A family office is a privately held investment and wealth management firm established to look after the investment, financial, household and lifestyle needs of high net worth individuals (HNW) and ultra high net worth individuals (UHNW) and participating family members.
Although the Washington DC metropolitan area ranks high when it comes to household income, it doesn’t appear to be a hotbed of family office activity. The FINTRX 2021 briefing on the state of family offices estimates there are 3,500 to 5,000 family offices globally, with about two-thirds in North America. Of those, approximately 40 percent are single family offices while 60 percent are multi family offices.
But only 2 percent are in Virginia and 1.8 percent call Maryland home. Washington does not appear among the top 10 cities with family offices. New York City leads the list with 20 percent of all family offices in the U.S.
Unlike mutual funds and hedge funds, family offices fly under the radar of the Securities and Exchange Commission and state regulators, so the numbers are at best an estimate. But why does there appear to be so few in the DC area?
In 2019, according to the American Community Survey conducted by the U.S. Census Bureau, four counties in Northern Virginia (Loudon, Fairfax, Arlington and Stafford) and three in Maryland (Montgomery, Howard and Calvert) ranked among the top 25 counties in the U.S. for household income. Loudon led the group with an average household income of more than $151,000.
However, household income does not equate to personal wealth. Well-paying jobs in the DC area – many of them in law, government, public policy, information technology and defense contracting – enable families to live comfortable lives. The people served by family offices live in a different ecosystem. Establishing a single family office requires at least $100 million in investable assets, and most single family offices have assets under management in the billions.
Where does this wealth come from? Very often, the principal of a family office has been successful in the investment and finance industry. Many are successful serial entrepreneurs or have recently sold a successful company. Real estate and inheritance are among the other major sources of personal wealth enjoyed by high net worth and ultra high net worth individuals.
Because of the high bar for establishing single family offices, there has been a trend in recent years toward multi family offices and outsourced family offices established by wealth management and investment professionals.
Finding the right type of family office
Let’s take a brief look at the different types of family offices and the services they provide. Family offices typically take one of these three structures:
Single family office. As the name implies, a single family office serves one family’s members. It’s important to keep it “all in the family” because inviting outside investors would turn the family office into an investment advisor subject to federal and state regulations.
Multi family office. Same concept as the single family office, but serves more than one family. Multi family offices are usually established in one of three ways:
- A single family office invites other families to join it or merges with another single family office
- A team of advisors (tax, legal, financial) invites families to join a multi family office
- A wealth management or investment firm establishes a family office subsidiary and offers its services to select clientele
Outsourced family office. This isn’t an office at all, but a collaboration among professionals (tax, legal, financial, accounting) to provide services to a family or group of families. It’s the least expensive option, but doesn’t offer the breadth of services or control of a traditional family office.
A firm and investment professionals
One attractions of a family office is that its professional managers free the family from the demands of daily oversight. For example, investment professionals strive to maintain generational wealth by looking after the family’s capital markets portfolio, which can run the gamut from stocks to direct investments to hedge funds to commodities to derivatives. Lawyers on the team provide legal advice, strategy and estate planning. Tax experts are there to devise tax strategies. Accounting professionals manage the inflows and outflows. If a significant chunk of the family’s assets are in real estate, there might be a real estate investment specialist.
And then there are the lifestyle needs. Family office employees might be involved in hiring and managing household staff, vetting private schools, executing major purchases (houses, planes, yachts), booking travel and more.
All of these specialties don’t come cheap. It’s not unusual for a family office to cost $1 million to $2 million a year just in personnel costs, let alone operational costs, such as office space. If the principals don’t have enough income and/or sustainable liquidity to pay for the family office, they must count on it making enough profit to pay for itself, which turns it into more of a business venture than a family office. This is especially true with a multi family office, which has to be profitable for its management company.
What to look for in a multi family office
The decision-making process doesn’t begin with a balance sheet or account statements. Rather, it begins with the family and its priorities. What are the most important goals and benefits? Some questions to ponder:
- Is the goal to preserve capital, or is it to grow assets?
- Will philanthropy play an important role in future planning?
- What are the expectations for multi generational wealth strategies?
- What is the tolerance for aggressive tax strategies that may minimize the tax burden but raise a red flag at the IRS?
- Is assistance with family governance important?
- Are concierge services expected, as well as management of financial matters (investments, taxes, estate planning)?
- Have key members of the family bought in to the family office concept?
These days, there are any number of national and regional wealth management firms in the business of managing multi family offices – all that’s needed is a web search. But how can the firms be differentiated, and how do you find the one that’s right for you?
Basic attributes a family office must have
Start with the basics of the firm, noting important attributes such as how long it has been in business, its privacy and security infrastructure, and the breadth of services it offers. The multi family office should be independent and objective but also aligned with the family’s interests.
The professionals at the helm need to be trustworthy and have impeccable character and credentials. Investor.gov, a website that’s part of the Securities and Exchange Commission, has a free search tool that links to the SEC’s Investment Adviser Public Disclosure (IAPD) website. Any investment professional should be registered, have a clean employment record and not have a history of disciplinary actions.
The family office should also have a strong governance culture, adhere to policies and procedures and have a stable staff with minimal turnover. It should also have a succession plan for its leadership.
Finding the right fit
Other considerations are subtle but still very important:
The size of the client base. Would you be one of the largest clients, one of the smallest or somewhere in the middle? The number of clients and assets under management might indicate that the firm is too new or too small to meet your needs. Do you want to be a little fish in a very big pond? Would the reverse feel comfortable?
Types of clients. Does the firm have a preponderance of a certain type of principals and families, such as entrepreneurs, old money, sports professionals, celebrities, or those with political affiliations? Think about whether any of those could pose a conflict (or could provide valuable contacts).
Risk management. The scope of the firm’s risk management should extend to anything that could be a threat: health, physical well-being and cybersecurity, to name three. The firm should also be able to provide advice on whether directorships and board seats (corporate or nonprofit) could pose a risk.
In-sourcing and out-sourcing. Does the firm have all of the expertise needed in-house or does it subcontract? Going outside for a professional to handle philanthropy, family governance or estate planning, for instance, could pose security and reputational risks.
References. It’s important to ask around, and even to ask the firm if it can provide contacts for current clients.
Finally, remember what the multi family office firm is being entrusted with: current assets, future wealth, even the family’s well-being. It’s important to be comfortable with the investment professionals. This is touchy-feely, but is there an emotional as well as intellectual rapport?
How to find family offices in Washington DC
D.C. may look big, but it’s more like a small town when it comes to making connections, whether someone is looking to sign up with a multi family office or a business owner wishes to mine the family office landscape to find investors and raise capital. In addition to web searches, networking is one of the best ways to identify multi family offices in Washington DC.
There are several family office associations and service groups, such as the Family Office Network, which has a DC affiliate, the Washington Family Office Association. This group offers events throughout the year, including seminars, luncheon discussions and social events. Membership is open to family offices as well as those looking to connect with family offices.
You can also find listings of family offices on several sites:
Cope Corrales, a Washington DC-based wealth management firm, can guide you to the world of family offices. Its services include investing strategies to ensure multigenerational wealth, tax planning, estate planning, risk management, charitable planning, business advice and family governance.