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 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.
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 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. A typical Class A family office:
- 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 free from conflicts of interest and will not sell products.
- Offers a comprehensive monthly report of all estate activity for no additional fee.
Class B Family Offices are operated by a bank, law firm, or accountant firm. A typical Class B family office:
- Offers investment advice for a fee.
- Can offer products and services outside the scope of a family office.
- Does not directly manage or administer illiquid assets in the estate.
Class C Family Offices are operated by the family with the assistance of a small support staff. A typical Class C family office:
- 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.