A family office is a private wealth management advisory firm that serves high-net-worth families and individuals. It provides financial and personal services to manage their wealth and investments, including asset allocation, tax planning, estate planning, philanthropy, and, often, lifestyle management services such as travel arrangements, concierge services, and private staff hiring.
Wealthy families typically set up family offices with the purpose of preserving and growing their wealth for future generations. They can be structured as a single-family office, serving one family exclusively, or as a multi-family office, serving multiple families. Family offices can also be established as independent entities or as part of a larger financial institution.
A team of financial professionals with expertise in various areas such as investment management, accounting, law, and taxation often staffs family offices. Their primary focus is to provide customised solutions and strategies that align with the goals and values of the family they serve.
Types of family offices
- Single-family office (SFO): An SFO is a family office that serves a single wealthy family. It is typically established when a family has significant wealth and wants complete control over their financial affairs. SFOs offer highly customised services tailored to the family’s specific needs and preferences. The minimum expected assets under management (AUM) to set up an SFO can vary widely depending on the needs and preferences of the family. Generally, experts recommend a minimum AUM of at least $100 million to establish an SFO.
- Multi-family office (MFO): An MFO is a family office that serves multiple wealthy families. It is typically established by a financial institution or a group of investors who want to pool their resources to access specialised services, lower costs, and benefit from economies of scale. MFOs offer a range of services, including investment management, estate planning, tax planning, and family governance. The minimum expected AUM to be part of an MFO can vary depending on the MFO’s requirements and the family’s needs. Generally, MFOs require a minimum AUM of at least $20 million to $50 million per family. Typically, the number of families constituting an MVO can range from two to a few dozen.
Responsibilities of family office
- Investment management: Family offices may manage the investment portfolios and assets of their clients, including stocks, bonds, real estate, and other types of investments.
- Financial planning: Family offices may develop and implement financial plans for their clients, including retirement planning, tax planning, and estate planning. They may work with attorneys, accountants, and other professionals towards this direction.
- Risk management: Family offices may manage the risks associated with the family’s investments and financial affairs. While managing the risk of investments is part of the investment management mandate, a range of risks associated with the family’s financial affairs might need special attention.
- Family governance: Family offices may provide family governance services to their clients, including facilitating family meetings, developing family constitutions, and helping to manage family dynamics and relationships.
- Philanthropy: Family offices may manage the family’s philanthropic efforts, including identifying charitable causes, developing grant-making strategies, and managing charitable trusts and foundations.
- Concierge services: Family offices may provide a range of concierge services to the clients, such as travel planning, event coordination, and personal shopping.
- Lifestyle management: Family offices may be responsible for managing the day-to-day lifestyle needs of their clients, such as overseeing household staff, managing property maintenance and repairs, and coordinating medical care.
- Education and training: Family offices may provide education and training to family members on a variety of financial and non-financial topics, such as investment management, philanthropy, family governance, and wealth preservation.
- Security and risk management: Family offices may manage security risks associated with their clients’ personal and financial assets, such as cyber threats, physical security, and travel risk management.
- Legacy planning: Family offices may assist their clients with legacy planning, helping to ensure that their clients’ values and goals are preserved for future generations. Legacy planning may include developing a family mission statement, creating a family foundation or trust, and preparing heirs for wealth management and family governance responsibilities.
History of family office
The family office concept can be traced back to the 19th century when wealthy families began establishing private offices to manage their financial affairs. These early family offices were often run by trusted family members or close associates and were focused primarily on managing investments, estates, and philanthropy.
The family office, as we know it today, began to emerge in the 20th century. In the early part of the century, family offices were typically set up by wealthy industrialists and entrepreneurs who had amassed significant fortunes through their businesses. These family offices were primarily focused on preserving and growing their wealth through prudent investment strategies.
In the post-World War II era, the number of wealthy families continued to grow, and the services offered by family offices began to expand.
In the 1980s and 1990s, the growth of the hedge fund industry and the rise of alternative investments led to an increase in the number of family offices. As a result, many wealthy families established family offices to manage their investments in these new asset classes.
Today, family offices continue to play a significant role in the wealth management industry. With the growth of global wealth and the increasing complexity of financial markets, the demand for family office services has never been greater. Family offices are now recognised as essential to the wealth management landscape, serving as trusted advisers to high-net-worth and ultra-high-net-worth individuals and families.
