The private world of the very, very rich, Part 3: Family offices

The phenomenon known as the “family office” is not widely known—most likely because family offices fly below the radar. They are very, very private. However, family offices are in increasingly important phenomenon: Joseph Reilly, president of the Greenwich, CT based Family Office Association, estimates that there are currently between 2,500 and 3,000 family offices worldwide.

The most common initial reason for starting a family office is the sale of a large business. The head of the company, as well as other family members, wants someone who can park the assets received from the sale of the business in a way that they will earn good returns. (John D. Rockefeller started the first modern family office.)

According to Reilly, “There is really only one type of family office: a dedicated, staffed investment office owned by one family of lineal descendants.” He explains that this structure is desirable because the office answers only to the family itself. When a family has outside advisors managing their assets, there is always the possibility of conflicts of interest. (See a future blog post for clarification of the role of banks and trust companies in offering “family offices”—are they truly family offices??) An outside advisor—for example, an officer at a bank or trust company—is not likely to spend as much time and attention on the family’s needs as a dedicated family office.

Another reason for starting a family office is that it is hard to get objective advice from someone who works for a company or who has his own business. There is always an “angle,” which makes it difficult to find people you can trust. Although family offices are expensive to operate, they are worth the expense. The investments are often in hedge funds, which require large minimum bids; this allows tremendous clout with banks.

The human side of family offices

Here is an abbreviated version, excerpted from The Legacy of Inherited Wealth: Interviews with Heirs, of one heir’s response to being a member of an extended family with its own family office. When Kate Shepherd (a pseudonym) was 16, she was taken to the Shepherd family office, which was managed by her uncle. She was informed of her net worth and of the trusts that were intended to protect her from “gold diggers.” “The whole financial structure of the Shepherd family is built on enabling,” says Kate. “The system is presented under the auspices of being a compassionate and valuable protection, but what it really means is that nobody has to take control of their lives—financially or in any other way. When you’re rich, nothing matters because you can always pay away your mistakes. You don’t even have to get into that risky territory where you might make a mistake. The whole system is infantilizing.”

The Shepherd family office is not unusual in this respect: a family office does just about everything financial for the family members: it pays their credit cards; it collects their income and expense information and files their tax returns; it handles legal issues, like prenuptial agreements; it even balances their checkbooks. And so on. It is infantilizing. Even more so than other inheritors who are not part of a family-office system, these heirs can avoid growing up.

In about a week, please take a look for the next part of this series: Multi-family offices.