Family Office : milestones and development

Introduction

Family office is not an invention but is coming from an ancestral tradition that can be traced since the Roman antiques.

Since mid 19th century the modern Family Office began to take shape in the US and Europe through the development of investment trusts and banks with private interests dedicated to their descendants. Examples are the family dynasties as Rockefeller, Bessemer, Deutsch de la Meurthe, ... In the beginning these structures were used to prevent the sale or division of the family’s wealth over the generations. The first trust company was created to execute financial transactions and manage the wealth for entrepreneurs. With the industrial revolution came the bank trust officer which had the responsibility of protecting the assets of wealthy families. So the Family Office served the financial needs of only one generation. Through the increasing wealth levels a need for wealth preservation across multiple generations became very important. Managing the wealth of the operating business, the family’s personal and financial dealings were supported by a separate structure.

In the 20th century entrepreneurs and industrials were managing their growing businesses and starting at the same time some new businesses. Responsibilities began to multiply and the family was expanding. The Family Office was born covering a multitude of structures ranging from one family member doing administrative tasks alongside other tasks in the family business, to a team of professionals focused on investment, accounting, legal affairs and concierge services. In Europe the concept developed especially during the last two decades.

Characteristics of family offices

Some families run their core operating business or other businesses; others are more focused on managing investments assets because they sold their company. European families invest more in real estate and core investments, Americans more in equities.

First generation Family Offices involve a family member. The larger the family becomes the more the family will be disengaged from his Family Office. If the wealth creator is present most of the decisions are made by him. When the first generation isn’t present anymore, the family has to introduce some governance. The European Family Offices typically have more committees and provide more frequently detailed reporting to their family members. First generation tend to be informed on a monthly basis. Later generation Family Office chose to inform twice a year. Reporting includes information on business opportunities, governance, family matters, trustees, philanthropic issues, special events, lawsuits, and minutes of the Board meetings.

Most important for Family Offices is the trans-generational wealth management. The second is the consolidation function of accounting afterwards tax and estate planning services. More soft requested skills are family education, concierge services and philanthropy. The office is a private office which has a consolidated management of wealth and controls everything. In Europe Family Offices are used to outsource fewer activities to wealth management. For most of them the asset allocation is done in-house. Other important factors are the cost effective money management; stable, controlled and scalable asset management; development of trust, cheaper administration.

There are three main categories of functions inside the Family Office:

those related to wealth management (asset allocation, manager selection and monitoring, risk management, estate planning)

those related to administrative functions (financial administration and reporting legal and tax services,...)

those related to the family (family education counselling services, relationship management,...)

Different examples of Family offices

A first example of a Family Office is a fully staffed private investment company which is located in a financial centre where they can constantly network with top investment experts. The head of the office has an investment banking background and his team includes professionals (analysts and traders), accountants, a lawyer, and a supporting staff. They outsource some legal services. They have different committees (investment, management and audit). Reporting is made on a monthly base.

A second example is a multi-generational service oriented family office. This Family office has a large team of professional investors, lawyers, accountants, economists and support staff. The investment management is outsourced to experts. The head of the office, lawyer by profession spends a lot of his time with supervising investments and family governance. They tailor asset allocations to each individual and focus on trans-generational wealth management. There first objective is balanced growth but tax optimization is also a priority. They have a management and a client relationship committee. Reporting is quarterly to all family members on their investments with detailed information.

Third case is a Family Office which has his focus on wealth preservation. This Family office is present in several countries. Family Governance is very important as well as their wealth succession. The office is also supporting administrative functions such as cash and tax reporting, estate planning, they also provide concierge services. They invest in real estate and equity but outsource this to external managers. The office has 10 employees. The reporting is quarterly made.

Practical examples

Rockefeller Financial Services

Founded in 1882, this is probably the most well known Family Office in the world. The first structure, Rockefeller Family and Associates was launched to preserve the wealth and manage the philanthropic missions of the family (medical research, education, church). In 1980 they welcomed other wealthy families’ trusts and foundations so they decided to found Rockefeller & Co, offering asset management, wealth advisory services, capital advice, private equity, hedge funds but through external funds. Their goal is Long Term sustainable growth. The Rockefellers have proven that consolidating the wealth of family pay dividends in the future.

Fleming Family & Partners

Robert Fleming was the founder of a group of Scottish investment trust and very well known for his banking firms. He sold his business to Chase Manhattan Bank in 2000. He had to sustain the considerable assets and so he created his Family Office. The company is managed by a group of advisors and has a hub of boutique investment institutions. They opened the Single Family Office in 2002 for his first non Fleming family client. Today the Multi Family Office serves more than 40 families and employs 150 people offering services in Private Equity, corporate advisory, financial planning, real estate and asset management.

Sand Aire

Provincial Insurance Company founded in 1903 by Sir James was sold to AXA in 1994. He had as personal advisor Keynes, who contributed to the success of its asset management division. The Scott’s decided to form a Family Office in 1996 and became a Multi Family Office in 2002 where they acted as trusted advisor. They used third party managers and were pioneer in multi-management offering a higher level of professionalism to his clients.

Conclusion

The Dual challenge of a Family Office is the management of the Family business as well as the management of the Family and the amassed wealth. The most important is that families want to be kept out of the public eye and they are convinced that no one will take their issues as seriously as they do it by themselves. Family office isn’t a different way of asset management but is for all from different kind; it requires a high level of disciplines as wealth management, international corporate and tax law, corporate finance, economics, psychology, sociology and politic sciences.

Diana Diels

President of Luxembourg For Family Office.