What is a Family Office?
A family office is a form of private wealth management and investment. Family offices are typically overseen by an experienced professional like Fintalent’s family Office Consultants, who advises both family and non-family members. The key difference between a family office and traditional private equity firms is that the funds are managed with “family values”.
Family offices offer an approach that is different from other types of investors in that they combine the skills of professionals and their personal resources to invest in companies. They have an ability to help their investors see their companies as not just investments but also as paths to happiness, meaning, and immortality. They use this perspective to help develop leadership within organizations which often leads to better business performance for the company in question.
Family offices are particularly important in Asia, where they help to fuel the growth of both family and non-family businesses. Most family offices in the region have evolved from a non-professional family office structure into a professional one, by converting a portion of their assets into professional investment vehicles.
The typical size for a family office varies by country. In China, for example, family offices typically manage between 50 million USD and 100 million USD. A Chinese family’s wealth is often managed through an offshore or onshore arrangement or through other investment channels that takes advantage of trust law regimes that offer greater privacy and confidentiality than are available in mainland China. The typical family office is made up of a relatively small number of people with a shared vision who work hard to protect and grow their client’s wealth.
Family offices are often identified as drivers of wealth creation as they often have deep pockets (large amounts of capital) to invest in a wide range of businesses. A number of family offices have been accused of having conflicts of interest. These conflicts occur when an investor’s interests and decisions are in conflict with the investors’ goals as a family. In addition to potential conflicts of interest, there are concerns about the tax treatment for funds managed by family offices. There are two general models for managing funds within a tax-advantaged trust structure and how those funds (EITs) will be taxed between different stages in their life.
Active investment strategies have a higher probability of realizing returns at the same time they realize losses. If a particular active approach has a greater probability of generating higher returns, the possibility of realizing lower returns is also increased.
While the passive management strategy is more “boring” than the actively managed funds, they typically have better risk-adjusted returns compared with the actively managed funds. This is because investors do not face investment phases when they have to absorb large losses. They can therefore avoid additional tax liabilities that are associated with realized losses. This is why it is particularly attractive to high-net-worth individual investors.
Family offices are typically managed by a small team of individuals who focus on the long-term interests of the family. The Family Advisory Board (FAB) helps to protect the client from any personal biases that may result from interactions. The Family Advisory Board provides: A typical Family Advisory Board typically consists of a group of individuals that include business leaders, financial professionals, and family members. They provide counsel for businesses seeking to expand into new markets or industries. The Family Advisory Board also provides the following services:
Family offices typically provide an annual review of the client’s financial situation on a regular basis and will often provide quarterly reviews. When there are major changes in the clients’ lives, they may need to have their financial situations reviewed at a more frequent rate. For example, if a client starts a new business or decides to change jobs, they may need to have their financial situations reviewed at a more frequent rate. Negotiations over different payment arrangements (such as payment schedules and lump-sum cash out) may be necessary depending on the client’s current situation (such as due date of a regular payroll check) during these times.
Family offices have evolved from their original form as confidential advisors to small groups of wealthy families. Over time, these family offices have diversified their scope to accommodate additional services for an increasingly wide range of families. As family offices have grown in popularity among ultra-high net worth individuals, they also have become more accessible to a wider range of investors.
