What is a family office? It’s a type of wealth management business that serves a particular high-net-worth individual and, optionally, their family. It offers a broad range of services tailored to the specific needs and values of its clients. In this article, we shall examine this more closely. We invite you to read on.
What Is a Family Office?
In simple terms, a family office is a type of business that operates in wealth management. Yet, unlike other similar entities, it’s focused only on one particular client and/or their family. As such, it is much more personalized than traditional wealth management services and can be tailored to the family's values and goals.
What is a family office in practice? It is a wealth management firm, a legal firm, a tax (and investment) advisory firm, and a type of intermediary for more complex investments. It’s a business that manages the finances of high-net-worth individuals in detail, from finding prospective investing opportunities to tax optimization, foreign investments (and their legal aspects), and connecting their clients with local experts if the need occurs—for instance when purchasing a property on a different continent.
A family office also manages the structures such as trust funds or foundations for the given family. Moreover, it may go beyond financial services per se—for instance, to overview private schooling or manage travel arrangements. On the one hand, this makes the lives of their clients significantly easier, but on the other, it requires excellent organization and tools for managing all the data. Moreover, setting up a family office requires considerable investments—that’s why it’s often done by the client themself.
What Are the Types of Family Offices?
Family offices can be divided into several types, depending on how they work and with whom. The three main ones are:
Single-Family Offices (SFOs)
A single-family office is set up to manage the finances (and more) of a given individual and/or their family. Such establishments are a model example of a family office from our definition. What are their pros and cons?
- Pros:some text
- tailored services,
- the highest level of confidentiality,
- aligned investment philosophy.
- Cons:some text
- the most expensive to run,
- require direct management (owned by the affluent family they service).
Multi-Family Offices (MFOs)
As the name suggests, a multi-family office offers its services to more than one family. This means a slightly lower level of customization, which is compensated by reduced operating costs. MFOs are usually the product of single-family offices evolving and looking for additional, shared resources. What are their pros and cons?
- Pros:some text
- less expensive,
- shared resources and expertise.
- Cons:some text
- lower level of customization,
- fewer additional services (typically).
Virtual Family Offices (VFOs)
Virtual family offices are a type of outsourced remote services. They are the most cost-effective of the options as they do not require an extensive number of employees. What are their pros and cons?
- Pros:some text
- the most cost-effective,
- convenient.
- Cons:some text
- only basic services,
- little-to-no customization.
How Does a Family Office Work?
Now that you know what family offices are, let’s see how they work in practice. They are a business like any other, meaning that:
- they employ not only experts but also administrative staff (apart from VFOs),
- they coordinate daily financial accounting and payroll activities,
- they manage investment portfolios and propose investment opportunities,
- they oversee and manage day-to-day services, such as household staff or travel arrangements,
- they operate either as a corporation or a limited liability company.
The officers are compensated depending on their agreement with the family—typically, this involves financial incentives based on the profits generated. At the same time, they might not be actively involved in investing but rather allocate funds to external asset managers.
As such, a family office usually generates considerable costs, typically between 1% and 2% of the family’s wealth, annually. This might not seem much, but you need to remember that running such a firm typically exceeds the sum of $ 1,000,000. Therefore, it’s recommended to set up a family office only for those individuals and families whose wealth exceeds $100,000,000.
Family Office Structure
Since family offices operate like regular companies, they usually have a clear-cut structure. What does it look like? This may depend on the particular business; however, we can present you with the most popular model.
- Leadership—The top of a family office usually consists of family members or an individual designated by them.
- Management—Apart from the leader, a family office typically has a manager who oversees everyday operations.
- Specialized teams—These take over particular roles in the financial well-being of the client. You can divide them into:some text
- the wealth management team,
- the investment team,
- the philanthropy team (often combined with other non-financial teams, such as private education),
- legal team.
- Administrative team—This team handles the administration and the operational elements of a family office.
- IT and cybersecurity team—Responsible for ensuring data security and the implementation of the best technology for wealth management.
- Client service team—It plays two roles:some text
- communicates with the client,
- coordinates the activities of other teams.
- External advisors—Sometimes, a family office consults external experts for more complex requests.
The Takeaway
Let’s sum up this article. What is a family office, and how does it work? It’s a company set up to manage the finances (and often other aspects of life) of a high-net-worth individual or a whole family. Usually, the client starts the family office, though it is possible to have a third-party family office that outsources its services. A business like this plans investments, optimizes taxes, ensures compliance, and oversees non-financial entities like travel arrangements, private schooling, or philanthropy. Ultimately, it is a company set to make the lives of affluent families easier.
You might also read: How to Start a Family Office
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