What Is a Family Office, and Does Your Family Need One?
Do you have more questions about a family office? Set up a time to talk to one of our private wealth advisors, Josh McAlister, CFP®, RMA®, CPA:
When you achieve a certain level of wealth, managing it effectively becomes a demanding job – one that many of your peers have already outsourced to family offices.
But what is a family office, and at what point do you need one?
This article will answer those questions, along with others you may not have considered about how wealthy families grow their net worth across generations.
As you know, extreme wealth and extreme responsibilities go hand in hand. The higher your net worth, the greater your obligations.
Many of our clients are elite athletes, but, aside from earnings from professional sports, they also found businesses, invest in private equities, and create other streams of income.
They often come to us for investment advice – and they’re tired of coordinating with multiple advisors for investing, taxes, legal issues, and business questions.
What if these experts were all under the same roof, with a mandate to grow your assets, safeguard your legacy, and make your life easier?
That's the indispensable service a family office can provide. And there are several ways to benefit from this service that don’t involve building a private family office from scratch.
Read on to find out if a family office is right for you.
What Is a Family Office?
Let’s start with the basic questions: What are family offices, and how are they different from other wealth management firms?
A family office is a private wealth management advisory firm for wealthy clients. Family offices bring together an integrated team, so that all aspects of a family’s financial structure and wealth strategy are aligned.
The history of the family office goes back to the industrialists and business titans of the nineteenth and early twentieth century – names like Rockefeller, Carnegie, and Vanderbilt.
These families discovered that hiring their own expert staff to administer their wealth was more effective and cost-efficient than working with multiple big banks, legal offices, and accounting firms.
The early family offices ensured continuity of family businesses, invested in family trusts that grew to sustain multiple generations, and administered philanthropy on a massive scale.
The world’s wealthiest families still operate on this model. People like Bill Gates, Jeff Bezos, and Elon Musk have private family offices to manage and grow their wealth, which includes complex investments, businesses, trusts, charities, and lifestyle holdings.
They hire teams of experts working solely for their families to increase their net worth and establish the continuity required to sustain it across generations.
Because this model is so effective, it has proliferated along with the increasing number of ultra-high-net-worth families around the world.
Advisory firms like ours, called multi-family offices, provide the same service for wealthy clients and families who need it – but who don’t want the complexity and expense of setting up their own single-family office.
3 Pillars of a Family Office
A few fundamental principles informed the creation of the first family offices. These pillars still inform the work of family offices, setting them apart from traditional investment firms and financial advisors.
1. Independent Advice
The advice provided to the family from their staff of experts was always in the family's best interest. They could trust this was the case because the experts they hired worked for the family – instead of earning commissions from a bank or investment firm.
Having an independent staff also provided these family offices access to an unlimited diversity of investments. They were not limited to what a single investment company could sell them, and they had the ability to independently evaluate opportunities.
2. Integrated Strategy
The first family offices understood – regardless of how many businesses, individuals, trusts, and other entities were involved – that a family has one net worth and one effective tax rate. There are no isolated decisions and every decision impacts the family’s entire net worth and taxes.
The advice they needed was far beyond the capacity of any one professional advisor, therefore, they hired a well-coordinated, highly experienced team of professionals from tax, investment, insurance, estate, business, and legal disciplines.
3. Individualized Services
Lastly, these families were not interested in cookie-cutter options. They were not about to accept being placed into the programs that Wall Street recommends at a mass scale to the average family.
They wanted everything built specifically for them, with a unified strategy to achieve their vision for the family’s wealth and legacy.
Family Office Structures
Today, family offices exist in a variety of structures, providing broad-ranging financial services for one or more affluent families.
Family office services can include:
Tax strategy
Portfolio management
Generational wealth transfer
Financial planning
Charitable giving
Estate planning
Insurance and risk management
And more
According to Ernst & Young Global Limited, at least 10,000 single-family offices populate the world. And most of them formed within the past 15 years. This furious growth is due to the increase of wealth for the world’s wealthiest families. In fact, private family wealth is greater than private equity and venture capital combined.
At the same time, firms around the world have developed similar models to serve families who don’t need a dedicated family office of their own.
There are three standard types of family offices: a traditional family office, a multi-family office, and an outsourced family office. Let’s go over each one.
Traditional Family Office
A traditional family office begins when a wealthy founder creates a legal entity. Its purpose? Manage the family’s wealth. This arrangement is “traditional” because the first family offices served one family.
Within the family office is a staff of experts hired to safeguard the family’s wealth (while making smart investments to help grow it).
Every wealthy family has its own needs and objectives. That’s why each single-family office has its own identity.
Some families hire a small staff to focus on investing only. Others hire a larger staff who handles household and legal responsibilities, along with portfolio management.
Multi-family Office
A multi-family office is a firm that manages the finances for more than one family. With teams of in-house experts and robust networks, they tailor solutions to each family’s financial structure and plans for the future.
