Onward, Downward

The family office is in a state of flux.

Long the exclusive enclave of the ultrawealthy (those families with $100 million or more), the family office has become more democratic as competition among financial services firms and top advisors for the high-end clients has heated up.

The new family-office model has a very different motive: profit, as opposed to privilege.

To learn more about the family-office universe, we spent nine months conducting a survey of 653 family offices with an aggregate net worth of $2.1 trillion including investable assets of $1.2 trillion.

We defined the family office as an organization created to oversee investment management and provide administrative services (largely record-keeping and tax preparation) for a single wealthy family, an extended family or a number of unrelated families.

To qualify for our study, each family office had to be overseen by an executive, usually with the title of executive director, and, more prosaically, it had to call itself a family office. (Although it was not part of our definition, most family offices also handle the privileges that go with wealth — booking flights, tables, hotels, interviewing au pairs, mowing lawns and getting heirs into the right prep schools, for example. And many family offices are expected to navigate inter- or intrafamily politics.)

The Three Types

We divided those 653 family offices into three types. First, there were 92 single-family, or “classic,” offices, which serve one — and only one — family (often a well-known clan like the Gettys or the Mellons).

The other two types were the multifamily and commercial family office, of which we surveyed 234 and 327, respectively. These last two office types involved more than one family (and as many as 273 for one commercial family office), and the families were not related. The difference between the multifamily and commercial family office is that the former has an “anchor” family, a first among equals that controlled at least 30 percent of the office's total assets.

For the most part, multifamily offices were run by an executive director selected by the anchor family. Commercial family offices, by contrast, were run by elite brokers, private bankers, boutique advisory firms, accounting firms and investment management firms.

Practically speaking, the multifamily offices also had far fewer families per office, an average of 4.5 families compared to an average of 102 for the commercial family offices.

There was also a big difference between the amount of money per family-office type, with the single-family offices in a financial league of their own.

What Motivates Them

We asked each family group about their motivations for starting or joining a family office. The varied responses show how greatly these three office types differ on major issues.

Single-family offices, for instance, unanimously expressed a desire for control. They then cited the economies of scale that come with combining services for all family members, protecting family members from solicitations and lawsuits and getting access to investments that would otherwise be beyond the reach of an individual family member.

Multifamily offices also put control at the top of their list, but generating a profit was a close second. Single-family offices didn't think in those terms: Profit-making was not even on their list. Three-quarters of the multifamily offices cited achieving economies of scale and access to investment opportunities. Indeed, many families join multifamily (and commercial family) offices because, by pooling their wealth, they can achieve the sort of institutional clout and scale that will allow them to take advantage of high-end investment opportunities or even to open their own hedge fund, for example, which none of the individual member families could do on their own.

Commercial family offices, perhaps unsurprisingly, cited profit as their leading motivation. The second motivation — better serving clients — was customer-service oriented in a way that would not occur to a single-family office, where attention to the family is already the raison d'être. Commercial family offices also yearn to lure other wealthy families to the fold, which single-family offices have no interest in doing. Further, the commercial offices want to leverage proprietary investment vehicles. This last bit was not as important because many commercial offices already had the scale to take advantage of such opportunities.

On the Horizon

Though they are driven by different motives, all three family-office types will be facing the same problems in the next few years.

First, as the number of family offices continues to grow, they are likely to find it harder to locate the right resources, whether they be the executive director to run the office or the investment talent to handle the day-to-day finances.

Many firms and advisors are already rushing into the marketplace without having the right experience or credentials, a problem compounded by the lack of a legal definition for family offices and for what they are obligated to deliver.

A dearth of experience can be especially problematic for ultrawealthy clients because many of the most complex tax mitigation and estate-planning strategies require ethical finesse born only of experience.

Further, there's the question of whether or not the changing model and democratization of the family office will lead to diminution of services and focus — can family offices move downmarket and retain their cachet?

Finally, and just as pertinent, can the larger family offices keep all of their ultrawealthy — and ultrademanding — families happy while still turning a profit?

On these and other important issues, the jury will be out for some time to come.