While there may be a community of families and professionals with some common interests, we make a mistake falling into an easy trap when we refer to a so-called family office “market” or “industry”. There is no such monolith; there is no “market”; at least not yet.
While this community has some economic aspects of a market there are many other identifiers and behaviors that are entirely unmarket-like; some that are even economically perverse. As such, it might be worth considering a taxonomy or classification system for family offices.
I’ll proffer three core divisions:
A first primary division is economic orientation. Many (I would suggest most) family offices exist to serve a family. In a manner, they reflect economic characteristics more like a not-for-profit entity. Other family offices (I would suggest a minority) are constructed to both serve a family and have systematically created incentives for family members and non-family employees that are performance based. They develop a dramatically different cultural anthropology where strategy, tactics, and organizational structure reflect choices based on some conscious form of marginal utility and other more predictable economic behaviors.
A sub-set of the economic orientation division, is the existence of an operating business; with very few exceptions, the source of nearly all great wealth. The mere existence of an operating business creates a different economic orientation but it also introduces the characteristic of illiquidity which effects the family office’s investment orientation. A secondary sub-set of the operating business division might be the degree to which the business interest has been liquefied and whether or not the family retains a control or majority interest.
Of course, a long recognized classification of family offices is the generation of the wealth. The founder patriarchal/matriarchal generation demonstrates many behavioral motivations that are quite different from future generations. G1 is often entrepreneurial; future generations have tended to be less entrepreneurial, however, my friend Steve McCarthy of KCG Capital asserts “many families are hankering to reinvent the entrepreneurial gene within.” There is much literature on the G1, G2, G3, etc. continuum to add anything new in this short commentary but the above assertion by Steve McCarthy causes one to pause and observe that perhaps we’ve reached a tipping point where we are collectively changing family office behaviors and effectively disintermediating the “shirtsleeves to shirtsleeves” depletion syndrome.
A last major division is the investment orientation; largely, the inherent basis for the family office. Nearly all family offices have some form of investment delivery – in house, co-sourced, or out-sourced. This is a fertile and dynamic area where patterns and trends are shifting, particularly since the 2007-2008 tumult where families came to an acceptance that investment management due diligence and research had outstripped their internal capacity. Whatever the platform of investment delivery, the family office’s orientation tends either toward stewardship/preservation (often simply managing the Malthusian effects on the SFO’s economic sustainability in outer generations) or growth/maximization.
Of course, the investment orientation is correlated to the economic orientation of the family and the generation of the family so these three core divisions can be viewed as interdependent.