A Family Office is an entity specifically focused on managing a family’s wealth and / or other personal affairs.
A family office is typically responsible for performing the following services (and more):
- Investment advisory and investment management
- Administrative/financial support
- Personal assistant/concierge services
- Vehicle for family governance and education of younger generations
Family offices are generally planning-driven, have investment portfolios that are highly customized, and oversee an extensive menu of services that are performed in-house or via outsourced suppliers.
Family offices are often operating on a much longer timeline than traditional investors. Family offices are often planning and managing for multiple generations. As a result, holding periods can be much longer, especially if an asset is generating cash flow that is being remitted to the principal and their family.
The family office entity is often a “chief advisor” to the family that provides personalized service, technical expertise, and day to day management of financial and lifestyle matters.
There are generally 3 types of family office structures: Single family office (SFO); Multi-family office (MFO); Hybrid family office.
Single Family Office (SFO)
A single family office is an entity that manages wealth and/or other personal affairs for a single affluent individual or family.
The Dodd-Frank Wall Street Reform and Consumer Protection Act specifically defined “family office” and excluded applicable family offices from registering as an investment adviser under the Investment Advisers Act of 1940. This is a tremendous relief to those family offices who are excluded from the regulations.
A single family office typically will have a dedicated full-time team. Staffing sizes range from a few to more than a dozen professionals. A Chief Executive Officer, Chief Investment Officer and a Chief Operating Officer are 3 roles often utilized. The annual dedicated staffing expense is typically higher than $1mm and thus single family offices are most frequently set up for families with more than $100mm in assets.
Multi-Family Office (MFO):
A specialized firm offering a suite of single family office type services to multiple individual families.
Many multi-family offices evolved out of single-family offices and still include the founding families as clients.
A true multi-family office is one capable of delivering “single-family office service” at scale, and at a lower than SFO cost through combining resources for efficiency.
A true multi-family office is also free of conflicts of interest. The only way a firm can act in an independent advisory role is if they are completely disconnected economically from the provision of financial products and services.
Many MFOs also offer a menu of “concierge” or lifestyle management services. In effect, the MFO serves as the “keeper” of any aspect of the client’s life that entails financial transactions.
In addition to a core investment offer many MFOs have an Outsourced CIO (OCIO) offer to provide investment advice to SFOs. Under these services, the MFO does not have assets under management but instead advises the SFO on how to invest—often for a flat fee rather than for an asset-based fee.
With the convergence of the SFO and MFO models, we see this trend continuing. More SFOs will look to hire internal professionals focused on one type of investing—either public or private markets—and will hire an outsourced CIO for the other. With the challenge and cost of finding good talent, we see more SFO professionals focused on their area of experience.
Hybrid Family Office
The hybrid family office is the fastest growing solution. Hybrid means some of the responsibilities are performed by the family, and others are outsourced to MFOs and other service providers. Each family chooses to perform the functions that they believe are best managed directly based on the existing skillset and staffing, and the balance is outsourced.
A hybrid fee schedule is also typically employed and consists of an asset-based fee for investment management + an individual line-item fee schedule for other services chosen by the family.
Hybrid Example: $50mm family that still runs a closely held business. A multi-family office is hired to manage the various investments, handles any investment related communication between all family members and consults with the family on any property purchases they plan on making for the business. The multi-family office also coordinates between the family’s pre-existing estate planning attorney and accounting/tax advisors. The family also outsources a selection of lifestyle services to the multi-family office in order to free up company resources and increase privacy. However, the family still relies on their own company staff for many sensitive and private matters.
When setting up a Hybrid Family office, the first step is to determine what functions will be performed in house, and what will be outsourced.
Hybrid family offices have become popular as they are the ultimate customized setup that is designed by each individual family. This allows each family to leverage their strengths and outsource the functions where resources are thin or additional expertise is desired.
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