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ACTEC Trust & Estate Talk
The Family Office Landscape: Overview of Models, Services, and Options
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The Family Office Landscape Overview of models, services and options that's the subject of today's ACTEC Trust and Estate Talk.
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Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.
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This is ACTEC Fellow Connie Iister Boulder, Colorado Family offices play a central role in managing wealth for ultra high net worth families. But there's no one size fits all approach. These entities vary widely in structure, services and complexity. In this episode, ACTEC Fellow Kim Kamen of Chicago provides an overview of the family office landscape, including different models available, the range of services offered, and key considerations when selecting or designing a family office structure. Welcome, Kim.
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Thanks, Connie. I am here today to give an overview of the family office landscape and specifically how to think about defining what is and isn't really a family office, the functions and services provided by family offices and the different variations of family offices that are out there. I've now been in this space for almost 30 years and there have been a lot of changes even just in the proliferation and use of that term. Many of us have heard the expression if you've seen one family office, you've seen one family office. And that's still true to some extent because families are all different. But I will say in some ways there's more standardization now than there used to be and there's also a lot more confusion. So let's start there. What is a family office? And there are numerous definitions floating around, but groups like the Family Office Exchange, FOX and the Ultra High Net Worth Institute think tank have done a pretty good job trying to bring some consistency to it. I'm going to paraphrase the Ultra High Net Worth Institute's wealthasaurus and say a family office is a private entity or firm established for a single family of significant wealth or for a group of ultra high net worth families to manage their assets and affairs and to provide a range of highly personalized financial investment, philanthropic and or other services that the family needs. If I strip that down even further, it is a centralized way to manage the financial ecosystem of an ultra high net worth family. And there are two primary categories of family offices. The first is the single family office or SFO that is designed to serve one family related by blood or by law. And then the second category is multifamily offices or MFOS and those are designed to serve multiple families. Often when we hear the term family office used in isolation, it is referring specifically to a single family office, while a multifamily office would then say multifamily office or mfo. But the most important distinction to me isn't structural, it's alignment. In my view, a true family office is a fiduciary that's built to serve the family. It's not product driven or trying to sell them something. It's there to sit on the same side of the table as the family and help them manage their lives. And that's where things can get a little blurry today, because family office has become a bit of a status symbol and therefore it's a label that people like to use. And you'll now see all kinds of organizations describing themselves that way, often just for marketing reasons. So it may help to put some numbers around this. For a fully functioning single family office, we're generally talking about billionaires, and There are about 3,000 billionaires worldwide with nearly a third of them in the U.S. so that's maybe a thousand families in the U.S. yet there are estimates that there's anywhere from 3,000 to 10,000 single family offices in the U.S. alone. And I also saw one industry database definitively stating that there were roughly 3,000 MFOs here. But it's important to recognize that all of these are just estimates and there's no official registry. It's kind of consistently changing and maybe it doesn't really matter how many there are. When you're evaluating options, it's a lot more helpful to focus on what the firm does rather than what it calls itself. So what does a family office actually do? While there's no typical family office, there are some common core functions, so you can think of it in buckets. Administrative investments and wealth management, potentially fiduciary services and lifestyle. I often simply refer to it by saying family offices help with investments, wealth planning and life. If you break it down even further, you can think about services across 10 categories. And I happen to be a person who loves lists as a way to organize complex information. And I'll also try to include some examples for each of the 10 service areas. The first is investments. That includes things like investment policy statements, portfolio construction, manager selection. Next is wealth transfer planning. This is trust design, estate planning implementation, often reviewing and coordinating things like crummy notices and grant payments. Next, there's philanthropy that can be services relating to mission statements or actual administration of private foundations or or donor advised funds. Fourth is Financial planning. This is cash flow, retirement planning, bank loans. That's financial planning. Fifth is information management. So helping with things like secure portals for the family's documents, reporting on their balance sheets and performance. Sixth is family continuity and education. These are projects like governance, financial literacy, preparing the rising gen to actually steward the wealth. Seventh, tax coordination. This is sometimes actual tax return preparation, or at least compliance and coordination of the filing of all the necessary returns. Next is risk management. These are things like insurance, both life insurance, or property and casualty insurance, and also security, both personal security and cybersecurity. The ninth service area would be fiduciary services. So serving as or helping to coordinate independent trustees and other fiduciary services for the family's trusts. And then finally, 10th is lifestyle services. These are things like domestic employee management, private aviation, healthcare services, and the list can go on. So for each service that the single family office or multifamily office is going to