On a call last week, a family business executive I was speaking with asked a simple, yet profound question. “What is a family office” or What do you mean when you say family office? Too often, family offices are treated like Justice Potter’s timeless dictum regarding obscenity, “you know it, when you see it.” Even within the family office world, there is an oft repeated maxim of ‘if you’ve seen one family office, you’ve seen one family office.”
This adage about family offices has become so commonly stated and accepted, that it has eliminated most attempts to provide a robust description or analysis of a family office. All organizations are unique, whether for profit or not-for profit.
So while this refrain seems to say something profound, it arguably does more harm than good. Of the near hundreds of times I have heard it stated, the speaker is intoning through it that family offices are beyond understanding for the average person.
Instead, I think it is possible to begin from first principles and build a comprehensive model of what a family office is and does. We will consider FOs from a function lens – i.e. what is the work to be done, and not concern ourselves with structure – which is highly varied.
I think the simplest definition of a family office is this – a family office is a professional services firm that helps manage the complexity of a family of significant means.
At their core, family offices are about delivering service to families. Implicit in this understanding is that the family of wealth is willing to invest in the development of a new firm to deliver these services because they are unable to readily procure those services from the open market or do so at a reasonable cost.
This point is vital to consider. There are many services, in fact most, that are best delivered at scale – i.e. spreading a fixed cost of operations across a broad base of customers. If the family is going to consciously choose to de-scale and build an exclusive boutique for their benefit, they must be seeking a value proposition that is materially different from what is in the marketplace.
We would argue that this value proposition generally falls into 2 buckets – an extreme degree of coordination / integration in services delivered (“the smartest team”) or the delivery of such a comprehensive set of services that it would be impossible to build their equivalent (“the do-everything team”).
All this is in order to help manage and steward the inherent complexity that comes with attaining significant wealth. For example, multi-generational families commonly have hundreds trusts to coordinate planning across. Or a wealthy, liquid entrepreneur may have a household that includes multiple residences, private aircraft, marine vessels spread globally. Coordinating the location, staffing, and maintenance of these assets is no easy feat.
The family is looking for a partner to manage this complexity. Often because of the scale or the particularities of it, the clearest path forward to build a specialized internal team to handle. While “family offices” are in vogue as a concept, at their core this is what they are about.