Should family offices use prime brokers?

What is a family office?

Family offices are typically private companies or special purpose vehicles (SPVs) that manage the wealth of high, and ultra-high-net-worth families. Today, family offices offer more than just investment and money management to their principals.

They can often oversee philanthropic and charitable activities and lifestyle management – that’s the management of private jets, yachts, residential properties, travel arrangements, and staff.

However, the primary focus of the family office is still managing the family money, not only preserving the capital but growing it for future generations.

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Demographics are influencing how family offices operate

We are currently in the midst of one of the greatest transfers of wealth we have ever seen, as the baby boomer and silent generations pass on an estimated $84.40 trillion of accumulated wealth to their heirs

Bank of America Merrill Lynch highlights a trend that it calls “giving while living” where wealthy individuals pass on their assets to their children and or good causes before they die.

These newly enfranchised heirs have different outlooks and attitudes towards investment than their older peers.

According to research by Bank of America, those aged between 21 and 42 have a greater preference for alternative asset classes, such as private debt, private equity, direct investment or loans, than those wealthy investors aged 43 or older.

Differing expectations mean that this affluent younger cohort expects more from their family office and not just in terms of product coverage.

Historically family offices have been closely aligned with private banks however things are changing

Chris Few a specialist consultant in prime brokerage and fund creation at Linear Investments says that:

“Typically family offices have been inclined to buy and hold listed products, which tend to be Bonds, Mutual Funds and Hedge Funds. Historically, they haven’t made use of leverage”

Mr Few adds

“This is where the Prime Brokerage offering provides a more competitive leverage offering as well as access to the emerging manager space, where the returns enhance their investment strategy. This younger generation is better informed and has a risk appetite, as long as it’s diversified.”

Services that a traditional private bank just doesn’t offer.

Broadening horizons

That means that family offices have had to look elsewhere and specifically to prime brokers who have traditionally financed, leveraged and settled trades for hedge funds and other active trading entities.

Prime brokerages have effectively acted as outsourced specialist back and middle offices, and treasuries to hedge funds, allowing them to keep their headcount and overheads under control and over time the prime brokers have become a one-stop shop for hedge fund managers.

These are exactly the services and skill sets that family offices who are looking to get exposure to leveraged and alternative investments require.

Meeting family office needs

A report published in September 2024 by Marex Prime Services, highlighted facilities such as bespoke financing, asset-backed lending programmes, portfolio lending, or collateralizing assets if you prefer, as being some of the draws towards prime brokerage and away from traditional private banking.

Access is also key. Prime brokerages have existing relationships and a presence in almost all major markets and asset classes, which means that a family office can act speedily through them, without the need to set up bilateral relationships, in say private equity or emerging market bonds.

Younger investors are more savvy and aware of what’s out there

These wealthy younger cohorts are more switched on,  and they are keen to have early access to new investment strategies and styles that often come from emerging hedge fund managers. Whose funds, are themselves often customers of the prime brokers.

Prime Brokers that offer capital introduction services can match family offices and ultra-high-net-worth individuals with these new and exciting managers.

Digital assets and cryptocurrencies may also be on their wish lists and not just coins and tokens, but also investments into infrastructure and software in this rapidly expanding space.

According to a 2024 report by James Parker, a partner at the law firm Norton Rose Fulbright LLP:

“Digital assets have passed the point where they are merely a curiosity and now form a valuable component of a well-balanced and future-proofed portfolio.”

He also noted that

“Family offices can embrace digital assets with confidence and play an important role in the development of this exciting and fast-moving new world.”

Common themes throughout the family office sector

Chris Few highlights that family offices in the Middle East are changing as:

“Younger family members (who) have had the benefit of being educated in the US and UK, have identified the ability to leverage the families’ investment portfolio, to maximise their returns”

However, these influences are not just confined to one region.

A recent survey conducted by specialist consultancy Ocarian, among family offices located in the United States, Canada, Bermuda, and the Cayman Islands, who manage almost $33.0 billion in assets between them.

The survey found that 93.0% of respondents acknowledged generational differences between family members. 33.0% of those family offices considered these differences to be important, particularly around areas such as sustainability /ESG investing and digital assets.

What’s more, half of the family offices surveyed also mentioned that private markets, asset allocation and overall investment strategy were contentious issues between the generations.

The winds of change are blowing through the family offices industry, and around those companies who provide support services to them.

Private banks that don’t have access to prime brokerage services, through a larger parent or group subsidiary, may find themselves sidelined as the new generation increasingly demands services they don’t offer.

That in turn is good news for prime brokers, particularly those small and medium-sized independents who can offer personal service and flexibility, on top of trade execution settlement, funding, finance and portfolio management and reporting to their clients.