handle, there's always the question of what should be done in house and what should be outsourced. Even a very large family with many employees and a fully functioning single family office often won't have the family office do everything themselves. And for smaller or more virtual models, they may outsource almost everything and simply coordinate these services centrally. So this is where it gets really interesting. What are the choices for the types of family offices on the single family side? There are a few variations and it can be helpful to break it down. So lots of families start with a family office that is embedded in their operating business. So we call this an embedded family office or an efo, sometimes a corner office. This is where everything is sitting inside the operating business and typically being provided by employees of that operating business. It's a simple model, but it can create issues such as confidentiality and sometimes even tax issues. If there could be deemed dividends for the personal services being provided to family members, then many families move on to the classic standalone single family office structure. This is a separate entity that's built solely to serve the family. But if the entity is going to be doing any investments, it's important to qualify under the SEC's family office exemption, so it doesn't need to register as an ria. But just setting up an entity and then paying all of the expenses that come with it can be incredibly expensive. And the family can't deduct those expenses unless there is also an active trader business that the family is running through the family office. This is why we have seen more and more families setting up the structure of a profits Interest structure when they can under the lender case model that's trying to address these deductibility issues and qualify for the ability to deduct these expenses. But you must have very specific facts to fit under the lender structure. And you're also taking on real risk if there isn't enough price profit to cover all the operating costs. Single family offices can also structure their family office through a private trust company. That's another way to avoid registering with the sec. In some cases, the private trust company might also be able to serve a wider range of clients, since the definition of families and the state laws that govern the private trust companies are often broader than the SEC's definition. And one state actually allows a private trust company to serve two unrelated families. So those are the classic single family office options, and they're in their variations. Then you've also got the virtual family office or called the VFO model. And I recently saw this called the invisible family office. That's where the family doesn't build an entity at all or take on the additional expenses of having to hire employees. They just assemble a team of providers, law firm, accounting firm, investment managers. But then someone in the family is stuck in the middle, having to coordinate everything. At least have one of the external advisors take the lead on the coordination. And large institutions can help support this informal approach. And then finally, as an alternative, the family can use a multifamily office. And as a disclaimer, I've been with a multifamily office the past decade, so of course that impacts my my perspective on this. And there are also different types of multifamily offices. Some started out as single family offices and expanded to let in other families. This helps them to offset costs, but also share what they have built with outside families. Some of them were built by multiple families together who wouldn't qualify for the single family office exception. But this is often when they want to stay together after selling a jointly owned and managed operating business. Finally, others are independent firms, usually boutique wealth management firms that were built specifically to serve this market. And those will be structured typically as RIAs or trust companies if they're managing investments. And finally, there are also variations of multifamily offices that are built by law firms or accounting firms who are not managing investments. And the point here is that services can vary significantly across MFOs. Some of the services they offer are quite broad, and others may be more investment centric or bookkeeping centric, or focusing just on a select few services. Finally, with each of the models, it's important to consider how to cover the expenses of the office and the fees, which can vary quite a bit. They could be fixed fee, hourly cost allocation, AUM based, performance based, or profits interest as I mentioned, and often it's a combination of all of the above. But ultimately the goal is alignment, making sure that the structure and the fees match whatever the family is trying to accomplish. I will say for single family offices, one of the largest challenges that I've seen is hiring talent. The costs of the infrastructure, technology, cybersecurity, these can really add up and the family can be spending a lot of its time navigating that. The next biggest challenge would be the generational transitions for leadership. Is it fair to require siblings and cousins to have to invest together, donate together, or operate a business together? That's something we ask families as they're setting these up. And I would argue that it can work beautifully when it's working and a happy family is getting along. But as Tolstoy said, each unhappy family is unhappy in its own way. So in my view, any structure being put in place should be flexible enough that the family members can decide for themselves to what extent to remain together and to what extent to have the autonomy to leave and go their own way if they'd like. So to wrap it up and step back, the family office space today is more developed, but in some ways also more complicated than it used to be. And regardless, the core idea hasn't changed. A family office is about creating a centralized, aligned way to manage wealth across generations. But the right approach is always going to depend on the specific family, their own assets, their complexity, and what they are trying to achieve.
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Thank you thank you Kim, for sharing your deep knowledge about family offices. It's been such a pleasure to have you speak with us today.
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Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit AC Please subscribe to this series and leave us a rating or a review.