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Family offices in developing economies most cost effective, says new research

Family offices in developing regions are the most cost efficient in the industry with governance and investments on par with their western peers. Is this down to operational efficiency or how offices interact with family businesses?

The family offices of Africa, Latin America and the Middle East have the lowest operating costs in the industry, according to the Global Family Office Report 2014, challenging the conventional wisdom that they are costly and underdeveloped.

Despite this, many have governance structures and investment services on par with older offices in Europe and North America, with which they have far more in common than originally thought.

The report suggests that a family office in the developing market regions, managing a portfolio of $200 million, will spend around $1 million on operating costs each year. A family office in North America or Europe will spend nearly double this.

Walid S Chiniara, head of private client services at Deloitte & Touche, has served family offices for more than 15 years. He says offices in the region are cost effective because they are often intertwined with the family’s operating businesses and can share costs.

“Most businesses operate either in the retail or construction industry and therefore generally pour profits back into their businesses. As a result, few have gone the extra step and set up an independent structure that manages investments related to the business,” he says.

Those family businesses that do establish fully-fledged family offices, Chiniara says, are often criticised by industry veterans because they are perceived as passion projects. He says they typically have no more than two members of staff.

Chiniara added that family offices are cost effective not only because the number of employees is small, but because they rely on existing relationships with third parties in order to reduce outsourcing costs.

Other results from the study suggest that developing regions are increasingly becoming home to international family offices that are looking to take advantage of investment opportunities in emerging markets.

Chiniara says that family offices in the Middle East are on the verge of a transformation, suggesting that the next generation is likely to professionalise the industry. He says the family office industry in developing countries will look markedly different by 2025.

“Most business families are now conscious of the need to introduce a level of governance separate from the family business. They are also conscious of the need to consolidate their wealth. The new generation of next-gens are rising and about to enter the market. They are educated, sophisticated, and highly ambitious,” he says.

The Global Family Office Report 2014 concludes that further research needs to be conducted into the cost efficiencies of offices in developing regions, suggesting that the area is little understood so far.

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