What is a Family Office?

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We provide investment management for family offices and wealth managers and in fact, one of my operating companies also serves as my own family office. So, we comment about “family office” a lot. People often ask: “What is a family office?”.

The short answer is a family office is a business entity, an operating company, that handles the personal affairs of a person or family. Rather than just paying for personal services like investment management, tax planning, estate planning and management, or house maintenance, etc. from a personal checkbook, a family office is established as a business entity (operating company), like a Limited Liability Company or Limited Partnership and that “business” manages the affairs of the family. It’s mostly useful for families of substantial wealth: maybe $5 million or more of personal assets.

For example, maybe the family owns multiple homes in different locations, a boat kept at a marina out of town, and maybe a plane. To maintain these assets and keep them safe, people must be employed, etc.

A common example of a family forming a family office is selling a business or medical practice. Often the owner of the business had an executive assistant who helped the family handle their personal affairs, too. When the business is sold, they have to decided what to do in their “new” business called “retirement”. The business owner may form a family office to have a formal structure for handling these things. For example, they may hire that executive assistant to keep helping them but focus exclusively on their personal assets. The business owner now has cash from the sale of the business to invest. The family office may hire a “Chief Investment Officer” or outsource an experienced one to manage the new investment capital to provide income to fund their new found lifestyle. As noted in How a Family Office Selects an Investment Manager a family office is usually more concerned about actively managing investment risk to maintain their capital first, then produce income and grow the capital base without large losses along the way. They usually want to keep what they earned as a first priority, so they hire experienced managers with a proven track record of compounding capital positively over time, while controlling downside loss. It’s all about putting the structure in place so the family can enjoy their freedom to do the things they love, by limiting the headache of dealing with the things they don’t.

We work with these issues all the time at Shell Capital. If you have any questions or want to understand how we do it, contact me.

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