KEY TAKEAWAYS
- Family offices provide a broad spectrum of private wealth management services to one or a small number of ultra-high-net-worth families.
- Besides financial services, family offices can provide various kinds of planning, charitable giving advice, concierge services, and other comprehensive services.
- An important responsibility a family office has is to educate next generations in the handling and management of their wealth.
- Single-family offices serve one individual and their family, while multi-family offices serve more than one family, and are less expensive due to economies of scale.
- The need for a family office can be determined by the extent of a family’s wealth and the complexity of its life due to that wealth.
What Is a Family Office?
A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals (HNWI).Family offices are different from traditional wealth management shops in that they offer a total solution to managing the financial and investment needs of an affluent individual or family. For example, in addition to financial planning and investment management, many family offices offer budgeting, insurance, charitable giving, wealth transfer planning, tax services, and more.
Understanding Family Offices
A family office provides a wide range of services tailored to meet the needs of HNWIs. From investment management to charitable giving advice, family offices may offer a dedicated team of specialists to service these clients. Family-run businesses may require structures for succession planning, such as trusts or a foundation for the family assets. Given the complexity of these situations, clients may utilize a family office to help manage the assets and align interests. The family office can also handle non-financial issues, such as private schooling, travel arrangements, and miscellaneous household arrangements.
Family offices are typically defined as either single-family offices or multi-family offices (MFOs). Single-family offices serve just one ultra-affluent family. MFOs are more closely related to traditional private wealth management practices. They seek to build their business by serving many clients. MFOs are more prevalent due to economies of scale that allow for cost-sharing among the clientele. Importantly, what a family office does can differ widely. While one client may need a family office for high-caliber advice from a range of experts, another may need a family office to organize their lifestyle needs.
The Responsibilities of a Family Office
Providing advice and services for ultra-wealthy families under a comprehensive wealth management plan is far beyond the capacity of any one professional advisor. It requires a well-coordinated, collaborative effort by a team of professionals from the legal, insurance, investment, estate, business, and tax disciplines. Often, a family office provides high-level financial planning through an integrative approach. Combining asset management, cash management, risk management, financial planning, lifestyle management, and other services, family offices help clients navigate the complex world of wealth management.
Legacy Planning and Management
After a lifetime of accumulating wealth, high-net-worth families can be confronted with several obstacles when trying to maximize their legacy. These obstacles can include confiscatory estate taxes, estate laws, and family or business issues. Given this complexity, a comprehensive wealth transfer plan must take into account all facets of the family’s wealth, including the management or transfer of business interests, the disposition of the estate, management of family trusts, support for philanthropic desires, and family governance. To ensure the family’s wealth transfer plan is well-coordinated and optimized for its legacy, family offices work collaboratively with a team of advisors from each of the necessary disciplines.
Lifestyle Management
Many family offices also serve as a concierge for families, handling their personal affairs and seeing to their lifestyle needs. This service could include conducting background checks on personal and business staff, providing personal security for home and travel, aircraft and yacht management, travel planning and fulfillment, and the streamlining of business affairs.
Investment Management
For a single family, a family office may be responsible for investment portfolio management, commercial real estate purchase, sale, and property management, private equity deals, hedge fund investments, and venture capital investments.
Family Wealth Education
A family office is responsible for educating younger members of the family in the proper handling of wealth and how it can or should be used, based on the family’s values. The family office can help instill in next generations an appreciation for their wealth and its demands. With the right education, a family office can help maintain family unity and prevent discord over money issues between the generations. John D. Rockefeller is thought to have established the first full-service, single family office in the U.S. in 1882. In 1937, when he died, he was worth $1.4 billion. That’s equivalent to approximately $255 billion now. The Rockefeller family office exists to this day.1
Types of Family Offices
Traditional Family Office
A traditional family office is an entity established by a wealthy individual to manage the family’s wealth. It usually has a staff of experts who protect and grow the wealth. The staff might include a financial advisor, tax specialist, estate planner, accountant, and more. All are employed by the family, so there aren’t the conflicts of interest with products and services that might be found if they worked for other financial institutions. The overarching objective is to serve the family’s demanding financial interests.
Multi-Family Office
A multi-family office is a firm that manages the wealth of more than one family. It offers the same types of services that a traditional family office offers. Its variety of experts tailor wealth-related solutions for each family’s financial and household needs.
Beyond investment management, these might involve bill-paying, transfer of wealth plans, philanthropic advice, wealth education, and more. Multi-family offices usually charge a percentage of investment portfolio assets under management for their services.
They can be less expensive than traditional family offices because they work for more than one family. However, a family has less control over these providers, as a result.
Outsourced Family Office
An outsourced family office is a network of appropriate service providers—financial advisor, lawyer, accountant, etc.—who collaborate on behalf of a client. Typically, one of the professionals is appointed to coordinate all communication and efforts.
The fact that they’re authorized to consult with each other about one family’s financial business is what separates them from other professionals who provide the same services.
An outsourced family office can handle many of the same matters that traditional and multi-family offices handle. These might include philanthropic planning and family wealth education. This type of family office is usually less expensive than a traditional family office. However, the family also has far less control over the professionals.
Do You Need a Family Office?
Whether or not someone needs a family office depends on the extent and complexity of their wealth, as well as the demands that wealth puts on their family. Certain situations may require a variety, or teams, of specialists with access to high-value resources that can address a long list of important issues.
Broadly speaking, those with a net worth of $250 million might consider establishing a traditional family office. Multi-family offices can be an option for those with a net worth of at least $30 million.
Overall, those with a total net worth of up to $50 million could find the services and support they need from the advisors they would find at a wealth management firm.
What’s a Family Office?
A family office is a private wealth management firm established by an ultra-high-net-worth family that provides that family with a selection of personalized services that include investment management, financial planning, estate and tax planning, philanthropic investing, concierge services, and more.
Who Needs a Family Office?
Since family offices can be very expensive to establish and operate, only the extremely wealthy who have complex financial, investment, and personal needs usually require one. One estimate is that only individuals with a net worth of more than $250 million need (and can afford) a dedicated family office.
Is a Family Office the Same as a Wealth Advisory Firm?
Not really. Wealth advisory firms can offer some of the services that a family office offers, such as portfolio management and investment management. However, wealth advisory firms typically have many different clients while a family office focuses on one (or several if it’s a multi-family office). What’s more, family offices offer a much larger range of services to address the complete list of wealth-related needs an ultra-high-net-worth family has.
The Bottom Line
A family office is established by ultra-high-net-worth individuals for a variety of reasons. First and foremost, a family office needs to manage and grow wealth. It also has to provide a wide variety of other services that can help a family manage the complexities and demands associated with that wealth.
While a family office may be appropriate for some extremely wealthy individuals and families, most highly affluent people should be well served by the professionals at a wealth advisory firm.
