Financial Poise
What is a family office?

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.

Bob Casey is Senior Managing Director for research at Family Wealth Alliance in Wheaton, Illinois. He explains: There are single-family offices (SFOs) and multi-family offices (MFOs). Single-family offices hold more than $4 trillion, while their multi-family counterparts manage hundreds of billions in assets

Single-Family Offices and the Dodd-Frank Effect

Historically, SFOs were excluded from the Investment Advisers Act of 1940 as “advisors with fewer than 15 clients.” Under the Dodd-Frank Act, the SEC now categorically defines “family offices” and the conditions under which they will be excluded from the Advisers Act.

Essentially, it says family offices:

  • 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 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 Single 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.”

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.

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 fiscal matters. Others are robust, multi-layered organizations. They may have in-house staff, numerous vendor relationships, and a diverse platform of services that might encompass managing properties, making travel arrangements, and overseeing household staff.

Again, it’s difficult to define the family office. Most criteria, however, include standard wealth management functions. Industry experts agree that the organization should be able to provide or outsource some combinations of services.

  • Tax compliance work
  • Access to private banking and trust services
  • Expense management
  • Bill paying
  • Document management
  • Bookkeeping and other such functions

While some SFOs might not provide all of these services, they would, at the very least, offer some combination.

So how much net worth justifies 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 lasting, proactive, and responsive relationships with a defined group of ultra-wealthy clients. Although all should offer customized solutions and specialized expertise, different enterprises identify themselves as family offices. Consequently, there is a diverse and growing field of contenders from financial planners, investment advisors, and investment management firms.

Who Needs an MFO?

Most multi-family offices are open to those with at least $20 million to invest, but clients typically have assets of $40M-$50M.

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 more than $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, notes Kristin Bauer, Senior Managing Director-Western Region, “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 their own MFOs. 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 owned by a family. We think that’s where the magic is. Being privately owned is very important for us.”

MFOs take responsibility for clients’ administrative needs like

  • Managing accounts
  • Paying bills
  • Completing transactions
  • Maintaining tax records
  • Consolidating financial information and data
  • Compiling household budgets

Helping Generations Create and Nourish A Legacy

Bauer says close relationships with clients are important in order to inspire trust and educate younger generations.

Those who manage MFOs, like Threshold, find ways to involve younger heirs, create a common mission, and encourage family members to pursue their own versions of a legacy. They use family meetings, consultants, and forums for families to share ideas and experiences.

Surprisingly, forum topics may include raising your child when you are leaving them a lot of money. Parents want to consider helping children think about impacting the world.  Families have to track investment returns but goals and intangible legacies matter, too. Generational Transitions

Casey and Bauer suggest that generational transitions are vital to successful family offices, and they aren’t always smooth.

Casey explains, “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 is that wealth gained in one generation will be lost over the years — that family fortunes start to peter out after the third generation.”

Changing the Conversation

Experts hope to steer the discussion of private wealth management toward meaningful change. “In the old investment world, it was all about how you measure yourself against benchmarks,”  Bauer says. “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.”

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

  1. The Legal & Tax Aspect of Investing: Asset Protection
  2. Estate Planning, and Tax Efficiency
  3. Estate Planning & Asset Protection -101

This is an updated version of an article originally published on November 2019. It has been updated by Dan Pelland]

©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.]

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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