What is a Family Office?

March 7, 2014

Every day large financial institutions are rolling out the new family office arm of their businesses. Maybe it has a different name, or maybe not. It seems today everyone has a family office. This can be unsettling to a client seeking financial assistance because it makes it difficult to even understand what exactly makes a firm a “family office.” How do you know if a firm really does what a family office does?

A traditional family office is a firm established to manage the financial affairs of one family – a single family office (SFO). The primary functions of a SFO are to view the family’s wealth holistically, ensure the family’s money is being managed in the appropriate way based on their objectives, and manage the critical functions needed to execute the strategy. The single family office often sets the mission, strategy, objectives and purpose of the family wealth. Since the family office is established to serve the one family, there are no competing interests.

There are a few distinguishing characteristics and services that separate this unique form of wealth management from the herd:

• Reconciliation and quality control over all the wealth management providers in a family’s ecosystem of providers;
• Investment and financial advice provided in the family’s best interest (with no competing interests);
• Independent and unaffiliated structure;
• Legal obligation to act as a fiduciary for the family.

 

This form of wealth management can become very costly (staff, infrastructure, etc…), and some SFOs take in additional families to distribute costs and become multi-family offices, or MFOs. Once a SFO becomes a MFO, the firm is often still legally bound to act as a fiduciary – i.e. put their clients’ interests above their own – and represent a different option for families than traditional wealth managers, who are often not legally obligated to put their clients interests above their own. Many MFOs are established as independent advisory firms and ideally do not face actual or potential conflicts of interest often found in larger financial institutions where a sales agenda may be a factor.

Here is the problem: the terms “Family Office” and “Multi-Family Office” are being hijacked as commonplace marketing terminology, making it difficult for a client to know which firm actually performs these services.

The bottom line is that there is some loud market noise around which firms perform which services. The only way to know with certainty is to learn more. For information about this and other critical issues that may affect your family, read our FAQs to shed more light.