The Family Office: What the Heck Is It and Why Would I Want One?
This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.
I have been in and around family offices for over 30 years. Frankly, I am still not sure what they are.
At best, the term “family office” is amorphous. So is its history. No one knows exactly when or how, but in Europe, the first family offices started in the 15th and 16th centuries just after the Crusades with land ownership being the main store of value being managed. By contrast, the original U.S. family offices were created by wealthy merchants in the 19th century who hired trusted advisors to oversee their wealth and, by extension, their families while they traveled. The concept grew and by the early 20th century families like Rockefeller, Phipps, and Pitcairn started their own offices to manage the family fortune for generations to come. Today, many offices are started by those in technology and finance. The fact is, then as now, no two offices are alike.
Since I like to simplify, I like to think of family offices as existing to take care of the “business of the family” rather than the “family business.” It is a subtle, yet crucial difference.
In its simplest and most comprehensive sense, a family office is an organization or group of organizations which provide planning, compliance, and administrative services to one or more generations of a family. These services are designed to preserve, enhance, and grow the already attained wealth of the family. Importantly, the family office is not an operating company that creates wealth; it is a vehicle to manage and administer family wealth for current and future generations. To the extent that a family office is involved with managing money for its clients, certain registration and compliance rules apply; these are beyond the scope of today’s discussion.
Ok, so I guess I DO know what a family office is!
These days, most family offices are started after the liquidation of a family operating business resulting in a large infusion of liquid capital to the family unit. The patriarch/matriarch is often not as interested in “running the money” as they were in “running the family business” and the hiring of outside advisors and delegation of control often occurs.
There are two basic types of family offices, the single-family office (SFO’s) and the multi-family office (MFO’s). Generally speaking, SFO’s are not economically viable unless there is a truly substantial amount of wealth, say $100 million or more. As in days of yore, these offices come in a wide variety of flavors and can be as simple as a single employee organizing the multiple members of the family to full-fledged enterprises with a CEO, CIO, accountants, bookkeepers, and other professionals on staff at the beck and call of the family members. MFO’s serve more than one family and may be private enterprises, combined to share infrastructure costs or may be public, commercial vendors organized around the wealth management model. We tend to think of MFO’s being housed in private banks and money management firms.
The third type of family office is actually a variation on the theme of the MFO. It is what I like to call the virtual family office (VFO). In a VFO, independent high end service providers such as money managers, accountants, attorneys and bankers join forces to form teams to act as family offices without the family having to make the substantial investment required of an SFO. The virtual family office also has an advantage over a traditional MFO in that the services are not limited to the offerings on the menu of the MFO.
Family offices can also be divided into three classes, with overlap of course, as follows:
- Class A – Family Office Companies
- Provide comprehensive financial oversight and estate management
- Often charge a flat monthly fee
- Advice is objective; report monthly to clients
- Class B – Financial Services offered by lawyers, CPA’s and banks
- Provide investment advice for a fee which may or may not be free from conflicts of interest
- Can offer products and services outside the normal scope of a family office
- Do not generally directly manage or administer illiquid assets in an estate.
- Class C – Basic Estate Services
- Monitors the estate and reports irregularities to the family or trustee
- Provides basic administrative services such as bookkeeping and mail sorting
- Generally run directly by the family
Once the province of the mega-wealthy, the family office has morphed into a concept from which a much wider group of high net worth families can benefit. Traditional accounting, legal, and investment management relationships have often evolved to include related and much-needed services that go far beyond the scope of the traditional relationship. As one’s family wealth grows, so does the need for an integrated and comprehensive approach to managing the “business of the family.”