Finance: What is a Family Office?

Don’t know what a family office is? Don’t worry, you are not alone. Perhaps you’re thinking it’s some sort of family-friendly office where you can bring your dog to work and, in a pinch, a child or two as well.

Not even close.

It turns out family offices are private wealth management advisory groups that handle a wide range of financial needs for clients with big coffers. If you happen to have tens of millions in assets kicking about, this wealth management and preservation vehicle may be for you.

In the following article, we’ll take a look at how family offices came to be, the services they provide, and the types of family offices that are available. For most of us, this is an aspirational glimpse into a world one can only dream of. But it’s good to know that family offices are there in case your entrepreneurial drive pays off, and that business you purchased becomes a household name.

A Brief History of Family Offices

The rise of family offices as a distinct sector within the financial industry closely parallels the rise of a mega-wealthy class in the United States. The first family office was established in 1864 by J.P. Morgan, one of the first titans of industry. J. Pierpont Morgan and Co. went through several iterations, amassing enough capital along the way to finance the formation of the United States Steel Corporation, the first billion-dollar corporation in the world. 

In 1882, at the height of the Gilded Age, J.D. Rockefeller took the concept a step further, establishing the first “full service” family office to manage the $1.4B in assets he accumulated as the nation’s most successful oil baron. Rockfeller hired a team of financial experts to manage his investment portfolio as a whole, and its assets were consolidated under the Standard Oil Trust, providing a model for all the family offices to come.

Over the years, single-family offices (SFOs) evolved along with other private banking services, gaining renewed popularity in the twenty-first century as the dot-com boom created a new class of American billionaires. 

Put very simply, an SFO is an organization staffed with individuals employed to manage a family’s wealth. Typically structured as a formal business entity (such as an LLC or corporation), SFOs allow a family privacy and control over their assets, giving family members the ability to create a portfolio that is aligned with their values and interests. Because they manage large sums of money, SFOs have a wider range of investment opportunities than you would get with a traditional financial management firm.  

Services That a Family Office Provides

Investment Management

The staff of an SFO is able to provide their well-heeled clients with higher risk-adjusted returns because they operate independently, with only their clients’ interests in mind, and can choose a portfolio that is broader than the options available at standard financial services companies. They are also able to offer lower expense ratios due to the fact that they are investing such large sums of money. (Multi-family offices, which we discuss below, work on the same principle by pooling the money of several wealthy families.)

Family offices usually have a dedicated investment committee, which allows clients to take an active role in determining the contents of their portfolio while at the same time alleviating them of the responsibility of daily operations management. 

Because so much money is involved, SFOs can afford to lure talent away from traditional brokerage firms. In some cases, though, an SFO will opt to use a hybrid model, combining a core in-house advisory staff with outsourced specialty positions.

Estate and Succession Planning

The primary goal of a family office is wealth preservation for generations to come. Thus, SFOs often handle issues like estate tax liability, the equitable distribution of property among family members, and developing a successful succession plan for the family business.

If you are a fan of the HBO series Succession, you know just how complicated succession planning can be, especially when rumors about key players reach shareholders and the public at large. SFOs are a vault where succession planning can happen privately, with time to explore the ramifications of changes in corporate leadership. 

Philanthropy

SFOs have played a role in managing charitable giving since the Gilded Age, when families like the Carnegies committed millions to found cultural institutions for the public good. Today, SFOs help owners to decide what kind of philanthropic initiatives they want to be known for. 

In addition to traditional philanthropy, which conveys tax benefits, an SFO might manage charitable assistance in the form of angel investing, “taxable” philanthropy (which does not come with restrictions or strings attached), and impact investing.  

Legal and Tax Services

Family offices may also provide legal and tax services to family members, taking a multigenerational timeline into consideration. Any given family may have diverse needs and goals – multiple properties in different jurisdictions, marriage, divorce, inheritance plans – and the family office makes sure that the right structures are in place to meet these needs. SFOs also help owners develop a tax-efficient investing plan. 

Family Governance

Central to all these services is the SFO’s commitment to educating, advising, and guiding family members in strategic wealth management. An SFO might have a coordinator who helps the family to establish the system of formal governance that is best suited to their individual needs. The coordinator may also be responsible for less glamorous tasks like paying bills and managing family members’ social and business schedules.

The primary goal behind having a system of family governance is to facilitate the successful transfer of wealth to succeeding generations, preserving the family’s financial legacy. A secondary goal is to encourage family members to develop an investment plan that aligns with their values and the image they wish to present to the world. Developing a family mission statement with the participation of as many family members as possible can help keep overarching objectives on track. 

Types of Family Offices

Throughout this article, we’ve been focused on explaining the concept of family offices through SFOs. There are several other types of family office worth noting, though. 

Multi-Family Offices

If you don’t meet the wealth threshold to justify having a single-family office – and some put that threshold as high as $100M – you do have the option to join other individuals whose net worth hovers at a measly $30M. Multi-family offices (MFOs) are registered investment advisors created to serve the needs of more than one family while still providing far more personalized client attention. An MFO might be full-service or offer an a la carte service model, which allows owners to pick and choose what they want to focus on.

MFOs are also a less expensive option. Whereas an SFO takes anywhere from 1-3% of the total amount being invested, an MFO’s expense ratio is closer to 0.30 to 0.70%. Finally, because they are a pooled resource, MFOs may offer a greater range of expert opinions under the same roof than SFOs are able to.

Virtual Family Offices

As its name implies, a virtual family office (VFO) offers the same services as a SFO or MFO – without the constraints of a physical office space. The VFO team consists of financial, tax, and legal professionals who collaborate remotely to serve the needs of single family or multi-family clients. This model benefits families with global assets and investments because it allows close collaboration among individuals in different parts of the world.

Hybrid Family Offices

A hybrid family office is an SFO that outsources some of its expert services and has others in-house.  

Some Final Thoughts

Family offices once played an important role in making the United States a prosperous country, helping to protect and grow the assets of the super wealthy at a time when we had no central banking system and federal income tax. 

While it would be hard to argue that they play the same role today, family offices continue to have an impact on the financial services sector as a whole. They have forced the industry into competition for wealthy clients and talented advisors. As more and more wealthy clients opt to go private, the need for traditional wealth management services has declined, forcing established financial firms to reconsider their fee structure and value proposition.   

Indeed, many traditional wealth managers have begun to offer “family office” services themselves, reflecting the more modest investor’s desire for a “boutique” financial advisory experience of their own.