What is a family office? A plain guide

A family office is a private company that manages the money and affairs of one wealthy family. It works only for that family. It does not take outside clients.

You may see the term in news about very rich families. This guide explains what it means in plain words.

What a family office does

The work depends on the family. Common tasks include:

• managing the family’s investments
• paying bills and keeping accounts
• planning taxes and estates
• running property, staff, aircraft or boats
• handling charity giving
• planning for the next generation

Some offices have a handful of staff. Others have large teams. Many use outside lawyers, bankers and accountants for parts of the work.

How US rules define a family office

In the United States, most firms that give investment advice for pay must register with the Securities and Exchange Commission (SEC) or a state regulator. Family offices are treated differently.

The SEC adopted a rule that defines a family office on June 22, 2011. It took effect on August 29, 2011. The rule is known as Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940. A firm that meets the definition is not treated as an investment adviser under that law.

To qualify, a family office must meet three conditions:

1. Family clients only. It has no clients other than “family clients.” These include family members and some key employees.
2. Family owned and controlled. It is wholly owned by family clients and controlled by family members or family entities.
3. Not open to the public. It does not present itself to the public as an investment adviser.

The rule defines “family” broadly. It covers the descendants of a common ancestor, plus their spouses. The common ancestor can be no more than 10 generations above the youngest family members.

Single and multi-family offices

A single-family office serves one family. This is the kind the SEC rule describes.

A multi-family office serves several unrelated families. Because it has clients from more than one family, it does not fit the rule’s definition. The family office rule does not cover them.

Family office or wealth manager?

A wealth manager or private bank serves many clients. It sells its services to the public. A single-family office works for one family, is owned by that family and does not market itself.

For the family, the trade-off is control and privacy against cost. Running a full office takes staff, systems and oversight.

Key terms

• Family client: a person or entity the family office may serve under the SEC rule.
• Key employee: certain senior staff of the office who may also be served.
• Investment adviser: a firm paid to give advice about securities, usually regulated by the SEC or states.

This guide is general information about how the term is used and defined. Rules have more detail than we cover here.

Top photo: mk. s on Unsplash, Unsplash License.