Besides managing investment portfolios, they facilitate private investments, advise and execute on tax strategy, assist with banking and credit, and create legacy plans.
Some multi-family offices also offer concierge services like managing properties and staff, making travel arrangements, paying bills, and more.
A multi-family office usually charges a percentage of each family’s assets under management, meaning the active investment portfolios. And because they work with multiple families, they typically cost less than a single-family office.
Outsourced Family Office
An outsourced family office is an office in name only. It’s not even a single organization. Instead, an outsourced family office is a collaborative effort amongst different professionals. A financial advisor manages the investment portfolio. An attorney controls the estate plan. A certified public accountant (CPA) crafts a tax strategy and handles bills.
Now, what makes an outsourced family office different from working with a financial advisor, attorney, and CPA to handle different responsibilities?
Well, under this arrangement, you authorize these professionals to communicate with each other and coordinate their efforts. You then select someone (usually the financial advisor or wealth manager) to coordinate and monitor communication between all parties. As a result, the wealth manager’s responsibilities expand beyond portfolio management and asset allocation.
Additional responsibilities may include:
Educating the family’s next generation
Coordinating family meetings
Scheduling philanthropy
An outsourced arrangement is usually less expensive than establishing a traditional single-family office. The drawback is less control and coordination.
What Does a Family Office Do?
A family office provides a variety of custom financial management services for the substantially wealthy. Family office services can range from managing investments to advising on charitable contributions. They might also manage household affairs, travel arrangements, and property.
They can offer such a wide range of services because they have a team of experts working together.
The purpose of a family office is to help a family expand wealth, while also preserving it for future generations.
Wealth Management and Legacy Planning
If you’re interested in creating generational wealth, a family office can help with that. They’ll identify and set up the best financial structures for your assets to preserve wealth for future generations.
A family office helps transfer liquid assets, such as stocks and bonds, from one generation to the next in the most tax-efficient, beneficial way. They also help transfer non-liquid assets, such as businesses and property, and ensure the right insurance strategies are in place to protect your wealth.
Family offices can help clarify your family’s legacy plans, and manage investments within trusts, foundations, and other structures to ensure you achieve your vision.
A family office can financially educate each new generation, preparing them for leadership. At times, a family office even acts as a mediator, resolving internal conflict within a family.
According to The Wall Street Journal:
“Besides providing investment advice, family offices can provide a benefit that is tough to quantify: fostering family harmony by creating better communication among relatives.”
Lifestyle Management
Some family offices provide services beyond managing their clients’ finances, such as managing aspects of their clients’ lifestyles. Think of these offerings as a personal concierge.
A family office may do the following:
Conduct background checks
Arrange home and travel security
Handle travel planning
Manage private aircraft
Hire domestic staff
Monitor payroll
On behalf of their clients, some family offices even pay all household bills.
Investment Management
A family office often handles all aspects of managing investments. Their service includes traditional portfolio management, but they typically have access to investment opportunities far beyond those available to retail investors.
Investment management services can include:
Stock and bond selection
Asset allocation
Venture capital
Hedge funds
Private equity
Commercial real estate
In short, a family office manages existing assets while acquiring new assets, looking for the best opportunities to grow the family’s wealth.
Now that we’ve covered what a family office is and what it does, you’re likely wondering if you need one. Let’s continue.
Do You Need a Family Office?
A family’s wealth may be too complex for one advisor to handle. No one is an expert in all aspects of finance. Indeed, there’s a limit to what one person can accomplish. But, a team of experts, with access to vast resources, has virtually no limits.
If your financial situation is complex and you’re not getting integrated advice that considers the whole picture of your net worth, a family office can help. It’s like having a Chief Financial Officer to safeguard and grow your family’s wealth.
A family office can offer:
A customized approach for managing your wealth
Financial education for your family members
Unbiased wealth-building advice from independent advisors
Protection from making wealth-compromising mistakes, such as reckless spending, inappropriate investments, poor tax planning, or inadequate insurance
Expert guidance for multi-generational wealth and business transfers
Neutral advice for resolving family conflicts
Philanthropic planning that suits your family’s wishes
Now you see why a family office is so potent for preserving and maximizing wealth.
Furthermore, the professionals who run family offices usually aren’t paid via commission, so they’re less likely to promote products that aren’t in their clients’ best interest.
This alone is a reason to choose a full-service family office to manage your portfolio over a Wall Street bank or brokerage.
Typically, a family office charges a percentage of their client’s active investment portfolios, which means they are incentivized to grow your net worth, not to sell you investment products.
Regarding net worth, how high should yours be before hiring a family office?
The Size of Your Wealth
If your net worth is at least $100 million, you could be a good candidate for establishing your own family office. If your net worth is at least $250 million, you’d be an even better candidate.
Multi-family offices have a lower threshold, for families with a net worth of at least $30 million.
Why does a single-family office require so much?
By definition, a family is employing a team of experts to work solely for their family, hence, the family will be solely responsible for all related expenses. The family will require best-in-class experts in their given fields.
