Wealthy individuals find a family office the optimal way to manage the family fortune
By Don Wilkinson
DFW & Associates
A family office (FO) isn’t for everyone, but it is for folks like Oprah Winfrey, who recently entrusted her wealth of a reported $2 billion to a family office. This asset management concept has been shrouded in privacy for generations, ever since John D. Rockefeller established the first one in 1882 in order to manage his family’s wealth. But the family office has come a long way. These days, the family office protects the assets and legacy of the likes of the Gates, the Bloombergs, the Rothchilds and others of immense wealth, most of whom are not household names.
If the family office has not been on your radar screen up to this point, know that a single-family office (SFO) is a private enterprise exclusively devoted to the wealth building, legacy enhancement and personal needs of one wealthy family. To accomplish these responsibilities, the family office will usually have a substantial support staff of wealth managers, CPAs, attorneys and administrative personnel. Further, The FO concept can be extended to include multi-family offices (MFOs), which include more than one family, as a way of sharing infrastructure costs. Similar to the SFO in makeup, the MFO manages the various financial, planning and lifestyle needs of a number of unrelated affluent families.
A family office offers clients asset management, direct investing, accounting and reporting, coordinated estate, tax, trust and insurance planning, philanthropy, intergenerational resolution, closely-held business management, and concierge services, among other things. No two family offices are alike, and the family client usually sets requirements based on their needs. However, the end game for the family client, and the most important aspect of the family office, is after-tax, after-fee positive performance on their wealth.
If you are completing putting your wealth into a single-family office with high-touch service, expect required assets upwards of $250 million. At the same time, entry into a multi-family office requires around $50 million. Growth in multi-family offices has increased because the economics of scale have opened the doors of family offices and made it doable for many more affluent candidates.
In spite of the big-ticket number, ultra-rich individuals and families are deciding to transfer their assets to family offices from wealth management firms, banking institutions and brokerage houses.
Essentially, a number of economic dimensions that occurred during the recent volatility in the marketplace have seriously affected the very rich. First, they have lost a portion of their wealth and are apprehensive of increased taxes, estate law changes, currency devaluation, deflation, inflation, liberal confidentiality rulings, geopolitical upheaval, etc. The list goes on.
The post-Madoff period and other Wall Street scandals have bruised the affluent, not only in the pocketbook but psychologically, as well. They have lost confidence in Wall Street, the banking industry and most often, in their financial advisor(s).
In many instances, the current economic situation has created a disconnect between high-net-worth clients and wealth management professionals. The chaos in the financial services marketplace has ignited an array of dissatisfied very high-net-worth clients looking for a better way to manage huge assets and their legacy of family fortune.
As proof, more than 100 very affluent investors who moved their assets during a four-month period from their financial provider cited the family office as the provider of choice (40 percent) over an independent advisor (26 percent), a bank (30 percent), a wire house advisor (10 percent) and investors managing wealth themselves (9.1 percent) in a Rothstein Kass study in January 2009.
The findings suggest that the family office, and especially the MFO concept, are growing in prominence and profitability, representing an exceptional value for high-net-worth individuals and families. More than 3,500 financial firms nationally call themselves family offices at present, according to the Family Office Exchange, a group that measures trends the family office industry.
Other reasons that often influence wealthy families to create a family office include:
- The need for management of complex issues or lifestyle-changing events, such as selling a family business.
- A desire for one controlled source of information for all family financial matters.
- The expansion of purchasing power across a family group.
- Building generation-to-generation continuity for family trusts, philanthropy, estate planning, etc.
- The need for access to professionals who can address family goals in a confidential manner.
- Lost confidence and trust in the financial industry.
The trends that are driving families to seek more complete asset management processes are becoming more apparent in the wake of recent events, as the affluent desire greater control and privacy over their wealth.
Significant changes in the utilization of technology are occurring, as families are demanding improved connectivity, transparency, communication and consolidation of services.
Families are also incorporating a philanthropic focus into their asset management portfolios (clean energy, green living, volunteer vacations and other options).
They are also utilizing the family office structure to make connections with other families in order to compare notes and seek mutual information.
Meanwhile, interest in seeking international talented traders (i.e. hedge funds, private equity, venture capital, etc.) is also growing, thereby, creating wealth through investment and partnership with emerging growth companies globally.
The family office structure can successfully deliver long-term profitable returns for affluent families. At the same time, family office management is usually involved extensively in many aspects of their clients' lives —from estate planning to lifestyle concerns. A family office increases the likelihood of family financial legacy success, making it simpler to adapt to global opportunities and changes, market downturns and key asset management strategies.
The very affluent are not only seeking successful management of their assets, but are attempting to get comfortable with a firm that offers multiple ways of dealing with their wealth, such as administrative and lifestyle services. An SFO or MFO for a family of significant wealth offers benefits that are hard to ignore.