WHAT IS A FAMILY OFFICE? How It Works

A family office is a full-service wealth and asset management organization that works with ultra-high-net-worth families to help them increase their money and pass it down to the next generation. Most people do not require a family office, but it is important to understand the services they provide. Some businesses will let friends and family to use their services without meeting any minimal standards. Instead of a family office, most people can employ a financial advisor to perform similar tasks at a lower cost.

What Is a Family Office?

To begin, what exactly is a “family office”? Even the designation of a company as a family office varies depending on who is asked. That being stated, I consider family offices to be any entity that invests money directly on behalf of the ultimate principle. Family offices, unlike hedge funds, pension funds, endowments, and other institutions, do not pool third-party capital and then invest it. They are working with the assets of a single – or numerous – families.

As a result, even designating a family office is difficult. According to the previously stated definition, a son who administers his mother’s $500,000 retirement account by trading equities in an online account has a family office. Interestingly, I have come across a family office that consisted of only the principle and one advisor (albeit the AUM of over $4 billion was slightly more than in my example above).

Most practitioners would consider the $100 million net worth level to be the point at which someone could potentially have a family office. According to a Credit Suisse analysis from 2018, there are 50,230 people in the world with a net worth of more than $100 million. Many of these people manage their wealth through their businesses, many pool their assets to form multi-family offices, and many are different branches of the same family. As a result, Credit Suisse’s estimates of the number of separate family offices range from 6,500 to 10,500.

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As a result, there is a saying that “when you know one family office, you know one family office.” Family offices differ in terms of their:

Source: Family offices can be organized around a single principle (“single-family”) or numerous principals (“multi-family”).
Size: Ranging from a few hundred million to many billions of dollars under management.
Structure: Ranging from fully-fledged investment advisors capable of competing with even the most institutional of firms to a single referenced individual advisor.
Strategy: While real wealth preservation is usually the primary goal, capital appreciation or growth can be equally significant depending on the nature of the principals.

Understanding Family Offices

A family office offers a variety of services designed specifically for HNWIs. Family offices might provide their clients with a specialized team of professionals to handle anything from charity giving guidance to investment management.

Family-run enterprises could need succession planning frameworks, including trust or a foundation for the family’s resources. Clients may hire a family office for assistance in managing the assets and coordinating interests in these complex situations.

A family office also can handle non-financial concerns like paying for private education, making travel plans, and other little domestic details.

Single-family and multi-family offices are the two types of family offices commonly considered (MFOs). Single-family offices cater to one wealthy family only. MFOs are more akin to conventional methods of private wealth management. They aim to expand their clientele to grow their business.

It’s crucial to note that a family office’s duties might vary greatly. While one customer may require a family office to handle their lifestyle demands, some other clients might want a family office to receive high-caliber guidance from various professionals.

The Functions of a Family Office

A thorough wealth management strategy is too complex for one professional advisor to advise and serve ultra-wealthy families adequately.

It needs a team effort from experts in the legal, insurance, investments, estate, business, and tax fields that is well-coordinated and cooperative.

By using an integrative approach, a family office often offers high-level financial planning. Family offices guide clients through the complicated world of wealth management by merging lifestyle management, asset management, financial planning, cash management, risk management, and other services.

#1. Legacy Planning and Management

High-net-worth families may face several challenges when attempting to optimize their legacy after spending a lifetime acquiring riches. These challenges may include familial or commercial problems, confiscatory estate taxes, and estate laws.

Given this complexity, a thorough wealth transfer plan must consider all aspects of the family’s wealth, such as the management or handover of business holdings, the distribution of the estate, the administration of family trusts, funding for humanitarian goals, and family governance.

Family offices collaborate with a group of advisors from each of the required professions to ensure the family’s transfer of wealth plan is well-organized and optimized for its legacy.

#2. Lifestyle Management

Numerous offices also act as a family’s concierge, managing their private life and taking care of their lifestyle requirements.

Background checks on personal and professional staff, home and travel security, boat and aircraft management, travel planning and fulfillment, and business process efficiency could all fall under this service category.

#3. Investment Management

A family office may manage a single family’s investment portfolio, commercial real estate acquisition, disposition, and property management, as well as private equity transactions, hedge fund investments, and venture financial assets.

#4. Family Wealth Education

Younger family members must be taught how to handle wealth and that it can and should be utilized by the family’s ideals of a family office. The family office would help future generations develop an understanding of their wealth as well as its requirements. A family office helps maintain family harmony and avoid generational strife over financial matters with the correct training.

