Family Office

There Is No Such Thing As A Family Office – Part 1

Edward Marshall January 15, 2024

There Is No Such Thing As A Family Office – Part 1

With this provocative title, this article explores the terminology of the family office space and how to improve the quality of life for complex, wealthy families.

The following essay comes from Edward V Marshall (pictured), who is the global head of the Dentons Family Office Group and a member of this news service's editorial board. (More on the author below.) Marshall and his team have published research about the activities of family offices. Marshall is also the co-author of a book about the sector. It is therefore very welcome to see him return to these pages with a two-part article. We hope readers find this analysis interesting and respond. Please jump into the conversation and email tom.burroughes@wealthbriefing.com

It may be a form of heresy to even question whether family offices really exist. Of course, the structure and concept known as the “family office” has yielded the creation of family office-focused clubs and organizations, drawn highly-skilled talent to family offices, and convinced numerous companies to create and staff service offerings geared toward family offices.

Yet there is value in exploring this question, and it is not purely academic. At a cocktail party, if you were to ask five people to define a family office, you would probably receive at least five different answers. Unsurprisingly, the more "family office experts" there are at such a party, you would find even greater differences in definitions. You might even hear arguments about what constitutes a "true family office" or “family enterprise” during this often jargon-filled discussion.  

Defining a family office can feel more like a Rorschach inkblot test. But does it have to be that way?

We’re from the government, and here to define family office
While discussing the intriguing topic of "what is a family office?" at that cocktail party, some of your fellow partygoers might focus on the "Family Office Rule" implemented in 2011 by the US Securities and Exchange Commission. That rule discusses how family offices are “established by wealthy families to manage their wealth and provide other services to family members,” that family offices “generally serve families with at least $100 million or more of investible assets.” The rule also mentions that a family office can only serve “family clients,” should be “wholly owned by family clients,” and should not hold itself out to the public as an “investment advisor.”   

Along with the rollout of the Family Office Rule, then-SEC Chair Mary Schapiro separately defined a family office as providing “services to family clients and other entities such as trusts and charities that are alter-egos of family clients, but were established for tax reasons, estate planning or administrative ease.” In the end, the Family Office Rule did not universally define a family office. It was created to give specific groups an exemption from the Investment Advisers Act of 1940's definition of an "investment advisor.” Even the Monetary Authority of Singapore acknowledges that the term "single family office" is not defined by [Singapore’s] Securities & Futures Act (SFA). 

Is there any common ground on defining a family office?
It appears that the differentiation between a multi-family office (MFO) and a single family office (SFO) is generally accepted. MFOs provide services to multiple families, whereas SFOs cater to the needs of a single family (notwithstanding the industry jargon construct of a “multi-single family office,” which just makes the author’s head hurt).

Beyond this numerical differentiation, consensus regarding the precise meaning of the term "family office" is scarce. The most frequently cited threshold arguments regarding the definition of a family office are a family's net worth, investment management activities involving family capital, the "complexity" of family operations, and the family's objectives.

A line of reasoning that is frequently encountered is that a family must have, justify, and/or afford a family office with a net worth of $X. As threshold values, typical levels of net worth include $100 million-plus, $250 million-plus, $500 million-plus, $750 million-plus, or $1 billion-plus. But is net worth a good measure of what constitutes a family office, or is it merely a stand-in for the expenses of running one?  

Another common refrain regarding the definition of a family office is that it involves the management of family capital. But what happens if a family's operating businesses are the source of all their wealth and they have very few liquid assets? A family that operates a substantial manufacturing company, real estate firm, or technology startup may not have much need to "manage money" or invest in unrelated asset classes. Does this imply that a family that owns a privately held business worth $2 billion is not a family office?

The idea of a "true family office" is another recurring theme of discussion. The personalized definitions that follow this moniker are extensive and, in general, unhelpful to the family seeking assistance in achieving their goals.  

When attempting to define a family office, complexity and the scope of operations that support a family are also discussed. In other words, to qualify as a family office, a family must perform a specific set of functions. Financial planning, investment management, legal counsel, accounting and bookkeeping, bill payment, household and estate management, concierge services, risk management and security, cash management, insurance, charitable contributions, and more are typical functions (in-house or outsourced) that fall under this version of a family office rubric. Wealthy families can afford to personalize services to an infinite degree. As a result, defining a family office by the number of services it provides appears to be at best subjective, given that some families may require some, none, or all of these services.

Lastly, the objectives of a wealthy family are sometimes used to define a family office. For instance, the family office exists to ensure the transfer of wealth to future generations. This further exemplifies the subjective nature of the term "family office," given that some families choose not to pass their wealth on to future generations or do not have any children.

Perhaps there is no such thing as a family office if we cannot agree on what it is or is not?  

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