What do you do when you have sold your life work and suddenly have hundreds of millions, or perhaps billions, in your account? You do not put them in a regular bank fund. Instead, you hire your own analysts, lawyers, and accountants, and build your completely private investment company. This is called a family office.
"What you prepare for is what you will get."
— Florence Scovel Shinn
The quote hits the core here. A family office is about preparing the wealth so that it survives for many generations. It is not just about maximizing stock market returns, but just as much about preserving the money, planning taxes, managing inheritance, and engaging in charity (philanthropy).
Different types of family offices
- Single-Family Office (SFO): An office that works exclusively for one single family. This usually requires the family to have an extremely large fortune to make it worthwhile to pay the salaries of all the specialized employees.
- Multi-Family Office (MFO): For families who are very wealthy, but not wealthy enough to run their own office alone. Here several wealthy families join forces and share the expenses for the managers and lawyers.
More than just stocks: A family office often handles the private properties of the family, tax planning, art purchases, and even security arrangements for family members, in addition to the actual stock investments!
Pros and cons
Advantages for the family
- Total control. The managers only work for them and have no hidden agendas or expensive bank products they have to sell.
- Tailored handling of inheritance, generational shifts, and complex tax rules.
- Access to highly exclusive investments (like Private Equity and direct buyouts) that require enormous capital.
Disadvantages
- Extremely expensive to run. Salaries for the best analysts and lawyers in the market eat up much of the return.
- Requires the head of the family to still spend time managing the office itself and the employees.
- Can create headaches and conflicts if different branches of the family disagree on how the assets should be managed.