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US Family Offices face evolving risks

13 July 2022

In a high inflation, rising interest rate environment, the global family office landscape continues to grow and evolve.

According to RBC’s Family Office Report 2021, family offices in North America saw an 86% increase in their wealth in 2021, with 20% saying it rose significantly in the last year. It is because of this growth that US family offices are at an important juncture and are now undergoing a phase of continuing and growing sophistication and institutionalisation. With this comes additional regulatory scrutiny and growing resource requirements.

The Human Capital Challenge

In 2021, the introduction of the HR 4620, the Family Office Regulation Act of 2021 and its impacts on Family Offices were widely reported and marked a seismic shift for US family offices. This bill requires family offices with more than $750m of assets under management (“AuM”) to register with the Securities and Exchange Commission (“SEC”) in order to achieve greater transparency. While we anticipate that this regulation will be both difficult to pass and perhaps even harder to enforce, family offices are preparing for the imposition of a greater compliance burden – with 29% of family offices now looking to hire in-house legal professionals within the next 12 months.

They may be looking to hire, but US family offices have not been exempted from the global race for talent – particularly when looking for legal and compliance professionals with the right skillsets to support their businesses. America’s family offices are seeking the most knowledgeable regulatory minds, not just to help them ensure full compliance and best-in-class governance for their existing wealth, but to scale their legal and regulatory framework for future growth and succession planning. This is driving a highly competitive race to hire operational talent in the industry.

With salaries for in-house talent at a premium, for example $300,000 plus bonus for an in-house counsel, family offices are finding that outsourcing provides a way to continue to work with the best global talent and cut their fixed cost base.

It is largely accepted that for single-family offices, or those beneath the $1bn AuM threshold, it is not economic to rely on a large staff and that it is essential to outsource some functions to carefully chosen partners. With hiring the right people an increasingly time-consuming exercise, working with a third party makes it easier for family offices to scale up or decrease their operations.

Risky Business

As part of the Family Office Regulation Act, the US Treasury Department has also proposed a register for the details of owners of corporations and LLCs that is currently anticipated to include their name, date of birth, address and proof of identification in a laudable bid to combat money laundering. While well-intentioned, there is serious concern amongst many family offices that as a consequence of this information being publicly available, they could be more susceptible to theft and fraud if the bill passes.

The global pandemic has heighted family offices’ focus on risks of all types. Cybersecurity continues to keep family offices awake at night, with RBC’s report showing that 28% have been the subject of a cyberattack over the last 12 months and 55% have been the subject of an attempted scam. Over the past decade, corporates and institutions have invested trillions in protecting themselves against fraudulent actors and by comparison Family Offices, Wealth Managers and HNWIs, whilst sitting on equally sizeable assets, are less well protected than large institutions and are therefore far easier targets for fraud.

At Apex Group, we understand that the fraud threat facing Family Offices and HNWIs is often more personal than it is for corporates, meaning it can take both a financial and psychological toll, primarily through the misuse of personal data and financial information. Outsourcing middle and back-office functions to the right provider allows for the reduction and dissipation of this risk, and ensures that the manager has the right resources, processes and technologies to do so.

The Single-Source Solution

US family offices must be strategic about how they pick their third-party providers and are increasingly consolidating multiple relationships (for both convenience and costs reasons) into one partnership with someone who both understands their business and provides the services they require.

As well as increasing the supply of talent available to family offices, Apex Group can also help reduce the time demands and costs placed on them as they search for talent. By outsourcing other middle and back-office functions such as regulatory compliance, rather than taking on full-time employees, family offices have found that they can achieve efficiencies, cut costs and have greater flexibility to adapt in accordance with their changing resource requirements. This can also help avoid the trap that many wealthy families fall into of operating with an under-powered skeleton staff, increasing the burden on valuable employees, and in the long run leaving the family underprepared in essential areas such as reporting and compliance.

Family offices need a provider which not only offers compliance support but can also help educate them on the growing risks (including fraud) facing them and put into practice protective behaviours and training for staff, as well as putting crisis response plans in place. Fund administrators have an important role to play here in that their greater scale can provide access to secure data storage and asset holding structures, as well as business services such as tax compliance, payroll, accounting and governance. Providers of corporate solutions can also offer HR consultancy and screening services that firms can use to ensure their staff have adequate background checks and training.

With multiple providers, there is an increased risk as more eyes are privy to data and other sensitive financial or personal information. By working closely with a single partner, a family can reduce this additional risk and eliminate the need for multiple service providers to hold information about the family offices.

To learn more or to understand how Apex Group can support your family business or office, contact us.

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