An intro to Family Offices
/The concept of a “Family Office” is somewhat mysterious and ill-defined by many individuals, service providers, and investment professionals alike. I recently participated on a panel discussion at a Family Office Conference in Chicago where our segment was primarily focused upon the range of service models Ultra-High Net Worth (UHNW) families (broadly defined as households with net assets in excess of $30 Million) may choose to employ. The balance of this paper strives to develop a baseline understanding of the “Family Office” space.
The concept, structure, and execution of Family Offices is global in nature. However, our focus herein will be on families domiciled within the United States. Therefore, we will first explore through the lens of the U.S. regulatory system. That said, this topic requires further review with legal counsel well versed in such matters.
The definition of a Family Office is important given the evolving regulatory landscape resulting from the global financial crisis of 2008/2009 and the affect on financial institutions; in particular with respect to the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). Section 409 of Dodd- Frank addressed Family Offices and specifically the definition of a Family Office which can be exempt from registering as an investment adviser under the Investment Advisers Act of 1940, Section 202(a)(11)(G). Dodd-Frank charged the defining of the exemption rule to the Commission (ie Securities and Exchange Commission, aka SEC).
The resulting rule, 202(a)(11)(G)-1 as issued by the SEC on June 22, 2011 defines a Family Office as follows (excerpt only, please see full rule for broader definition, including grandfathering; and seek legal counsel accordingly regarding establishment and/or status of compliance):
§ 275.202(a)(11)(G)-1 Family offices.
(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.
(b) Family office. A family office is a company (including its directors, partners, members, managers, trustees, and employees acting within the scope of their position or employment) that:
Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for one year following the completion of the transfer of legal title to the assets resulting from the involuntary event;
Is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and
Does not hold itself out to the public as an investment adviser.
Therefore, by definition and with the consideration for grandfathering, a Family Office established other than what the rule allows will be subject to the Investment Advisers Act of 1940 and be a Registered Investment Advisor (RIA); as is Clearwater Capital Partners, LLC (CCP). Furthermore, a Family Office has ‘no clients other than family clients’ and is sometimes referred to as a “Single Family Office” (SFO). Therefore, other service models have evolved and may be known as a Multi-Family Office (MFO) or a Virtual Family Office (VFO) structures which reflect organizational and market positioning. Optimally the MFO/VFO structures are centered upon the fiduciary standard and the independence offered through the open architecture environment which RIA’s can offer.
Moving beyond the definition, the purpose of a Family Office should reflect the essence of why families would create an SFO or engage a MFO/VFO service model. Dr. Kirby Rosplock in her book “The Complete Family Office Handbook” notes that Family Offices are “designed to prepare family members to collectively manage, sustain, and grow their wealth across multiple generations”. Single Family Offices have their unique structures and exemption status as outlined above. There is much to be learned from successful SFO’s which can be incorporated by RIA MFO’s in serving their UHNW client families. In particular a family’s wealth, and thereby risk management, should be viewed across a wide array of Capital considerations and approached with respective intentionality:
Human Capital: the role each individual plays in the family and their respective development of their talents and uniqueness.
Intellectual Capital: what each person knows and how they contribute to the decision making process within the family.
Social Capital: what the family views as their role in society, what lasting difference (legacy) they will make and which organizations they will engage and support for the betterment of society.
Financial Capital: the legal property ownership of the family … financial assets, business interests, real estate holdings, farmland, intellectual property, mineral rights, etc.
Richard C. Wilson in his book “The Single Family Office” highlights that the SFO’s are “holistic, full balance sheet wealth management solutions” which serve UNHW families that prefer the ultimate in control, privacy and confidentiality. That said, given the SFO is a business in itself, there are expenses for staffing, governance, technology, and in-house services for tax, legal, and financial affairs. Furthermore, some SFO’s incorporate lifestyle services such as travel, security, aircraft/yacht maintenance, public relations, event planning, and social engagements. Therefore, the cost / benefit of establishing a SFO is debatable, but typically begins at $100 Million in net assets and some have argued in excess of $250 Million.
Although SFO’s have unique considerations, such as where to domicile the office location, SFO’s may also outsource certain activities in a similar manner as MFO/VFO services, such as, but not limited to:
Legal Services: estate planning, mergers/acquisitions/divestitures, and contract negotiations to name a few, Accounting & Tax Planning: given the legal framework, the greater the wealth the greater the opportunity for complexity in the families’ tax considerations.
Investment Management: liquid public markets, direct investments (controlling and minority participating), and real estate.
Risk Management: investment & risk management go hand-in-hand with respect to financial capital, but it is important to remember that risks apply to human / intellectual / social capital as well; for example, reputational risk, blackmail, and extortion to name a few.
Insurance: this is an area which extends the considerations regarding risk management and what risks are desired to be transferred to an insurance company for a premium. The examples range from life insurance within life insurance trusts for estate tax risks to insurance for kidnapping & ransom.
Philanthropy and Charitable Giving: engagement in the global community is an important consideration and extends beyond job creation through business ventures into charitable giving. There are many tools to facilitate the giving process, including Private Foundations (PF), Donor Advised Funds (DAF), or various Charitable Trusts (Remainder, Lead, etc). Charitable giving links financial capital with the intentionality of social capital and is a great way to develop next generation(s) human capital.
We must always remember, in the end a families’ Human, Intellectual & Social Capital reflect the hopes, aspirations, and purpose of a Family while the Office helps to organize and manage the tools, financial and legal, to sustain the family and achieve their objectives. Similar to the unique nature of each individual in a family and the family collectively, there is no ‘one size fits all’ approach, but legal compliance and appropriate registrations is a must.
Given the baseline understanding, Clearwater Capital is not a SFO, but comes alongside our UHNW client families in a wide range of services and roles in a MFO/VFO offering. We continue to evaluate the services we provide and welcome feedback and discussion to ensure we continue to meet the evolving wealth management challenges of families.