Like any other company, the single-family office will need to offer competitive market compensation and incentives to attract and retain employees.
At a minimum, this integrated team of experts will consist of the following professionals:
Certified Private Wealth Advisor (CPWA)
Certified Financial Planner (CFP)
Chartered Financial Analyst (CFA)
Certified Public Accountant (CPA)
Attorney
The payroll and necessary expenses to operate a single-family office are estimated to be greater than $1 million annually.
The multi-family office model was created for families of substantial wealth who don’t have the net worth to justify their own single-family office and families who meet the net worth criteria but choose not to absorb the financial burden singlehandedly.
What families understood was they could share the cost of the integrated team while maintaining complete independence, which ensures advice is in each family's best interest and maintains the customized and individualized planning.
One surprising benefit of the multi-family office is the ability to leverage the shared best practices of other clients as they face similar complexities.
Before you hire a family office, though, you’ll first want to determine your family priorities.
Family Priorities
What exactly do you hope to achieve with a family office? What’s most important to you? What kind of legacy do you want to leave behind?
Do you want your children or other family members to be directly involved with family wealth management? Do you trust their expertise?
Or do you prefer to have a team of experts dedicated to preserving and growing your family’s assets?
After thinking about those questions, you can contact a family office with experienced wealth managers to discuss your specific situation.
Now, let’s discuss how to set up a family office.
How Do You Set Up a Family Office?
Here are five tips for setting up a family office structure to manage and grow your family’s net worth. These tips will help you choose the right team and make the process as smooth as possible.
Calculate Your Assets
Before setting up a family office, clarify the amount of capital you have.
You want to have enough assets that generate consistent income to comfortably cover all necessary expenses. If you want to establish your own single-family office, your family alone has to pay these expenses.
Does your investment income justify employing several full-time investment and accounting professionals with 6-figure salaries? If not, consider hiring an established multi-family office.
With a multi-family office, advisors serve more than one wealthy family. The result?
Highly customized professional management for a lot less money.
Multi-family offices typically have a minimum asset threshold for new clients, but it’s much more accessible than establishing a single-family office.
Determine Your Investment Vision
If you haven’t already, analyze your existing capital. Which assets are short-term? Which are long-term?
Also, what do you plan to do with your short-term assets? How are your long-term assets performing?
Note all your discoveries.
Furthermore, you want to document your family’s vision, goals, and mission. That way, you can establish a blueprint for future generations to follow.
Keep in mind that a wealth manager can help you establish your plan. More on that later.
Choose the Right Experts
The integrated team you choose for your family office should have the right designations and experience to professionally manage your family’s wealth. If not, you’re exposing yourself to unnecessary risks.
When choosing advisors, professional designations aren’t the only consideration. However, they are essential to ensure that certain standards of education, experience, and ethical behavior have been met.
These professionals should be on staff with the firm you hire:
CFP® (Certified Financial Planner) leading the planning team
CFA (Chartered Financial Analyst) leading the investment team
CPA (Certified Public Accountant) leading the tax team
CPWA® (Certified Private Wealth Advisor) for your generational wealth
Licensed Attorney advising on your legal needs
Above all, you want to hire experts who have advised clients with similar circumstances and goals. You’ll increase your chances of a productive family office relationship when your team has highly relevant experience.
Look for a team that specializes in the type of families they serve. For example, at AWM, we have advisory teams specializing in wealth management for professional athletes. Our advisors have direct experience in the NFL, MLB, and PGA, so they understand the unique risks and opportunities that impact an athlete's net worth in each sport.
When you’ve chosen an advisory team, you should consider having scheduled performance and operation reviews. That way, you can track if your family office is meeting all of your objectives. You’ll also be able to discover if you need to make any adjustments.
Involve the Next Generation
You need a dependable system that promotes successful intergenerational wealth transfers.
In other words, you want your family office to operate like a well-oiled machine. Generationally.
For this to happen, the present family leaders should meet with the younger members consistently. Each time, they can instill the family values and objectives. Doing so can prepare the younger generation for their future takeover.
Furthermore, the younger generation can establish a rapport with the family office advisors. This can, and should, happen long before they inherit significant assets and leadership roles. That’s how you build a foundation of trust amongst all parties.
So, make sure you involve the next generation. That way, they learn from engagement rather than instruction only. In fact, research proves that engagement accelerates the learning process.
It’s about thinking both short-term and long-term if you want future generations to preserve the wealth you’re building.
Get in Touch with an Experienced Wealth Management Family Office
An experienced wealth management team can help you tie all of the tips in this article together. They can help you set up a plan that best suits you and your family.
It’s almost impossible to see everything within your family office structure. Outside counsel, led by an independent wealth manager, can provide advice — backed by research, experience, and expertise.
So, we answered the question, “What is a family office?” But there’s far more you can learn from speaking to us about your situation.
If you would like to speak to an experienced wealth management family office, don’t hesitate to contact us.
