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Afamily office is aprivately held company that handlesinvestment management andwealth management for a wealthy family, generally one with at least $50–100 million in investable assets, with the goal being to effectively grow and transfer wealth across generations. The company'sfinancial capital is the family's ownwealth.
Family offices also may handle tasks such as managing household staff, making travel arrangements,property management, day-to-dayaccounting and payroll activities, management of legal affairs, family management services, family governance, financial andinvestor education, coordination ofphilanthropy andprivate foundations, andsuccession planning. A family office can cost over $1 million a year to operate, so the family'snet worth usually exceeds $50–100 million in investable assets. Some family offices accept investments from people who are not members of the owning family.[1][2][3][4][5][6][7][8][9]
A family office either is, or operates just like, acorporation orlimited liability company, with officers and a support staff. Officers are compensated per their arrangement with the family, usually with incentives based on the profits or capital gains generated by the office. Family offices are often built around core assets that are professionally managed. As profits are created, assets are deployed into investments. Family offices might invest inprivate equity,venture capital opportunities,hedge funds, andcommercial real estate. Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals. Some family offices remain passive and just allocate funds to outside managers.[10]
The firmDuPont, after founderIrenee died in 1834, was conceived as a form of family office, where three of his sons split management duties of their late father's gunpowder mill.[11][failed verification] TheRockefeller family first pioneered family offices in the late 19th century.[citation needed]
Family offices started gaining popularity in the 1980s, and since 2005, as the ranks of thesuper-rich grew to record proportions, family offices swelled proportionately.[12]
In 2007, the case of theAyer family office highlighted family office risk when a "family confidant allegedly siphoned about $58 million away in a few years."[9]
Under theDodd–Frank Wall Street Reform and Consumer Protection Act of 2010, an organized effort was undertaken by single family offices (SFOs) nationwide led by the Private Investor Coalition that successfully convinced Congress to exempt SFOs from having to meet certain criteria from the definition ofinvestment adviser under theInvestment 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. TheObamaU.S. Securities and Exchange Commission under chairMary Schapiro promulgated the final "family office rules" on June 22, 2011,[13] after hearing from around 100 family offices through their attorneys, who invoked solicitor–client privilege in the communications with the SEC. In the words of one solicitor: "The extended family that controls the family office has asked this firm to provide the Commission with comments to the Proposed Rule on its behalf, as it believes that providing comments directly to the Commission might compromise its privacy, including publicly revealing the manner by which it conducts its family office business."[14]
Family offices became more common in years since 2010 after the rapid increase in valuations of technology companies led to many people having newly created wealth.[6] Also in 2010, the academicJournal of Family Business Strategy was launched byTorsten Pieper to "publish research that contributes new knowledge and understanding to the field of family business."[15]
According to a 2015 report by theFinancial Times, the label "family office" was increasingly replaced by otherbusiness names, such as "private investment office", with services in relation therewith called "private company services" or "strategic philanthropy advice".[16] Globally in 2015, one source numbered 79,000 families that controlled roughly $19 trillion in assets.[16]
In January 2021, it was revealed thatLeon Black paidJeffrey Epstein $158 million over the period from 2012 to 2017 for family office tax advice.[17]
In spring 2021 the implosion ofArchegos Capital Management drew the scrutiny of several regulators and the questioning ofSherrod Brown, Chair of the USSenate Banking Committee.[18] It came to light that family offices were reportedly "more loosely regulated than other investment vehicles, with fewer disclosure requirements."[18] In response to these concerns, US RepresentativeAlexandria Ocasio-Cortez introduced The Family Office Regulation Act of 2021, H.R. 4620, which would limit the use of the family office exemption from registration as an investment advisor with the SEC to offices with $750 million or less in assets under management. The bill would also prevent persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office.[19] This view, however, is not shared by a number of regulators[20] and commentators,[21] including CommissionerHester Peirce of the Securities and Exchange Commission (SEC) and CommissionerBrian Quintenz of theCommodity Futures Trading Commission (CFTC), who published an op-ed arguing that family offices do not need new regulations.[22]
A traditional single family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. Typically, these organizations employ staff to manage investments, taxes, philanthropic activities, trusts, and legal matters. The family office invests the family's money, manages all of the family's assets, and disburses payments to family members as required.[23]
According toSpear's Wealth Management Survey in 2022, "Family offices are private companies that support a number of functions for wealthy families including the smooth running of day-to-day affairs as well as more complex matters involving wealth management and strategy. These issues are particularly important for families with assets and interests in multiple jurisdictions."[24]
In June 2008,Wharton Magazine reported that "About 1,000 SFOs are in operation around the world catering to families with a least $100 million in assets. More than half the SFOs are managing family wealth of more than $1 billion." Services handled by the traditional SFO include investment management, property management, day-to-day accounting and payroll activities, and management of legal affairs, and they often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning.[25] An academic investigation defined SFOs as "professional organizations dedicated to managing family wealth and family matters, represent the leading edge of a broad trend in substantial personal wealth accumulation. The worldwide concentration of wealth in the hands of relatively few is well documented. As the rich grow even richer, and particularly as fortunes filter down through generations, wealth management becomes ever more complex. It is in this context that SFOs—dedicated to the service of one multi-millionaire or billionaire family—have evolved."[26]
