Family office

A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with over $100 million in investable assets, with the goal being to effectively grow and transfer wealth across generations. The company's financial capital is the family's own wealth. Family offices also may handle tasks such as managing household staff, making travel arrangements, property management, day-to-day accounting and payroll activities, management of legal affairs, family management services, family governance, financial and investor education, coordination of philanthropy and private foundations, and succession planning. A family office can cost over $1 million a year to operate, so the family's net worth usually exceeds $100 million in investable assets. Some family offices accept investments from people who are not members of the owning family.[1][2][3][4][5][6][7][8][9]

This article is about offices that manage the wealth of primarily one family. For offices that manage the wealth of several families, see multi-family office.
Chart of family office services

Some firms that cater to multiple clients offer personality psychology services for family members to support better alignment and communications among members of the family.[10]

A family office either is, or operates just like, a corporation or limited liability company, with officers and a support staff. Officers are compensated per their arrangement with the family, usually with incentives based on the profits or capital gains generated by the office. Family offices are often built around core assets that are professionally managed. As profits are created, assets are deployed into investments. Family offices might invest in private equity, venture capital opportunities, hedge funds, and commercial real estate. Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals. Some family offices remain passive and just allocate funds to outside managers. [11]

History

The Rockefeller family first pioneered family offices in the late 19th century. Family offices started gaining popularity in the 1980s, and since 2005, as the ranks of the super-rich grew to record proportions family offices swelled proportionately.[12]

Family offices became more common in recent years after the rapid increase in valuations of technology companies led to many people having newly created wealth.[6]

Traditional and modern usage

A traditional single family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. Typically, these organizations employ staff to manage investments, taxes, philanthropic activities, trusts, and legal matters. The family office invests the family's money, manages all of the family's assets, and disburses payments to family members as required.

The Family Office Council, the membership group for single family offices, defines a single family office as "An SFO is a private organisation that manages the investments for a single wealthy family. The assets are the family’s own wealth, often accumulated over many family generations. In addition to investment management some Family Offices provide personal services such as managing household staff and making travel arrangements.

Other services typically handled by the traditional Family Office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family Offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning."

Modern family offices

Defining the service proposition is not straightforward and a common phrase used by industry insiders is: "When you have seen one family office you have seen one family office". Some professionals have created models to try and explain the types of family offices which exist and different levels of services offered. Scott Gardner, President of Sterling Wealth Management, separated into four classes:

Class I Family Offices provide estate and financial services and typically are operated by an independent company that receives direct oversight from a family trustee or administrator. A typical Class I family office:

  • Offers comprehensive financial oversight of all liquid financial assets.
  • Offers daily management of all illiquid assets, such as real estate.
  • Can administer and manage the entire estate with little to no supervision.
  • Charges a flat monthly fee for all family office services.
  • Offers advice free from conflicts of interest and will not sell products.
  • Offers a comprehensive monthly report of all estate activity for no additional fee.

Class II Family Offices are also known as Virtual-Family Offices (VFO). A typical Class II family office:

  • Assists in the financial oversight of all liquid financial assets.
  • Assists in the daily management of all illiquid assets, such as real estate.
  • Assists in the administration of the family estate with little to no supervision.
  • Charges a flat monthly fee for all family office services.
  • Offers advice free from conflicts of interest and will not sell products.

Class III Family Offices focus on providing financial services and are typically operated by a bank, law firm, or accountant firm. A typical Class III family office:

  • Offers investment advice for a fee.
  • Can offer products and services outside the scope of a family office.
  • Does not directly manage or administer illiquid assets in the estate.

Class IV Family Offices focus on providing estate services and are typically operated by the family with the assistance of a small support staff. A typical Class IV family office:

  • Has a staff that will monitor the estate and report into the family trustee with any irregularities.
  • Provides basic administrative functions, such as bookkeeping and mail sorting.
  • May have an office inside a family member's home.

In 2016, single family offices are in a state of transition largely because the founding patriarch/matriarch is aging or deceased. The next generation often finds the costs to maintain the office prohibitive. New models are emerging, including the virtual family office.

U.S. law

Under the Dodd–Frank Wall Street Reform and Consumer Protection Act, an organized effort was undertaken by single family offices nationwide led by the Private Investor Coalition that successfully convinced Congress to exempt SFO's meeting certain criteria from the definition of investment adviser under the Investment Advisers Act of 1940 (previously, such family offices were deemed to be investment advisers and relied on the "less than 15 clients" rule to avoid registration under the Act, a rule that was eliminated under Dodd-Frank). The U.S. Securities and Exchange Commission promulgated the final "family office rules" on June 22, 2011.[13]

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References
  1. "EY Family Office Guide" (PDF). Ernst & Young. 2017.
  2. Frank, Robert (June 10, 2004). "How to Bank Like a Billionaire". The Wall Street Journal.
  3. "Family Offices". Investopedia.
  4. Hawthorne, Fran (March 18, 2008). "The Family Office, Granting Every Wish". The New York Times.
  5. KOLESNIKOV-JESSOP, SONIA (September 6, 2011). "Setting Up an Office to Manage a Wealthy Family's Affairs". The New York Times.
  6. Das, Anupreeta; Chung, Juliet (March 10, 2017). "New Force on Wall Street: The 'Family Office'". The Wall Street Journal.
  7. "Defining 'Family Office'". Familyofficecouncil.com. September 15, 2013.
  8. Steinberg, Julie; Greene, Kelly (May 17, 2013). "Financial Advice, Served Rare". The Wall Street Journal.
  9. Douglas, Craig M.; Wollack, Todd (June 8, 2007). "Case highlights family office risk". American City Business Journals.
  10. Milburn, Robert (November 21, 2014). "Mr. Freud in the Family Office". Barron's.
  11. "Opalesque BACKSTAGE Video-Terry Beneke: What attracts family offices to alternative investments". Opalesque. 30 April 2010.
  12. Scheiber, Noam; Cohen, Patricia (December 29, 2015). "For the Wealthiest, a Private Tax System That Saves Them Billions The very richest are able to quietly shape tax policy that will allow them to shield billions in income". The New York Times.
  13. "SECURITIES AND EXCHANGE COMMISSION : 17 CFR Part 275: [Release No. IA-3220; File No. S7-25-10]" (PDF). U.S. Securities and Exchange Commission.
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