When we first think of a family office, we might think of wealthy financiers and industrialists, like J.P. Morgan and the Rockefellers from the 19th century and the management of their family empire to create a powerful and sustainable legacy. After all, when one is worth billions of dollars, having a dedicated family office becomes more of a necessity than an option to ensure that the collective family’s wealth is managed properly and sustainably from one generation to another.
We’ve come a long way since then, as various types of family offices have emerged. We have seen them grow in popularity as successful entrepreneurs and executives from Silicon Valley to Wall Street have amassed significant wealth.
So, what is a family office? Simplistically, it’s a separate legal entity that manages the comprehensive wealth and personal lifestyle needs of ultra-wealthy families and their future generations. Privacy and preserving the wealth and values of the family through multiple generations are of paramount importance. As families extend into the next generation and beyond, new challenges and complexities arise if the family tree grows disproportionately relative to the underlying family wealth. By design or default, certain family assets might not be liquid or able to be distributed, so a family office is one way to ensure better management of this shared pool of assets and to reduce intrafamily conflicts. But with the growing number of wealthy families, today’s family office concept has expanded beyond just serving the super wealthy.
Broadly, the most common office types are the single-family office (SFO) and multifamily office (MFO). The SFO only serves one family, with its multiple generations. And it’s generally for ultra-wealthy families who have assets in excess of $250 million with very complex lives that are often intertwined with family businesses. The MFO provides sophisticated professional and personalized management services to multiple families, who are usually not related, and have multimillion-dollar portfolios. Unlike an SFO, MFOs benefit from economies of scale and shared costs among many families.
Conceptually, today’s high-touch wealth-management model is an extension of the MFO structure as it seeks to provide wealthier families with customized solutions, specialized expertise, advanced planning and life management services at a more accessible cost.
Similar to the traditional SFO, an MFO takes the time to understand a family’s entire financial and personal situation, goals and preferences so they can tailor their services to the specific family’s needs. Many affluent families want a fully integrated and proactive wealth- and investment-management team. They also want to save time and simplify the management process by working with one office instead of multiple external service providers. Time is a valuable asset, and a family office allows its clients to focus more of their time on their family, business, philanthropy and other endeavors, as they streamline their wealth-management responsibilities.
MFOs and high-touch wealth-management firms tend to have the following characteristics:
- Breadth of services: They provide a wide range of services and typically manage their clients’ entire financial universe. They are also known for their comprehensive investment management, inclusive of private investments, and for their multigenerational estate-planning and wealth-transfer strategies. Other primary services include tax planning, cash management and bill paying, insurance and risk management, philanthropy and family governance and, of course, preparing financial reports.
- Experienced, professional team with diverse skill set: Based on the wide array of advice being provided to their clients, their professionals tend to have extensive knowledge in investments, financial planning, taxes, legal, estate planning, risk management, insurance, cash management, budgeting, philanthropy and lifestyle management. To the extent that in-house expertise is not available, a family office will normally have a preferred outsourced network of specialists.
- High-touch services: They tend to serve fewer clients, allowing more attention to each family. They also tend to offer a service team that understands the family dynamics well, maintains privacy, addresses issues quickly and is proactive in anticipating future matters. As part of their high-touch services, some family offices may offer personal concierge-type services, such as managing household staff, overseeing second homes and rental properties, and coordinating travel and medical needs, to name a few.
- Fees: Pricing models include hourly, fixed retainers and asset-based fees depending on the complexity and services being provided.
While many wealth management firms can and do offer some form of these services, a true MFO typically becomes much more involved in the day-to-day management of a family’s finances while offering the financial advice and resources a family might need to succeed for generations. Building long-term, trusting relationships that are attentive and flexible to their clients’ needs is a cornerstone to a family office’s success.
If you are considering family office services, take the time to do your research and make sure: the family office provides all the services you need and that your fee covers all of these services; the professionals working for you have years of experience and appropriate certifications; they are a registered investment adviser with a clean compliance record; you will receive comprehensive financial and performance reports on a timely basis; and you are comfortable with your primary adviser and service team. Bottom line, wealthier clients are attracted to family offices to help make their lives run more efficiently today while keeping a watchful eye on their future legacy.
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