What is a family office? A Family Office Defined
Family offices are entities established by wealthy families to manage their money and provide investment management, tax, and estate planning and similar services.
A family office is a private company that manages investments and trusts for a single wealthy family. The company’s financial capital is the family’s own wealth, often accumulated over many family generations. Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million to operate, so the family’s net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members.
Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients. The Dodd-Frank Act removes that exemption to enable the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.
The SEC is proposing to define a family office as any firm that:
- Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members.
- Is wholly owned and controlled by family members.
- Does not hold itself out to the public as an investment adviser
- Offers comprehensive financial oversight of all liquid financial assets.
- Offers daily management of all illiquid assets, such as real estate.
- Can administer and manage the entire estate with little to no supervision.
- Charges a flat monthly fee for all family office services.
- Offers advice and investment management free from conflicts of interest and will not sell products.
- Offers a comprehensive monthly report of all estate activity for no additional fee.
- Can offer products and services outside the scope of a family office.
- Does not directly manage or administer illiquid assets in the estate.
- Has a staff that will monitor the estate and report into the family trustee with any irregularities.
- Provides basic administrative functions, such as bookkeeping and mail sorting.
- May have an office inside a family member’s home.
Modern vs. Traditional Family Office
A traditional family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. Typically, these organizations employ staff to manage investments, taxes, philanthropic giving, trusts, and legal matters. The stafff may not directly manage the investments, but instead hire portfolio managers like Shell Capital Management, LLC. The purpose of the family office is to effectively transfer established wealth across generations. The family office invests the family’s money, manages all of the family’s assets, and disburses payments to family members as required. Some families who have a family office may establish a separate entity for investment management and even have it registered as an investment advisor to offer it’s portfolio management to other families.
The office itself either is, or operates just like, a corporation (often, a limited liability company, or LLC), with a president, CFO, CIO, etc. and a support staff. The officers are compensated as per an arrangement with the family, usually with overrides based on the profits or capital gains generated by the office. Often, family offices are built around core assets that are professionally managed. In addition, a more aggressive and well-capitalized office may be engaged in private equity placement, venture capital opportunities, and real estate development. Many family offices turn to alternative investment programs like hedge funds for alignment of interest based on risk and return assessment goals.
Modern family offices are typically separated into three classes:
Class A Family Offices are operated by an independent company that receives direct oversight from a family trustee or administrator.
Class B Family Offices are operated by a bank, law firm, or accountant firm. A typical Class B family office:
Class C Family Offices are operated by the family with the assistance of a small support staff. A typical Class C family office:
Establishing a family office, what is a family office, family office management.
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