Which of these should be designated a Family Office?
- Son that manages the investment portfolio for his family, including his mother and sister?
- Patriarch that provides financial, investment and tax services to three branches of his family?
- Hedge fund manager hired by a family to source and vet private investments for the family LLC?
- Chief operating officer of a recently sold family business asked to help find an investment advisor?
- Assistant to an individual with $30 million who is hired to pay bills and assist with day-to-day finances?
- Wealth management firm that provides investment, banking and planning services to a family?
Depending on how you define a Family Office, all or none of the above might be considered one. In an industry defined by the putrid slogan “if you’ve seen one Family Office…” how can you create uniformly applied parameters? Certainly you have to create a range of variables, add flexibility in application and allow for a serious margin of error. Or, as often applied, make broad assumptions (e.g., all individuals above $500 million have a Family Office).
The numbers are all over the place. Campden Research recently estimated 3,100 North American Family Offices (7.300 worldwide), Wealthbriefing and Highworth Research recently identified 2,000 SFOs in the United States (4,000 worldwide), and FOX and Ernst & Young have estimated over 10,000.
“I know it when I see it,” the paraphrased statement by Supreme Court Justice Potter Stewart comes to mind. But if you want to take an accurate count of how many Family Offices your firm serves or calculate the number of offices in a particular area, you would need IBM’s Watson or perhaps an abacus.
A starting point in defining a Family Office might be the employment of at least one individual by a family to represent them financially. This breaks down quickly when a Family Office is run by family with no one from the outside or perhaps when a Family Office is embedded in an operating company. Further, must the employee handle “financial” matters rather than education, administration, etc.? Does level of wealth matter, breadth of responsibilities, number of employees, formality of structure?
Adding to the conundrum, the IRS does not even recognize Family Offices. Families file tax returns by entity (Trust, LLC, LP, Corp, etc.). However, the SEC put Family Offices on the map in 2011 by creating the Family Office Exception in the Dodd-Frank legislation. In fact, the SEC gave us a terrific definition:
“Family Offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services.”
Further, Dodd-Frank repealed the 15-client exemption (allowing the SEC to regulate hedge fund and other private fund advisors) and gave Family Offices an exemption from filing with the SEC. If the Family Office only provides investment advice to “family clients”, is wholly owned by the family, and does not hold itself out to the public as an investment advisor, it is exempt from filing. This change resulted in many hedge funds shutting down and converting to Family Offices to take advantage of the freedom from the SEC.
If that’s not reason enough to create a Family Office, let’s briefly ponder some other reasons a family might consider in deciding whether to form an office.
Reasons to be, or not to be a Family Office:
- To organize. Whether a single family or multiple branches, a Family Office is a splendid way to organize. The family coming together to make coordinated decisions and agreeing to overall structure can lead to more efficient outcomes.
- To hire. Families often lack the expertise to do everything that will lead them to financial success across generations. From portfolio management, to cash/debt optimization, to general counseling and administration, a family can benefit from employed expertise.
- To manage. Wealth can be overwhelming. The right structure and team can take over the day-to-day responsibilities for an entire family. Management could include general administration, risk management, guiding the philanthropic activities, etc.
- To pool. A family with multiple branches may lack the scale to organize, hire or manage dedicated investment professionals of their own. But together, when resources are pooled, alternatives increase greatly. From shared costs, to lower fees, to greater access, pooling is a terrific advantage.
- To govern. Great resources bring great responsibility. Families should seek common rules, guidelines, mission and culture. A well-defined Family Office improves communication, provides a framework for better family dynamics, and can define legacy and social impact. With proper governance, families stand a better chance of remaining cohesive through the trials of time.
These are all great reasons and oftentimes many or all will apply to a family of significant wealth. But the above comes at a cost. In fact, except for the wealthiest of families, the cost is generally higher than what can be found elsewhere in private banks, RIAs, and multifamily offices. This begs the question of why build when you can buy? It is a question of trade-offs, and many families ponder these issues.
Since the Vanderbilt and the Rockefeller Family Offices were established in the 1800s, families across the globe have organized, hired, managed, pooled and governed to ensure a lifestyle, legacy and efficiency that made sense for the family. Regardless of the number or the name, Family Offices continue to grow because they add value to the family through cohesion, efficiency and control.
Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank is the banking affiliate of Wells Fargo & Company.