Modern day family offices began with such industrialists as John D. Rockefeller, Sr. In Ron Chernow’s book, Titan
, he discusses Rockefeller’s appointment of a family office leader:
Worn down by masses of people clamoring for his money, Rockefeller knew that he now needed a larger and more efficient method for disposing of his fortune. Without it, he would lapse into the slipshod amateurism that he detested. Dr. Strong and Dr. Harper had planted a vision of a large project in his mind, but it would require the careful tending of a lapsed Baptist minister named Frederick T. Gates to bring this seed to glorious life.
Many family offices have been created as a result of the post-World War II entrepreneurs who initially built successful companies and are now retiring and/or selling those organizations.
Some family offices help serve the continued operations of these family businesses and the wealth and outside assets they have generated. Other family offices help fulfill the defined post-monetization goals of these wealth creators and their successors through the growth and utilization of the legacy wealth. These family businesses, and the wealth they have created, have been significant drivers in the expansion of family offices since 1990.
The number of individuals worldwide with $30 million of liquid assets to invest rose to 103,000 in 2010, according to Bloomberg. This group controls $15 trillion of capital.
Estimates show that trillions of dollars will pass from our current generation to the next generation by the year 2050.
The number of multi-family offices has doubled in the past 10 years, according to Family Wealth Alliance. That growth is expected to continue with high-quality strategic plans providing significant value to the process of growing and transferring wealth.
Family wealth management is expected to grow more and more complex due to the variety of investment alternatives, ever-changing tax and asset protection laws, growing philanthropic needs and all of the seemingly endless regulations that touch this industry.
As an example, through the Dodd-Frank Act the SEC has defined a “Family Office” exemption from the requirements to become a Registered Investment Advisor. This brings more stringent requirements to family offices and the families they serve, and is an example of the need to monitor changes in the regulatory environment.
Another example involves the need for additional due diligence assistance. As families diversify portfolios they will seek additional asset classes, money managers and custodians, often involving international investing and a variety of legal ownership situations. In fact, family offices should seek a greater level of due diligence when pursuing returns through country-specific direct investments such as real estate or private equity, according to the CCC Alliance.
In addition to expanding monetary complications, many family offices will continue to address the psychological side of family wealth and the related educational process. As new studies are conducted in this area, the quantity and quality of written materials and teams of advisors also is expected to grow.
Our Family Office Industry Group has positioned itself to directly (through services) or indirectly (through the selection and monitoring of other service providers) assist clients with all of their family office opportunities and challenges. Through that process, we will fulfill our mission of “providing trusted legal insight and service required to ensure that family offices succeed and long endure.”
Types of Family Offices
Single Family Office (SFO)
An SFO is normally structured as a separate operating entity, generally a Limited Liability Company, and operates as a business that employs staff to manage investments, taxes, philanthropic giving, trusts and legal matters for a family with significant wealth.
Some SFOs are involved in private equity, venture capital, real estate development and hedge funds. There are about 2,500 – 3,000 family offices in the U.S. today, according to a 2010 Family Office Exchange publication.
Multi-Client Family Office (MFO)
An MFO is similar to an SFO; however, the organization serves more than one family. MFOs are generally established in one of the following ways:
An SFO expands to assist additional clients or merges with another SFO.
The MFO is established by professional service providers such as investment, tax or legal advisors.
An existing financial institution, most often a bank or brokerage firm, creates an MFO subsidiary or division.
Embedded Family Office
“Embedded” in the family operating entity, an embedded family office is generally an extension of the family business. One or more departments and/or individuals within the family business manage or assist in areas that would typically be handled by a family office. The company’s chief financial officer or other staff assist with or handle family investments, estate planning, charitable giving, tax and related functions.
Virtual Family Office
A Virtual Family Office exists when a wealth creator formalizes a structure and process that links a team of outside advisors (usually including a legal advisor, accounting and tax advisor, lead investment advisor, insurance/risk management advisor and oftentimes a private banking advisor) to help set and achieve the family’s wealth-related goals.