Among world’s richest families, the concept of a “family office” is not new. Even in antiquity, a noble family would assign the management of its wealth to a trusted advisor who would, as the saying goes, “manage their affairs.”   

The family office as a modern concept has its roots in the 19th century, when the family of financier J.P. Morgan established the House of Morgan to manage the family’s vast wealth, investments and philanthropic activities.   

Today, interest in family offices has grown along with the increase in wealthy families and the complexity of asset management and investment strategy. The growth in the number of family offices has been astounding in recent years, and now there are more than 10,000 around the world. In the U.S., single-family offices number in the hundreds, and you can probably guess some of the names – Bezos, Walton, Gates.    

The estimates, though, are just that, because family offices are basically private investment firms, unfettered by federal regulation. In fact, there’s a saying in the wealth management industry: “When you have seen one family office, you have seen one family office.” The regulations come from the family itself under family governance principles, indicating that a family office is more than a wealth management strategy. It’s also a way for a high-net worth family to not only preserve and grow its wealth for future generations, but also a tool for doing good.    

What are family office services?   

The basic goal of a family office is to be profitable, showing a healthy return on investment so that the family can continue to grow its assets. A family office staff can comprise a few people or many. The services can include investment management, directing household staff, making travel arrangements, managing real estate, tax planning, legal affairs, and day-to-day accounting and payroll activities.    

It can also provide family management services, such as family governance, financial management education, succession planning and the operation and coordination of foundations and philanthropic activities.   

All of those duties and services require many different types of knowledge and expertise. That’s why many family offices have a sizeable staff and cost $1 million to $2 million a year to operate. The threshold for establishing a family office is north of $100 million in private wealth. That’s a critical point. For a family office to be established, the family’s assets must be privately held, from a   

family business or investments, for example.   

Multi-family offices   

As its name implies, a traditional family office serves one family. Relatively few families have the wherewithal to establish single-family offices. But there are plenty to fuel the growth of multi-family offices, which are managing $300 billion to $700 billion in assets just in the U.S.   

A multi-family office is a private enterprise established to meet the goals and needs of several high net worth families. It is created in one of three ways:   

• A single-family office invites in additional clients or merges with another single-family office.  
• A team of advisors (investment, tax, legal) invites families to join a multi-family office.   
• An existing financial institution (most often a bank or brokerage firm) creates a multi-family office subsidiary.   

Clients of a multi-family office typically have a net worth in excess of $50 million. Multi-family offices provide many of the same services that a single-family office provides: including tax and estate planning, financial services, investment advice, and philanthropic foundation management. Some also offer personal services, such as arranging travel and managing household staff.   

Outsourced family offices   

An outsourced family office isn’t an office or a single organization. Rather it’s a collaborative effort among several disciplines: a financial advisor who handles the investment portfolio, an attorney who handles the estate plan, and a CPA who handles tax strategy and pays bills. Concierge services, next-generation education and family governance advice are services often included in the fees at large wealth management firms.    

You might be asking: “I already have a financial advisor, lawyer and CPA. How is this different?”   

Good question. The answer lies in the authority the advisors in an outsourced family office have to communicate with the family’s principal at any time. The principal also will select someone to coordinate most family financial matters – a sort of quarterback. 

The downside of an outsourced family office is that it doesn’t provide the total control or coordination of a traditional family office. The upside? It’s the least expensive approach.   

What is family governance?   

We’ve referred several times to “family governance,” but what does that mean?   

Before establishing any type of family office, it’s important for family members to come to terms with the values and principles that will guide their enterprise. Family governance is a framework for joint decision-making among family members based on shared values, a common mission or purpose, and a collective vision for the future.   

Family governance typically has three components:   

• Annual meetings of the entire family.   
• Family council meetings for those families in which a representative group of members plans, creates policies and strengthens communications.   
• A written family constitution – the policies and guiding vision and values that regulate members’ relationship with the family business.    

A family office typically provides advice on family governance.   

Is a family office an RIA?   

Traditional single-family offices are not structured as registered investment advisors (RIAs). However, for multi-family offices, the rules are different.   

