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What is a Family Office?

Private Wealth Management for Well-To-Do Families

Family offices date back to the 19th century, when the likes of John D. Rockefeller and other tycoons spearheaded them as effective tools to manage their sprawling fortunes. What is a family office? Traditionally, it’s a private company whose purpose is private wealth management for families with more than $100 million in investable assets.

These days, however, you don’t need to be a household name to consider forming one. Indeed, family offices have recently been growing at a steady pace, fueled by the enormous increase in private wealth that the past two decades have witnessed. There are a number of reasons for this trend, ranging from the creation of tech and Wall Street fortunes to the momentous transfer of assets between generations, as well as an economic climate that favors  entrepreneurs who can strike gold via innovative ideas and businesses.

Simply put, as the rich keep getting richer—that oft-cited “One Percent”—family offices are likely to multiply in tandem with the assets that they control.Their intense, laser-like focus on individuals, as well as their often holistic approach, drives much of the appeal of the family office model.

There are two types of family offices: single-family offices (SFOs) and multi-family offices (MFOs). Single-family offices hold a combined assets under management of more than $4 trillion. Meanwhile, their multi-family counterparts manage hundreds of billions in assets, according to Bob Casey, Senior Managing Director for research at the Family Wealth Alliance consulting firm in Wheaton, Illinois.

Single-Family Offices and the Dodd Frank Effect

First let’s take a look at single-family offices. Historically, SFOs did not have to register with the SEC under the Investment Advisers Act of 1940, because of the exemption provided for advisors with fewer than 15 clients. That all changed with the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd Frank reversed this exemption, but it did require the SEC to strictly define the parameters by which single-family offices could be excluded from registration under the new law.

Essentially, Dodd Frank categorized family offices as entities that:

  • Are exclusively controlled by members of one family.
  • Only have members of that family as clients.
  • Do not hold themselves out as investment advisors.

Bob Casey explains:

“An SFO is a business established by a family to manage its affairs, financial and otherwise. Their definition before Dodd Frank was a lot more squishy. But Dodd Frank really clarified what a single-family office is—and what it is not—by law. After that, the only way a family office can operate without registering with the SEC is to serve just the one family.  No non-family clients and no non-family owners allowed.  So, for the first time, there was a really clear line between SFOs and other entities that managed personal wealth.”

Privacy, Control, and Continuity in Family Offices – But No One Approach

“Single-family offices offer several critical benefits to those who can afford them,” Casey adds. “The reason people start them is threefold. First, privacy. Second, control. And, third, continuity. They want a very private relationship with their advisors. In fact, they want it to be so private that they are the only person that the advisors deal with. And they want control. Continuity is sort of a function of control, as much as anything. You want to maintain a continuous long-term relationship with your advisors, and one way to ensure that is to set it all up yourself. Those are the concerns that really are motivating people.”

Because a single-family office is driven purely by the needs, goals and preferences of the underlying family, there is no set standard or Golden Rule for how one should operate or approach private wealth management. “If you have seen one family office, you have only seen one family office,” Casey stresses. “They come in many shapes and sizes depending on the specific family and the complexity of their situation. SFOs are all one-offs. They are all structured differently, have different mandates and governance. There is nothing cookie cutter about this space.”

For instance, some single-family offices are lean and mean enterprises that concentrate exclusively on investing and other fiscal matters. Others are robust, multi-layered organizations with in-house staff, numerous vendor relationships, and a diverse platform of services that, in addition to portfolio administration, might encompass managing real estate properties, making travel arrangements and overseeing household staff. Once again, this disparity makes it difficult to establish hard-and-fast rules for how a single-family office should be defined, other than its dedication to a single family.

Most criteria, however, will include standard wealth management functions. Furthermore, industry experts agree that in order to legitimately call itself a single-family office, the organization should be able to itself provide—or effectively outsource—tax compliance work, access to private banking and trust services, expense management, bill paying, document management, bookkeeping, and other such capabilities. While some SFOs might not provide all of these services, they would, at the very least, offer some combination thereof.

So how much net worth does one need to justify a single-family office?

“The rule of thumb used to be that in order to have your own family office, you needed $100 million,” Casey states, “But that is changing. I would put it more in the $500 million range. It depends on how much you want to outsource. You could run a family office with $100 million, if you were very smart about outsourcing all or most of the functions and keeping only minimal administrative matters in house. But if you want to handle everything internally—your investment shop, your lawyers, tax accountants and so forth, you need at least $500 million.”

Multi-Family Offices: A Burgeoning Market for Private Wealth Management

“Post Dodd Frank, multi-family offices are all commercial entities, and they are all regulated,” Casey explains. “They are either registered investment advisors, or they may be banks or accounting firms. Some are law firms.”

