Family office

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Chart of family office services

The term family office can refer to a family controlled investment group, and also the two major terms: single family office (SFO) or Multi-family office (MFO). The distinction is important since, despite the similar names, each provides a significantly different service. This article refers principally to single family offices, which are the predominant forms of family offices today. An 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 a year 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]

History[edit]

According to the New York Times the Rockefellers first pioneered family offices in the late 19th century. Family offices started gaining popularity in the 1980s, and since 2005, as the ranks of the super-rich grew to record proportions family offices swelled proportionately.[5]

Traditional and modern usage[edit]

A traditional single 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 Family Office Council, the membership group for single family offices, defines a single family office as "An SFO is a private organisation that manages the investments for a single wealthy family. The assets are the family’s own wealth, often accumulated over many family generations. In addition to investment management some 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."[6]

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. As profits are created, assets are deployed into investments. In addition, a more aggressive and well-capitalized office may be engaged in private equity and venture capital opportunities, as well as sponsoring hedge funds and owning large amounts of commercial real estate. Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals. Some famiy offices remain passive and just allocate funds to outside managers. [7]

Modern family offices[edit]

Defining the service proposition is not straightforward and a common phrase used by industry insiders is: "When you have seen one family office you have seen one family office". While some firms seek to distinguish themselves with unique offerings such as personality profiling of family members to support better alignment and communications for multi-generational wealth management.[8] Some professionals have created models to try and explain the types of family offices which exist and different levels of services offered. Scott Gardner, President of Sterling Wealth Management, separated into four classes:[9]

Class I 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 I 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 II Family Offices are also known as Virtual-Family Offices (VFO). A typical Class II family office:

  • Assists in the financial oversight of all liquid financial assets.
  • Assists in the daily management of all illiquid assets, such as real estate.
  • Assists in the administration of the family 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.

Class III Family Offices focus on providing financial services and are typically operated by a bank, law firm, or accountant firm. A typical Class III 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 IV 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 IV 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.

In 2016 single family offices are in a state of transition largely because the founding patriarch/matriarch is aging or deceased. The next generation often finds the costs to maintain the office prohibitive. New models are emerging, including the virtual family office.[10]

Tax avoidance[edit]

Family offices in the United States are politically active, making campaign contributions to many candidates and PACs on both sides of the aisle. They use sophisticated tax avoidance techniques which can reduce the tax burden, at least in the United States, considerably. The Private Investor Coalition, an association of family offices, lobbies the U.S. Securities and Exchange Commission for favorable rulings. Allies such as the Managed Funds Association, an association of hedge funds, actively lobby the United States Congress to preserve and expand provisions which allow tax avoidance. Some have argued that a reduction in agency funding as a result of the IRS targeting controversy has limited government efforts to examine the income tax returns of wealthy families, and entities controlled by them via the Global High Wealth Industry Group.[5] Some find that this stance blames the victims of IRS targeting. The counter-argument is that the fault lies squarely on the Obama administration, claiming that it created a culture that made the IRS feel comfortable targeting conservatives, which in turn led to funding reductions circa 2015.

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.[11]

See also[edit]

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. ^ a b Noam Scheiber and Patricia Cohen (December 29, 2015). "For the Wealthiest, a Private Tax System That Saves Them Billions The very richest are able to quietly shape tax policy that will allow them to shield billions in income.". The New York Times. Retrieved December 31, 2015. ...tax planning is a core function. 
  6. ^ "Defining 'Family Office'". Familyofficecouncil.com. 2013-09-15. Retrieved 2016-01-15. 
  7. ^ Opalesque (30 April 2010). "Opalesque BACKSTAGE Video-Terry Beneke: What attracts family offices to alternative investments.". 
  8. ^ Milburn, Robert (2008-12-16). "Mr. Freud in the Family Office - Penta Daily - Barrons.com". Blogs.barrons.com. Retrieved 2016-01-15. 
  9. ^ Gardner, Scott (2010-11-14). "Sterling Wealth Management - Family Offices Abound" (PDF). www.sterlingwealth.net. Scott Gardner, President. Retrieved 2016-01-15. 
  10. ^ McLaughlin, James H., Ultra-High-Net-Worth and Family Offices: Proscriptions and Prescriptions, IMCA Investments & Wealth Monitor, Jan/Feb 2016
  11. ^ "SECURITIES AND EXCHANGE COMMISSION : 17 CFR Part 275: [Release No. IA-3220; File No. S7-25-10]" (PDF). Sec.gov. Retrieved 2016-01-15.