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Malcolm Kerr: Why the family office should be hitting the mainstream

Malcolm_Kerr_EYRecent work from the Centre for Economics and Business Research suggests around £5.5trn of assets are expected to transfer between generations over the next 30 years.

That is either a challenge or an opportunity for advisers and no doubt there will be winners and losers. My guess is there will be rather more of the latter.

But I do not think a failure to engage with today’s millennials will be the problem. Typically, affluent people tend to live longer, so it is not unreasonable to suggest a 50-year-old client today may have at least another 30 years in them and their spouse slightly longer.

When it comes to any inheritance, the clients’ children may well be in their 50s before their parents pass away. In the meantime, the focus of this demographic is likely to be getting on the housing ladder and/or starting a new business.

This is the pivotal issue. How can advisers position themselves to help both parties throughout this time? I think there is room for a family office-type proposition. So, what might this look like?

Malcolm Kerr: The keys to high standards

The first requirement would be confidentiality. Parents might not wish to share their personal information with their children, let alone their grandchildren, and vice versa.

Second, there could perhaps be a fee structure where all family assets are added together so the less wealthy members get a better deal than they would individually.

Third, the proposition might assign more than one adviser to the family, so that appropriate and strong relationships can be created and a degree of confidentiality maintained.

Fourth – and of course most importantly – the proposition would need to be much broader than one simply focusing on intergenerational wealth transfers.

Apart from very recently, longevity has been improving steadily, which has thrown a spotlight on the range of mental and physical health issues that can impact the elderly. The family office proposition would need to recognise this problem and help generations plan accordingly.

For instance, long-term care can often turn out a higher priority than inheritance tax and can be hugely expensive for clients used to an affluent lifestyle.

Aside from IHT and long-term care planning, the family office should also provide retirement income solutions, investment and cash management, a relationship with a local solicitor for wills, equity release advice, private health insurance and so on.

That younger generations will need different services should also be borne in mind. For example, some may need mortgage advice and the family office will need to facilitate this, albeit not necessarily deliver it themselves. Needless to say, the online experience will also need to be able to resonate with each segment.

My guess is that many advisers already offer services similar to that I have outlined. But the size of this opportunity is such that it must be worth others speaking to clients and finding out if the concept appeals.

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Taking the idea a bit further, such a firm could also facilitate an annual or semi-annual family conference for all the relevant adults.

In my experience, many wealthy families find it difficult to talk about money until something happens and the issue becomes urgent. The conference could be positioned as a relatively generic market update but could also provide a platform and stimulus for some important conversations.

Many advisers have expressed concerns about how they might lose control of client money when clients pass away and the family office would mitigate the problem.

Others may take the view that they will have retired before this issue impacts their firm. And that may well be the case. But if they are thinking about selling their business, I imagine some form of realistic retention strategy would be required to achieve more than a run-off valuation.

It is also important to remember that new institutional competitors are emerging in the market – many focused on the 50+ consumer segment. For some players, you may quite rightly think that is a triumph of hope over experience. But others are looking at this potential £5.5trn intergenerational transfer as the opportunity it is and are already prepared to invest significantly. For the advisers who currently dominate this space, that could turn out to be a problem.

Malcolm Kerr is an independent consultant

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