Family Office vs. Wealth Management: Know the Difference
A financial advisory service works to achieve the best outcome for their client’s wealth. This service’s structure, clarity, and consistent level are integral components for achieving the financial goals. The kind of financial advisory that one needs depends on the individual’s nature and quantity of assets. Thus, defining objectives and goals is essential when it comes to economic matters. The two types of financial advisory services that play a crucial role in today’s fast-growing economy are family office and wealth management. Unlike the common misconception, these services are not similar but have a thin line that separates them from each other. However, it is essential to know their minute details before understanding the differences between the two services.
WHAT IS A FAMILY OFFICE?
Several family offices have been established across the world this past decade. Family offices are considered the fastest-growing service designed to aid ultra-high net worth investors in controlling their family finances, legal matters, tax issues, and other administrative issues. In simple words, it is an entity that has been set up or engaged by a family or group of families to manage their wealth. The family office aims to manage, build and preserve family wealth for current and future generations.
A family office builds a multifaceted portfolio and ensures its proper management, thus playing a significant role in risk management. One must note that a well-established family office provides the structure and accuracy needed to navigate the wealth management landscape because it does not face any conflict of interest.
While establishing a family office to meet the wealth preservation needs of wealthy families or ultra-high net worth investors, it is necessary to have a clear definition of the family office’s purpose and role. The common motivators for wealthy families to set up family offices include:
1. To preserve family wealth and support inter-generational wealth management by a professionally managed organization.
2. To improve prospects of successful wealth transfer while managing complexities to ensure the efficiency of wealth management.
3. To give strategies that enable excellence in investment management.
4. To pursue new family business ventures while supporting existing family businesses.
5. To furnish a forum that unites the family and develops talent within it.
6. To provide strategies to grow wealth and support entrepreneurship in the family.
A family office is often divided into two broadheads,
- Single-family offices that serve and support just one ultra-affluent family
- Multi-family offices that build their business by serving many clients.
WHAT IS WEALTH MANAGEMENT
Wealth management is an investment advisory process that combines and uses other disciplines like finance, investments, and accounting to develop strategies that address clients’ financial needs. A wealth manager gathers information regarding the client’s needs and financial situation and develops tailored strategies for asset and estate management, financial planning, taxation, etc.
FAMILY OFFICE VS WEALTH MANAGEMENT: DECODING THE FUZZY LINE BETWEEN FAMILY OFFICE AND WEALTH MANAGEMENT
As mentioned earlier, there is a fine line of difference between family offices and wealth management. This line is a culmination of several factors that can be explained as follows:
1. Personal attention
Family office differentiates itself from wealth management and several other investment strategies by the level of personal attention it gives to its clients. In a family office, the focus remains on one or a small number of ultra-high-net-worth families, whereas in wealth management, the clientele comprises several affluent investors. The level of attention given to a client is important, as it can establish trust and a positive relationship between the client and firm.
2. Holistic approach
Wealth management services rarely provide the kind of holistic approach that family offices do. Besides financial assistance, family offices also advise the family on charity, concierge, and other comprehensive services. On the other hand, wealth management works only towards traditional wealth management services such as tax planning, asset management, etc.
3. Private wealth management
Family offices too can manage wealth and have their investment teams. They are, in fact, wealth managers, but to a particular family only. In comparison, a traditional wealth manager has lots of different clients. This fundamental difference in the number of clients is an integral aspect of both the financial services rather than the kind of services they provide.
4. Custom-made investment plans
A family office is a full-service private wealth management that offers tailored plans to maximize its clients’ benefits. Family offices promote diversity of investments to help their clients gain the benefits they wish to receive while experiencing limited risks. On the other hand, wealth managers provide only those investment plans that they already have. This leaves no room for demonstrating individuality and customization of services that are offered in family offices.
5. Cost of services
Family offices often work for people whose financial needs are of more significant amounts of money. This is mainly because of the costs that are associated with running such services. In contrast, wealth management deals with clients having varied economic backgrounds.
6. Scope of investment
The scope of advisory functions of wealth managers is quite limited as compared to that of family offices. Wealth managers offer limited investment opportunities, whereas family offices not only offer a diversified list of investments, they also have various duties to uphold such as expense management, family governance, financial education of the family, etc.
7. Family offices are multidisciplinary.
The family office is established or engaged by the ultra-high net worth investor families because their assets are significant in number and complex to handle. Thus, they require a full-fledged professional team to manage their wealth according to their preferences and goals. It is beyond the capacities of a traditional wealth management plan to provide advice and services to such families. They require a collaborative, exclusive, and well-coordinated team of lawyers, insurance and investment experts, estate, business, tax consultants, etc. The scale of resources needed for such planning and advising is quite complex and requires complete focus. The family office grants this focus, but it becomes difficult for wealth managers to do so, given their large clientele base.
8. Services offered
A traditional wealth management plan offers centralized management of investments, tax, estate planning, charity plans, etc. At the same time, the array of services provided by the family office includes traditional wealth management services as well. Family offices incorporate asset management, risk management, financial planning, lifestyle management, expense management, family governance, and expanding the horizons of financial knowledge among the next generation for long-term benefits.
The abovementioned points indicate the difference between family offices and wealth management. The task of managing the investments and assets of ultra-high net worth families can be challenging. This requires a team of professional experts, i.e., a family office that customizes financial plans as per the needs of their clients.
As there is no clear asset-size delineation, it becomes difficult to understand the difference between family office and wealth management. However, with families’ desire for greater control over their investments and assets, the option of bespoke wealth planning through family offices is preferred. Wealth management plays an integral role in managing investments and assets of people from varied economic backgrounds, as these plans do not need customization and are affordable.
About Xanara
Xanara is a private banking and wealth advisory focused on developing and implementing transparent and client-centric, financial solutions that are backed by expertise. We understand the weight of our solutions and act with the utmost care, resilience, and, most importantly, integrity.