Understanding Family Offices
If the term “Family Office” is unfamiliar to you, you’re not alone. Most individuals outside of the investing and financial sectors aren’t aware of what a Family Office is or how it’s connected to venture capital or private equity funds.
What is a Family Office? Family Offices are private management and advisory firms or groups that represent the interests of ultra-wealthy investors. In layman’s terms, instead of using a public wealth-management firm to handle investments, finances, or even a private-equity firm, a multi-millionaire or billionaire family may choose to create a private Family Office. In this way one can pick and choose who to add to that team to provide solutions for his or her family’s finances, investments, budgeting, insurance, philanthropic donations, family-owned businesses, etc.
Today Family Offices are growing beyond financial and investment strategies and advice to helping with broader issues like charitable foundations and real estate management.
Why create a Family Office? Globally volatile markets, preserving family wealth, looking for new and different investment options - there are many reasons to consider a Family Office. Public companies, according to this article by Ronald Diamond are required to report earnings every 90 days. That means that these companies are going to be focused on their short-term earnings. In turn, they’re most likely going to guide their clients towards investments that are going to boost those short term earnings. Most at public wealth-management companies are incentivized with bonuses based on sales so, again, there’s an issue with where the loyalty lies: with the investor or with the company?
By creating a Family Office, you’re ensured that those working for you are going to work to find the best investment opportunities based on your family’s needs and interests. They’re not working for a company that will provide a bonus for every new asset they manage. They’re working directly for you and are paid by you to provide sound advice based on your family’s financial goals.
Why choose a Family Office over Private Equity or Venture Capital investments? Unlike Private Equity groups, a Family Office doesn’t have to invest in anything if it doesn’t want to. If markets are at a volatile point or trading at high multiples, a Family Office can hold off. They can afford to be patient or take a different route. Private Equity firms are going to invest, period, no matter the current market situation.
Most of those with Family Offices have made their money in particular areas, whether that’s from creating a pizza chain, like the Ilitch Family, or investing in an oil company like the Rockefellers. Therefore, there are still connections in those areas. These connections can lead to business investment opportunities for these families that they might not otherwise have known about.
Through their Family Office they can be strategic in their investments. For instance, if a family made their money in the oil and gas industry and learns of a new technology for oil extraction that sounds promising but needs investors, they have the option to invest in that startup company and provide guidance, support, and funds. The biggest difference between Family Offices and Venture Capitalists though, is that Family Offices have other options and other avenues for investing. Investing in a startup is an option for them, one of many.
Do I have to be ultra-wealthy to start a Family Office? Not at all. Smaller Family Offices can be created by those who have a large family business and perhaps prefer to have a full-time accountant who also provides investment advice. As the business grows the family might add someone with non-profit experience to their full-time staff to help them with philanthropic work or they might hire someone to specifically seek out start ups in their same region in which to invest. In this way the family is slowly creating a Family Office. As their business grows, the family office grows.
Another option is to consider a multi-family office in which a private group manages wealth and investments for more than one family. The overhead costs are lower and the experts that are hired might even feel better able to provide advice because their job isn’t tied to just one family’s financial gains or losses.
What’s next? According to this article by Francois Botha on Forbes.com, Family Offices will continue to grow and expand their services. They’ll eventually be guiding and providing advice to clients on everything from mission statements to cybersecurity. As the interest in Family Offices continues to grow, so will opportunities for those graduating from Ivy League colleges to find work in these private settings. According to many currently in the industry, the most important aspect of being part of a Family Office is focusing on just that: understanding one’s clients and their family’s needs.