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The rise of the Virtual Family Office

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17 October 2023
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Recent years have seen a clear trend for high and ultra-high net worth individuals and families to move increasingly towards a Virtual Family Office (VFOs) model to help manage their increasingly diverse assets, investments and business affairs – something that Crestbridge Family Office Services director Daniel Channing explained to eprivateclient.

In essence, a VFO is a wide group of consultants servicing the assets and supporting the specialist needs of families from afar, with responsibilities usually divided amongst the group and clearly delineated, as opposed to the more traditional, physical family office with salaried staff.

A number of factors are driving this trend, Mr Channing explained.

In particular, multigenerational family dynamics, the shifting needs of the next generation and a greater diversity of focus are making family interests more complex – in terms of family members, ‘branches’ and geographies, as well as investment interests, businesses and asset classes.

This broadening span is, Mr Channing said, a key driver to family offices having to scale in both size, expertise and jurisdictional reach, leading to a greater propensity to turn to trusted external partners to support those complex areas.

In addition, the uptake of the VFO model is also being driven by the increasingly challenging landscape of international regulation and requirements around, for instance, reporting relating to more diverse investment strategies or beneficial ownership disclosure.

These factors are ‘the stick’ – all demanding more of families and precipitating the demand for specialist expertise; expertise that need not necessarily be ‘on the ground’ locally but could be tapped into wherever it is in the world.

In addition, the continued progression of communications technology has meant that the transition to remote and hybrid working practices has been relatively smooth. This is ‘the carrot’ – the enabler that has meant the shift to accessing the best expertise, wherever it is, is absolutely possible.

“The VFO has become a very viable option for families at all levels,” Mr Channing said.

“Getting the very best expertise and support is what families ultimately want – and actually it can be far more accessible, more flexible and more cost effective to be able to tap into that expertise remotely or virtually.”

Mr Channing explained that a key benefit of a VFO was its flexibility.

Rather than a fixed office with a static staff, a VFO functions as a group of advisors and consultants orbiting the family, and ‘departments’ can be added or removed with greater ease than traditional recruiting.

They enable families to respond to changes in the market or indeed the family itself with speed and without incurring the fixed, longer-term costs of salaries and rent. They also allow families to access a wider range of expertise and experience than traditional FOs.

“If a family, for instance, wanted to move assets to a new jurisdiction,” explained Mr Channing, “it can be much faster, easier and potentially cheaper to consult with a remote team on a temporary basis than to set up a physical office and hire salaried employees.”

VFOs can also be very well equipped to deal with generational change in the family. As wealth cascades down and disperses through inheritance to multiple family members, more advisors can be consulted with this in mind, as and when necessary – for instance in new markets where a family has little existing experience or is not as comfortable.

“Family offices are having to become more sophisticated quite quickly,” Mr Channing said.

“A virtual structure can allow them to cope with that rapid change much better than a traditional approach, allowing them to get access to the very best financial advice, remain agile, and enabling them to meet the changing needs of the market.”

Such a fundamental shift in operations is not without its challenges, Mr Channing warned.

While a VFO can be very nimble, the nature of the ‘office’ means that direct communication between advisors, who may have entirely different responsibilities, can be difficult.

“It’s important to be mindful that VFOs have the potential to create ‘silos’, where consultants do not interact, and this can lead to opportunities slipping through the cracks or a lack of efficiency,” Mr Channing advised.

“Clear and effective leadership is necessary to prevent mistakes and losses due to this lack of communication.”

In addition, while VFOs are very flexible in addressing logistical and regulatory challenges, they can struggle when it comes to technology, Mr Channing warned.

He explained that they can be less secure than traditional FOs, who will run their own servers and house their own data, and because the consultants all work for different firms, they may prove to be slower than more centralised operations in adopting, for example, the potential benefits of AI systems.

“While there are challenges in the operation of VFOs, most can be solved with a focus on strong leadership, regular and easy access to the family, and a clear focus on the mandate – while assigning an experienced, trusted service provider that can act as a central point of contact and liaison for all parties can be an effective approach,” Mr Channing said.

“If the founders remain close to the operation and ensure a high level of cooperation between the advisors involved,” added Mr Channing, “then there is no reason why the VFO can’t be an incredibly exciting opportunity for families to grow their wealth and secure their holdings for years to come.”