Types of Family Offices

#1. Traditional Family Office

A rich individual builds a conventional family office to manage the family’s fortune. It often has a team of specialists who look after and increase the riches. A money manager, tax expert, estate counselor, accountant, and others might be on the staff. Since everyone works for the family, there are no conflicting interests concerning the goods and services that would exist if other financial organizations hired them. Serving the family’s demanding financial interests is the main goal.

#2. Multi-Family Office

A company that looks after the wealth of multiple families is known as a multi-family office. It provides the same kinds of services as a typical family office. Its diverse professionals create wealth-related solutions specific to each family’s monetary and domestic requirements.

Along with investment management, these services could include bill-paying, transferring wealth plans, charity guidance, wealth education, and other things. The standard fee for multi-family offices’ services is a percentage of the resources in the portfolios they are managing.

Since they serve multiple families, they might be less costly than traditional family offices. A family does, however, have far less power over these providers.

#3. Outsourced Family Office

A network of qualified service providers, such as financial advisors, attorneys, accountants, etc., work together as an outsourced family office for a customer. Usually, one of the experts is chosen to oversee all communications and actions.

They differ from the other professionals who offer the same services in that they are permitted to consult with one another regarding a family’s financial affairs.

An outsourced family office can handle some of the same issues that traditional and multi-family offices face. Charitable planning and family wealth training may be some of these. Generally, this kind of family office is a little less expensive than a conventional one. But the family has typically much less power over the experts.

Who Works at a Family Office?

A family office hires a group of experts who provide various services. The following are amongst the most frequent occupations you may expect to see at a family office:

#1. Wealth managers and Investment

These prudent men look after the wealth. They can perform their duties in a plethora of ways and will invest the funds of their customers. These employees have a variety of alternatives, from investing in a mutual fund to starting a brand-new one tailored to their client’s preferences, given the enormous amount of money that a family office handles.

#2. Tax Consultants

The office frequently employs a group of committed tax-related lawyers and accountants. They guarantee that the client receives the best possible tax benefits. With their help, a client might save hundreds of thousands of dollars.

#3. Lawyers

A family office requires legal counsel on a range of issues. Customers depend on their understanding of real estate law, financial issues, trusts, estates, and even criminal cases. Every decision the office takes must be made with the client’s best interests in mind. Without knowledgeable legal guidance, this cannot be done.

Of course, these are only a few examples of the professional knowledge you’ll encounter at work; they do not cover all tasks. In a typical family office, several professionals that can assist in meeting the client’s needs are employed in addition to supporting employees.

How much money do you need for a family office?

Family office costs typically range from 1% to 2% of the family’s active assets, including cash assets, trust assets, and investment portfolios. Therefore, the yearly cost for a small family office having $155 million in active assets would be between $1.5 million and $3.1 million.

What are the benefits of a family office?

A family office enables a family to save all sensitive information in a single, safe location that is only accessible to a small number of people. Therefore, the family office might act as the protector and defender of the family’s privacy.

What is the structure of a family office?

A wealthy person builds a conventional family office to oversee the family’s fortune. It often has a team of specialists who look after and increase the riches. A financial planner, tax expert, estate manager, accountant, and others might be on the staff.

How does a family office make money?

Private equity, venture capital, hedge funds, and commercial properties are among the possible investments for family offices. Many family offices resort to hedge funds for interest alignment based on risk/return assessment goals. Some family offices take a gentle approach, giving money to external managers.

Who runs a family office?

Intending to grow and transfer wealth across generations successfully, a family office has been a privately owned business that manages investments and wealth for wealthy families. These families typically have investable assets between $50 and $100 million. Family wealth serves as the company’s financial capital.

Estate Management at Family Offices

In many ways, a family office’s primary duty is estate administration. Ensuring that the fortune endures for future generations is the responsibility of this office.

A family office allocates funds to meet the demands of several generations. This includes managing family trusts, ensuring the conditions of trust are followed, and ensuring that the monies are prudently managed. It also entails dealing with tax difficulties that hardly ever arise in other circumstances. Only a small percentage of American families are subject to estate taxes, but anyone with a family office would undoubtedly pay those taxes.

Additionally, a family office oversees the transfers of illiquid assets. From one generation into the next, it will be passed on from generation along with assets, companies, and real estate. This entails, in particular, striking a balance between the importance of preserving money and the requirements of a younger generation.

The management of the family itself is helped by a family office, too. Both interpersonal and financial oversight may be offered. It takes the necessary steps to ensure that the individuals who currently possess the money save some for others who will require it in the future.

Conclusion

For a variety of reasons, ultra-high-net-worth individuals create family offices. A family office must manage and increase wealth first and foremost. In addition, it must offer a wide range of other amenities that can aid a family in managing the difficulties and demands brought on by that riches.

While some wealthy people and their families may profit from having a family office, most affluent individuals will benefit from working with a wealth advice firm’s professionals.