Welcome back everybody!
Thanks for spending a little bit of your Tuesday afternoon enjoying this quick read, that I’m actually pretty stoked about.
I realized we don’t have a ton of info on family offices, which is really strange because it’s one of the more simple fund structures to understand…
So we’re going all in on family offices today.
What they are, how they work, examples, and how you can get involved.
What is a Family Office?
A family office is basically an entity that is created to help extremely rich families manage their investments and continue to grow their wealth.
The idea here is that you have a family that has been extremely successful with their businesses in their life and are transitioning into retirement.
However, they recognize the immense potential and power that their millions and millions of dollars wields, and they don’t want that cash to just sit around and lose value with the passing of time.
Especially with all that is taking place with inflation these days.
Butttt these people are typically at the end of the working stage of their lives and don’t want to put in the time or effort of managing all that money.
Therefore, they create an office that is run by a management team which oversees all the families finances.
BOOM! A Fund is born.
Fund Managers and Family Offices
So where does the fund manager come in here and what is his role?
It’s a unique situation for sure, because the whole capital raising side of things is pretty much nonexistant.
The family, or collection of families, is your sole client – or investor.
You’ll also typically be compensated for your work based off of a percentage of the total AUM of the family office.
Most tend to be between 1-1.5%, which is a great job when you consider just how massive most of these offices are.
Per “The Global Family Office Report” –
The average family wealth of those surveyed for this report stands at USD 1.2 billion, while the average family office has USD 917 million in AUM.
The Global Family Office Report
Now that’s A LOT of money.
In some cases family offices will offer their managers a base salary and then offer incentives for hitting certain benchmarks or goals.
This incentives a family office manager to excel in his role and grow the capital as much as possible.
Family Offices Types and Functions
There are two main types of family offices.
You have a Single Family vs. Multi-Family
The names are pretty self explanatory, but one simply combines multiple families’ wealth into a single office to build greater AUM.
Or you can go it solo, and have increased control.
The branches of a family office can include, but are not limited to, any of the following:
- Philanthropic Work
- Real Estate
- Educational Work
- Private Equity
- Stocks
- etc.
However, one of the main concerns of a family office is managing the money that will be passed along to future generations.
Many offices will fail to properly plan the transition of wealth down to their posterity and it will lead to major discord in the lives of their children, grandchildren, etc.
Poorly managing this process means creating rotten “trust fund babies” for a generation and then watching massive wealth dissipate like water in a dessert.
Not to mention you’d miss out on the chance to provide true value in lives of your posterity such as scholarships and other educational opportunities.
Examples
There’s a lot of good and bad out there when it comes to family offices.
Which really helps us appreciate what structures work and what don’t.
Prince passed away five years ago with over $200M to his name.
Unfortunately he had not put any measures in place to manage or pass on his wealth and it was a giant fiasco with over 40 people claiming a piece of the pie.
Similar failures took place with the Vanderbilt family fortune – Which at it’s peak would’ve been worth more than $220B.
It’s unfathomable to think that nearly all of that fortune was squandered away.
On the flip side the Rockefeller family did an excellent job of establishing a structure that allowed the wealth to be passed on responsibly and reasonably.
They did this by essentially setting up an LP family bank system which gave their descendants access to cheap capital – with low interest rates attached – which incentivized and rewarded wise investing and sound business ventures.
Lesson here is, FUNDS WORK. Understanding them and mastering them can be put you in a great position to set up a thriving family office or manage one.
Conclusion
Well I hope this helped clear up any of the vagaries of family offices for you all.
It’s crazy to think just how much money is out there and what opportunities are present if we learn the name of the game.
Best of luck rebels,
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
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