It is difficult to provide an exact number of family offices worldwide as many operate with high confidentiality and privacy. Nevertheless, according to some estimates, there may be tens of thousands of family offices worldwide, most of which are in the United States.
Advantages and disadvantages of family office over private banking service by a big firm
A family office has several advantages and disadvantages compared to using private banking services offered by a big firm.
- Customised services: A family office can provide more personalised and customised services tailored to the family’s specific needs. Private banking services offered by large firms may be more standardised and less flexible.
- Greater privacy: A family office can provide greater privacy and confidentiality for the family’s financial affairs.
- Complete control: With a family office, the family has full decision-making control over its assets and investments. In contrast, private banking services may involve the family delegating some decision-making control to the private banking service.
- More independence: A family office is typically independent of any financial institution or investment firm, which can provide greater independence and objectivity in making investment decisions.
- Higher costs: Setting up and operating a family office can be expensive, and the costs associated with managing investments and providing services can be higher than those of a private banking service.
- Limited resources: Even if a family office has more than $100 million to $200 million AUM, it can be considered a firm with limited resources, which could make it difficult to access the same range of investment opportunities and services as a larger financial institution.
- Limited expertise: Depending on the size and structure of the family office, there may be limited investment expertise and experience available, which could limit the range of investment opportunities and services offered.
- Greater responsibility: With a family office, the family has greater responsibility for employing and monitoring the apt wealth management professionals, which could require more time and effort on the part of family members.
Also, refer to the ‘Difference between wealth management and private banking‘ section in our An introduction to wealth management page.
Cost of running a single-family office
- Investment Personnel Costs: The biggest expense for an SFO is typically the personnel costs of its investment team. This expense is for paying salaries and bonuses to the investment management team that manages the family’s assets. The family office needs to fire a team of professionals with specialised expertise to manage the family’s wealth and provide customised services. The cost of personnel will depend on the size and structure of the SFO, but it can range from $1 million to $4 million annually.
- Investment Logistics Costs: These include other direct costs of managing the assets, such as expenses incurred to gather information, analyse the prospective investments, transaction costs, etc. Depending on the investment strategy, these can range from $200,000 to $1 million per year.
- Fund Fees: The SFO must pay fund fees to the fund issuer if the family office invests in such funds. The fund fees can range from 0.2% to 2% annually, depending on the investment strategy.
- Office Space and Equipment: The cost of renting or buying office space and equipping it with technology and other equipment can range from $200,000 to $0.5 million per year.
- Professional Fees: The SFO must hire legal, accounting, and other professional services, costing up to $500,000 annually.
- Other Administrative Expenses: Other administrative expenses, such as travel, insurance and administrative personnel, can range from $150,000 to $500,000 per year.
Overall, the total costs to set up and operate an SFO with $100 million in assets under management can range from $3 million to $9 million annually.
Family office and privacy
Family offices are generally private organisations that are not required to disclose information about their operations or clients. While some family offices may choose to share information about their services and clients, many do not advertise their services publicly and operate with a high level of confidentiality and privacy.
It’s important to note that the lack of public information on family offices is intentional and is designed to protect the privacy and confidentiality of the families and individuals they serve. The discretion and privacy offered by family offices are often crucial factors in their appeal to wealthy families who value personalised, customised services and greater control over their financial affairs.
- Limited public exposure: Family offices often operate with a low profile and limit their exposure to the public. This may include avoiding publicity or media attention, using unlisted phone numbers and addresses, and limiting their online presence.
- Non-disclosure agreements: Family offices may require employees, vendors, and other third parties to sign non-disclosure agreements to protect the confidentiality of client information.
- Restricted access: Family offices may restrict access to their offices.
- Segregated data: Multi-family offices may segregate client data and use separate systems and databases to ensure client information is not inadvertently disclosed or shared.
- Experienced staff: Family offices typically employ experienced and skilled professionals familiar with the complexities of managing the financial affairs of wealthy families. These professionals are often trained in privacy and confidentiality and understand the importance of protecting client information.
- An introduction to wealth management
- An introduction to discretionary investment management
- Financial advisers and discretionary investment management
- Managed Discretionary Account (MDA) structure
- Robo Advice for your Wealth Management
- Financial Adviser
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