A good strategy to provide an optimal service in these circumstances may be to incorporate young talent into the team of bankers, so that they are familiar with the entity’s values from very early on and, at the same time, share the interests and preferences of these new generations, in order to maintain maximum harmony between the entity and the client. Forward-thinking families prepare for succession in advance, so the family office team must support the client and guide the new generations, anticipating the personal and financial circumstances that may arise.