Whatever their composition, multi-family offices specialize in deep, lasting, proactive—and extremely responsive—relationships with a defined group of ultra-wealthy clients. Although all should offer customized solutions and specialized expertise, many different enterprises identify themselves as family offices. Consequently, there is a diverse field of contenders.

And a growing one.

“The number of multi-family offices has been on the rise,” Casey states. “This momentum is coming from several different sources, including financial planning firms, registered investment advisors, as well as spin-off teams from investment management firms who establish multi-family office platforms to provide independent, conflict-free counsel to their clients.”

While most multi-family family offices are open to those with at least $20 million to invest, clients typically have assets in the range of $40-$50 million.

It’s no surprise, then, that the number of MFOs is increasing. It is currently estimated that over 36,000 households in the U.S. have a net worth of more than $100 million, and over 80,000 households have a net worth over $50 million.

Some multi-family offices, such as the Threshold Group in Seattle, started as single-family offices looking to expand and share infrastructure.

As with SFO’s, “if you have seen one multi-family office, you really have only seen one multi-family office,” notes Kristin Bauer, Senior Managing Director-Western Region of Threshold. “They run the gamut from a single-family office that takes on some friends and other families, all the way up to huge banks starting up their own MFOs. And ownership structure varies, as does the way in which they work with individual clients. We have settled on being a boutique-like, multi-family office that is owned by a family. We think that’s where the magic is. Being privately owned is very important for us.”

For its part, in addition to investment advisory services, Threshold takes responsibility for many of their clients’ other administrative needs. These include managing accounts, paying bills, completing transactions, maintaining records for tax compliance, consolidating all of the family’s financial information and data, and compiling household budgets. To do so, Threshold’s financial specialists work side by side with not only family members, but also their accountants and other advisors.

Helping Generations Create and Nourish A Legacy

Bauer emphasizes that Threshold prides itself on the extremely close relationships that its team forms with clients, as well as the importance the firm places on educating and nurturing younger generations.

To do so, Threshold continuously works to find ways to involve younger heirs, create a common mission, as well as encourage family members to pursue their own versions of a legacy. This includes organizing family meetings, enlisting top experts as consultants, and providing forums for families to share ideas and learn from one another’s experiences.

“A lot of what we do is education—education on how to raise your child, when you know you are leaving them a great deal of money, as well as how to help them lead a fulfilled life, so that they too can have an impact on this world,” Bauer states. “Those are the conversations that we start to have. It’s not necessarily about what your investment return was last quarter, but often far more about what your goals are, and what kind of legacy you want to leave. And how your financial planning can influence your legacy. Our approach is very, very in-depth.”

Both Casey and Bauer suggest that helping to ease generational transitions is a vital component of what successful family offices of all types can achieve. This is particularly true because, “not invariably, but in many cases, there can be problems with these transitions,”  Casey notes.

“There are many reasons for this,” he explains. “The family itself may not have adequate governance, or may otherwise be in discord and disarray. There is a phenomenon that we call generational decay, where over time you get more people who are living off the same fortune. And if the family doesn’t have a way of renewing itself in a very profound sense, it is just going to go away. From shirtsleeves to shirtsleeves in three generations—it’s an old cliché, but it happens to be true. The idea that wealth gained in one generation will be lost over the years—that family fortunes start to peter out after the third generation.”

“It can be difficult to buck this trend,” agrees Bauer. “So much is going against you—taxes, expanding branches of the family. It’s so important to raise good decision makers. So, we are really trying to offer new models, and talk about things like impact investing and how to really inspire the newer generations to do something meaningful—instead of just living off of this tremendous wealth that they inherited. We need to break that cycle, so that the money doesn’t define you. Instead, you actually have a purpose and vision and inspiration outside the money. That is just so important. And that is where family offices can just be so instrumental.”

Bauer hopes to steer the discussion of private wealth management towards more meaningful change. “In the old investment world, it was all about how you measure yourself against benchmarks,”  Bauer suggests. “But within family offices, the discussions become more about what impact you are having on the world and what is fundamentally important to you. So we are really trying to change the conversation. And it is very, very exciting.”

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The Legal & Tax Aspect of Investing: Asset Protection; Estate Planning, and Tax Efficiency and Estate Planning & Asset Protection -101. This is an updated version of an article originally published on December 16, 2014.]

About Gay Jervey

Gay Jervey is a senior contributing writer for Accredited Investor Markets. She has written for such publications as The New York Times, Money, Inc., Business Week, Fortune Small Business, Reader’s Digest, Good Housekeeping, Working Mother, More, CFO, The American Lawyer, Financial Planning Magazine and The M & A Journal. Ms. Jervey started her career as…

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