The family office, once an esoteric investment vehicle for the richest of the rich, has experienced a rapid rise in recent years. According to Preqin, the number of family offices tripled from 2019-2023.

More than 4,500 are now operating, 37 percent of which are based in North America, controlling more than half of the sector’s assets under management. In a history that stretches back to John Pierpoint Morgan’s establishment of the House of Morgan in 1838, to manage his family’s estate and art collection, there has never been a period of growth and evolution like this.

The upsurge in family offices, which manage investments for either one single wealthy family or a group of unrelated families, is largely a reflection of growing global wealth. From 2009 to 2023, the number of individuals with assets exceeding $100m almost doubled, from 46,400 to 90,870.

Now, the family offices that have sprung up to manage that wealth have reached an inflection point. As in any fast-growing industry, the potential for consolidation is becoming hard to ignore, as costs rise, geopolitical and cybersecurity risks spread, and the ever-present concern of succession looms.

The changing family office

Alongside growth for the family office sector has come change, with many shifting the focus of their investments. Real estate was once the bedrock of the family office, but increasingly attention has turned to the entrepreneurial market: from 2020 to the first half of 2023, over 60 percent of family office investments were in startups, up from 38 percent between 2013-16.

As the target of family office investments has evolved, so too has their structure. The share of ‘club’ deals, where family offices participate alongside other institutional investors, has risen from 22.5 percent of direct investments made between 2013-2016 to over 55 percent on average since the beginning of 2020.

That reflects the desire among many family offices to pursue a more institutional approach, turning what have historically been family-run or dominated entities into something resembling a modern financial organization.

This transformation is underway but far from complete. At present, only 51 percent of family offices in North America are run by finance professionals from outside the family, a figure that falls to 35 percent globally. The reliance on family members over industry experts can carry a cost, as one US family office chief executive e has suggested: “Our board is comprised solely of family members. For years I have been trying to get outside professionals onto the board and investment committee to instil best practice… I believe that is the single biggest change we can make to upgrade our structure.”

Research from UBS has suggested that the result of non-professional management is often weak governance and the lack of robust controls that would be taken for granted by a typical institutional investor. Its survey of family offices found that only 40 percent had cybersecurity controls in place, just 44 percent had a documented investment process and governance framework, and only a slight majority (56 percent) even had a formal investment committee. According to a Deloitte survey, 72 percent of family offices say they are either underinvested or only moderately invested in technology.

Single to multi?

The need to address such shortfalls and the burden of rising costs is likely to put consolidation, combination, or partnership on the agenda for many family offices.

The numerous single-family offices (SFOs) that have emerged in recent years are encountering the high cost of doing business. For SFOs, the average operating cost is $3.2m annually. Rising compensation for employees, the drive to invest more in technology and infrastructure, the tilt towards alternative assets, and the need for specialist talent are all increasing cost pressures.

As costs climb, all eyes turn to the question of scale. While family offices with more than $1bn under management enjoy relatively low costs – 0.2 percent of AUM – these rise considerably for midsize firms managing $250m-$1bn (0.7 percent of AUM) and small offices with less than $250m under management (0.6 percent of AUM).

Not only do small firms count the direct cost of being subscale, but they are also locked out of many advantages of scale – shared infrastructure, easier access to talent, and better deal flow. Those benefits become even more apparent against a backdrop where three-quarters of family offices say it is difficult to attract talent across IT, accounting, and tax, two-thirds say they struggle with staff retention, and the proliferation of global regulation and tax regimes is becoming burdensome to adhere to.

For SFOs looking to mitigate costs and regulatory risk, the option either to combine with an existing multi-family office (MFO) or form their own may be tempting. That has been the history of some of the most significant family offices in North America, which began serving the needs of a single family and evolved into MFOs providing investment services to many wealthy clients. The largest global MFO, New York-based Bessemer Trust, which now manages over $200bn for more than 3,000 clients, began in 1907 as a vehicle for the family of Henry Phipps, who made his fortune as a co-founder of the Carnegie Steel Company.

Newer institutions, such as ICONIQ Capital, which was founded in 2011 and manages the wealth of entrepreneurs including Mark Zuckerberg and Reid Hoffman, are testament to the enduring relevance of the MFO model even for the wealthiest clients. In the case of Iconiq, it not only allows some of the richest people on the planet to invest together, but enables them to pool their charitable giving. Its philanthropic arm has made $519m in donations since 2019.

Preqin’s research shows that more SFOs (2,055) than MFOs (1,252) have been formed since 2019. But what begins as a single-family office will not necessarily live out its life as one. In a world of more complex investments, rising costs and increased regulation, family offices may be less willing to go it alone. Partnerships, combinations and a higher degree of outsourcing are set to be the way of the future. And if it means giving up a degree of family control, the rewards of increasing scale and cutting costs may be too enticing to ignore.