Family office

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Chart of family office services

A family office or single family office (SFO) is a private company that manages investments and trusts for a single family.[1] The company's financial capital is the family's own wealth, often accumulated over many family generations. Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning.[2] A family office can cost over $1 million to operate, so the family's net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members.[3]

More recently the term "family office" or multi family office is used to refer primarily to financial services for relatively wealthy families.[4]

Traditional and modern usage[edit]

A traditional family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. Typically, these organizations employ staff to manage investments, taxes, philanthropic activities, trusts, and legal matters. The purpose of the family office is to effectively transfer established wealth across generations. The family office invests the family's money, manages all of the family's assets, and disburses payments to family members as required.

The office itself either is, or operates just like, a corporation (often, a limited liability company, or LLC), with a president, CFO, CIO, etc. and a support staff. The officers are compensated per their arrangement with the family, usually with overrides based on the profits or capital gains generated by the office. Often, family offices are built around core assets that are professionally managed. In addition, a more aggressive and well-capitalized office may be engaged in private equity placement, venture capital opportunities, and real estate development. Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals.[5]

Modern family offices[edit]

Modern family offices are typically separated into three classes:[6]

Class A Family Offices provide estate and financial services and typically are operated by an independent company that receives direct oversight from a family trustee or administrator. A typical Class A family office:

  • Offers comprehensive financial oversight of all liquid financial assets.
  • Offers daily management of all illiquid assets, such as real estate.
  • Can administer and manage the entire estate with little to no supervision.
  • Charges a flat monthly fee for all family office services.
  • Offers advice free from conflicts of interest and will not sell products.
  • Offers a comprehensive monthly report of all estate activity for no additional fee.

Class B Family Offices focus on providing financial services and are typically operated by a bank, law firm, or accountant firm. A typical Class B family office:

  • Offers investment advice for a fee.
  • Can offer products and services outside the scope of a family office.
  • Does not directly manage or administer illiquid assets in the estate.

Class C Family Offices focus on providing estate services and are typically operated by the family with the assistance of a small support staff. A typical Class C family office:

  • Has a staff that will monitor the estate and report into the family trustee with any irregularities.
  • Provides basic administrative functions, such as bookkeeping and mail sorting.
  • May have an office inside a family member's home.

U.S. law[edit]

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an organized effort was undertaken by single family offices nationwide led by the Private Investor Coalition that successfully convinced Congress to exempt SFO's meeting certain criteria from the definition of investment adviser under the Investment Advisers Act of 1940 (previously, such family offices were deemed to be investment advisers and relied on the "less than 15 clients" rule to avoid registration under the Act, a rule that was eliminated under Dodd-Frank). The Securities and Exchange Commission (SEC) promulgated the final "family office rules" on June 22, 2011.[7]

Notes and references[edit]

  1. ^ Douglas, Craig M.; Todd Wollack (2007-06-08). "Case highlights family office risk". Boston Business Journal. Retrieved 2007-06-27. 
  2. ^ Beyer, Charlotte B., "Family Offices in America - Why the Bloom is off the Rose", The Journal of Private Portfolio Management, Fall 1999
  3. ^ Frank, Robert (2004-06-10). "How to Bank Like a Billionaire". The Wall Street Journal (Dow Jones). Retrieved 2007-06-27. 
  4. ^ Wakem, Maria (2005-03-22). "Family Matters". wallstreetandtech.com. Retrieved 2007-06-27. 
  5. ^ Opalesque (30 April 2010). "Opalesque BACKSTAGE Video-Terry Beneke: What attracts family offices to alternative investments.". 
  6. ^ Gardner, Scott, 2010 Article: "Family Offices Abound"
  7. ^ http://www.sec.gov/rules/final/2011/ia-3220.pdf

See also[edit]