The modern concept and understanding of family offices was developed in the 19th century. In 1838, the family of J.P. Morgan founded the House of Morgan, which managed the families’ assets and in 1882, the Rockefellers founded their family office, which prevailed until today. Family offices started gaining significant popularity in the 1980’s; and since 2005, as the ranks of the super-rich have grown to record proportions, family offices have also swelled proportionately.
A single family office (“SFO”) provides information, education, opportunities for networking, idea sharing, and pooling of buying power, to affluent families, and prepare the next generation for their wealth. Importantly, an SFO is a private company that manages investments and trusts for a single family. The company’s financial capital is the family’s own wealth, often accumulated over many family generations. Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning.
The SFO’s are run by trusted professionals with a fiduciary responsibility to a single family. The professionals running these family offices have broadly defined roles, covering multiple areas and multiple skill sets. The offices tend to be staffed with talented individuals who can span accounting, legal, operational, and investment management activities, among others.
Defining the service proposition is not straightforward and a common phrase used by industry insiders is: “When you have seen one family office you have seen one family office”.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an organized effort was undertaken by single family offices nationwide that successfully convinced Congress to exempt SFO’s meeting certain criteria from the definition of investment adviser under the Investment Advisers Act of 1940 (previously, such family offices were deemed to be investment advisers and relied on the “less than 15 clients” rule to avoid registration under the Act, a rule that was eliminated under Dodd-Frank). The Securities and Exchange Commission (SEC) promulgated the final “family office rules” on June 22, 2011.
The development of the multi-family office came as a result of the growing number of wealthy families, as well as the rapid developments in technology within the financial markets, which required greater sophistication and skill in financial advisors in the 1980s and 1990s. These changes, combined with the consolidation of the financial services industry, significantly diminished the role of the bank trust departments that traditionally served the wealthy families. These trends have resulted in an increased need and cost for family office-type services. To defray such costs many families have opened their family offices to non-family members, resulting in multi-family offices (“MFO”). While some ‘closed’ MFO’s retain many of the attributes of a SFO, most MFO’s are ‘open’ to any wealthy investor, and therefore should be considered in the same category as traditional Registered Investment Advisors (“RIA”).