By Mark Barnicutt on February 4, 2022
This blog will be considered 1 of a 3-Part series pertaining to Family Offices.
Background:
The term, ‘Family Office’, has become increasingly used within the wealth management industry in recent years. Unfortunately, there are many definitions of what a Family Office is, and also many wealth management firms who now seem to be using the term as a marketing tool to attract affluent family clients. As a result, all of this is causing confusion as to what a Family Office is actually all about.
Having spent over three decades in the wealth management industry, and almost twenty years now researching & working in the family office segment, I wanted to write an article that hopefully brings clarity to the true meaning of ‘family office’, what forms of family offices exist and what type of family office HighView has successfully utilized for more than a decade in helping affluent families steward their hard-earned wealth.
What’s A Family Office?
Affluent families often face a myriad of challenges that come with wealth, including:
- Asset management
- Tax and estate planning
- Family wealth succession
- Business succession
- Setting and funding philanthropic goals
- Finding the time to manage these activities themselves or identifying trusted advisors who can.
As a result, rather than managing their financial affairs on their own, many affluent families hire a group of practicing professionals including lawyers, accountants, investment advisors, family coaches, and other consultants to do it for them, through some form of ‘family office’ structure.
One of the best definitions of a ‘Family Office’ that I’ve encountered is from the Family Office Exchange, which is the world’s largest peer-to-peer network for ultra-wealthy families and their family offices, as well as being a leading authority on matters related to legacy wealth management.
“A Family Office is the organization that is created, often after the sale of a family business or realization of significant liquidity, to support the financial needs of a specific family group. The goals and needs of the family shape the office, making each office unique in their approach to life and wealth management.”
What Are The Traditional Family Office Options?
There are historically two traditional types of family office businesses:
- The Single Family Office (SFO):
Many families with significant wealth form their own Single Family Offices to fulfill the majority of their wealth management needs. These are usually managed and staffed by accountants and/or legal professionals as well as select investment professionals. As a result, an SFO is essentially a mini-wealth management business with a single owner and a single client – ‘the family’.
The advantage to this SFO structure is that a single family will have full ownership and control of the family office business. The disadvantages to an SFO are typically the ability to attract and retain top talent who works for the family office business, having to manage the people & operations of a family office business combined with the generally high fixed costs (ie: mostly employee compensation) associated with operating this business.
- The Multi-Family Office (MFO):
Given the disadvantages of an SFO structure, a Multi-Family Office (MFO) structure can be formed in which two or more families effectively ‘combine’ their businesses so as to share the costs of operating a Family Office, thus reducing the cost borne by each family individually. This alternative poses the same staffing and remuneration issues associated with maintaining a successful SFO. Furthermore, getting participating families to agree on costs and staff selection as well as structuring the MFO to reflect the unique needs of each family can be problematic.
As these two traditional forms of family offices are effectively mini-wealth management businesses, they require a certain minimum level of investment assets which generate a sufficient level of revenue via investment returns to cover the family office operating costs as well as the income requirements of the family members. For this reason, these traditional family offices are only self-sustaining with investable assets of at least $100 – $200 Million.
Stay tuned for the Part 2 blog pertaining to the Services of Family Offices.
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- Future of Family Wealth Preservation: Virtual Family Offices - September 13, 2023
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