Is a Family Office Right for You? A Multimillion-Dollar Question

11 4 minutes read

With more of the world’s capital being controlled by ultra-high-net-worth (UHNW) individuals and asset management becoming more complex, family offices are growing.

Ultra-high-net-worth individuals are commonly defined as having net investable assets of $30 million or greater.

Altrata’s 2023 World Ultra Wealth Report estimates that there were about 157,000 UHNW individuals in the world in 2004, and they controlled about 9.6% of the globe’s wealth.

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The report estimates that by 2027, the UHNW population will rise to more than 528,000 and control 11.1% of global wealth.

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A family office is a private organization that manages a wealthy family’s affairs. Financial planning and investments are generally the principal focus of family offices.

Ancillary services may extend to personal matters such as bill payments, the administration of personal and household staff, property upkeep and management, travel planning, real estate deals and legal matters, and personal security.

Popularity increases with rise in wealth

Family offices are not new, but their popularity has increased with escalating private wealth. The point at which a family office becomes practical depends on various factors, but the financial minimum ranges from $60 million to $200 million of net investable assets.

Beyond assets, an individual should account for their financial position and objectives, portfolio holdings and lifestyle when considering using a family office.

For instance, a UHNW individual with a single operating company, an established management structure and limited cash flow may not need a family office.

Conversely, a less-wealthy individual facing a large liquidity event may benefit greatly from a family office, as the influx of cash could demand reinvestment, tax planning and careful structuring that would be best handled by a professional team.

Traditionally, UHNW individuals manage their wealth by working with private banks or trust companies on strategies related to asset growth and generational wealth transfer.

They may also rely on outside professionals such as financial advisers, attorneys, lawyers and accountants on a case-by-case basis. However, a family office can provide a level of discretion, control and customization that outsourcing to individual professionals might not.

How family offices work

The goals of a family office are to manage intergenerational wealth preservation, asset growth that exceeds inflation, risk management, succession planning and family governance.

They may serve a single client or a limited number of clients and, therefore, may encounter fewer conflicts of interest.

For example, a bank representative has a fiduciary responsibility to their client, but they may be restricted to fulfilling their responsibility using only the investment universe available through their employer.

This contrasts with a family office manager who is exclusively focused on the success of their client and thus will work with multiple banks and asset managers to secure opportunities that best serve the client.

Family offices generally fall into two categories: the single-family office (SFO) or the multifamily office (MFO), and each has distinct advantages and disadvantages.

SFOs vs MFOs

In the SFO structure, the client has the advantage of greater control, privacy and customization. Disadvantages include higher costs, less access to investment opportunities and increased succession planning complications due to a higher rate of family member conflict.

Outsourcing investment and operational control to a third party, as is the case in an MFO structure, generally facilitates succession planning primarily because it is a primary focus in the MFO relationship.

An individual or family employing an SFO usually has assets exceeding $100 million and values control, confidentiality and complex financial planning.

SFOs require specialized software, staff, investment professionals, legal services, tax management and risk control.

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The average number of employees at an SFO is 11 and may include both family and non-family members. According to J.P. Morgan Private Bank’s 2024 Global Family Office Report, respondents reported spending an average of $3.2 million annually to run their family offices.

MFOs are an option for UNHW individuals looking for cost efficiency, enhanced network effects (i.e., cost synergies and deal flow access) and simplified operations.

MFOs often appeal to those with assets of $60 million to $100 million who may be less concerned with privacy and do not require a team of experts and advisers who are committed only to them.

Since MFOs do not need the dedicated personnel of an SFO, the costs may be in the form of a flat fee or a percentage of AUM (assets under management). According to Greenlock, a Zurich-based MFO, AUM fees start at 2% for assets of $5 million and 1% for $10 million. They gradually decline to 0.02% at $500 million or more.

Creating a family office

Recruiting employees for a family office isn’t easy, as competition for talent with other family offices and institutional firms can be fierce.

UHNW individuals often hire people with whom they already have relationships, such as their existing private bankers or attorneys. In such cases, competency may be secondary to trust and ease of process.

The growth of family offices reflects the increasing complexity of managing substantial wealth.

Whether a UHNW individual or family chooses an SFO or MFO, the decision hinges on a careful assessment of individual needs, asset levels and desired degrees of control and privacy.

As the number of UHNW individuals continues to rise, family offices will likely play an increasingly vital role in preserving and growing wealth across generations.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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