Multi-family offices are usually structured as RIAs, which means they are registered with the Securities and Exchange Commission (SEC), or as trust companies, which are typically regulated at the state level. That said, while all multi-family offices are RIAs, not all RIAs are multi-family offices. Let’s look at some of the differences.   

The family connection 

It would be unusual to call an RIA and ask for help with making a large purchase or organizing a family meeting. But in the world of multi-family offices, such requests are commonplace. Because of the wealth these families possess, their needs go beyond simply managing and growing assets. The family office is in essence an extension of the family.   

Focus 

Another difference is in the number of clients served. An RIA might have several hundred clients, while a multi-family office might handle up to 50. This is because multi-family offices work with multiple generations and branches of large and complex families.   

Longevity 

Finally, RIAs and multi-family offices differ in staffing and longevity. Because it serves several generations of a family, the multi-family office tends to work with a family over a longer period of time. And because its clients require more time and attention, multi-family offices have more employees. That generational context becomes important as the needs of the family shift over time. Children need to be educated. Successors must be prepared to assume responsibility for the family business. New investment opportunities present themselves.   

Family offices founded by successful first-generation entrepreneurs are accustomed to deal-making and are more aggressive in investing, with the goal of significant wealth generation. The modern family office is migrating toward private investment in both young and established businesses. In fact, family offices – which can make decisions and act on them quickly – are giving venture capitalists a run for their money (pun intended) when it comes to funding promising startups.    

Is a family office worth it?   

There’s a bit of “keeping up with the Joneses” pressure when wealthy families consider starting a family office. “My peers have a family office, so shouldn’t I have one, too?”   

Maybe. But it’s important to realize that wealth is just one of the factors to consider before starting a family office. And it’s not necessarily the deciding factor.   

Here are other factors to consider:   

Income  

Either from private investments or from a large liquid portfolio, sustainable income — after paying for all lifestyle needs — has to be high enough to pay the overhead of a family office. Neither the principal nor the family want to burn liquidity or depend on excessive market returns to pay for the family office.   

Diversity of holdings 

If a person’s income derives from only one or two sources, such as the family business or private investment, a wealth management firm should be enough. But if there are several businesses in play, such as successful serial entrepreneurial enterprises, more help might be required to handle the due diligence these activities require.   

Goals and needs of the family 

An ultra-high net worth individual with no heirs, even if income and diversity meet the threshold for a family office, probably won’t need one. Regular advisors – attorneys, wealth managers and CPAs – can help with tasks like succession planning. But if there are siblings, spouses (ex and current), children and philanthropic goals involved, the calculus for meeting all of their needs becomes more complex. This is where family governance comes into play, as well as the willingness of the principal to establish and maintain a family office.   

The costs and fees associated with a family office can quickly add up. Is there a physical office? That will mean real estate costs. A good chief executive officer will command a salary of $500,000 to $800,000. Specialists like CFOs, investment professionals and attorneys will have six-figure salaries as well. Throw in risk management, reporting systems, administration, insurance, travel expenses and outside legal services, and you are soon approaching millions in expenses.   

A family with $250 million in assets that pays a fee of 0.7%, which is an average amount, for a family office is forking over nearly $1.8 million for the privilege of having a family office.   

That’s why many high net worth and ultra-high net worth families and individuals turn to a multi-family office, which can operate at scale, provide most of those services for less money, and give access to a broader array of services.   

Ready for the next steps?   

Anyone who feels ready to explore establishing a multi-family office will want to identify a wealth management firm that understands the complexities of managing substantial wealth and can provide the professional advisors required to execute a multi-generational wealth strategy. It also should appreciate how much time these activities require and how valuable the principal’s time is.   

Look for one that offers:   

• Multi-generational wealth and investment strategies   
• Tax planning   
• Trust and estate planning   
• Private banking   
• Risk management advice   
• Philanthropic planning   
• Business consultation   
• And the all-important guidance on family governance   

To learn more about family offices and how to start one, contact Cope Corrales, whose two principals, Joseph Cope and Luis Corrales, make it their mission to build a better future for your family. Reach them at 888-336-8402.