A Guide to the Family Office Investment Strategy

If you have seen the show “Billions” before, then you may or may not know that the show is loosely based on a real person who ran a very successful hedge fund. That person’s name was Steven Cohen, and the fund was called SAC Capital. Steven Cohen, at one point in time, got in trouble with regulators and had to close his fund. Instead, he converted his money into a family office structure. These days, family offices have become more prevalent. But how do they work? Let’s break it down below.

A family office is a private wealth management firm that is set up to manage the wealth of one family or multiple families. The firm offers a dedicated solution to managing a family’s assets among different asset classes. Family office investments offer a streamlined approach, vast services, lower capital management fees, and possible tax advantages.

A family office serves high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs). They can also serve as a platform in which fund managers who have been locked out of managing other people’s money continue to invest using their own money.

So why would someone choose to set up a family office? Why not just go and give the money to a bunch of different money managers you know personally? A family office offers the following benefits:

Let’s look at each of these benefits in more detail.

Family offices offer an all-under-one-roof streamlined approach to asset management. They focus on just one client or an exclusive handful of clients and thus completely comprehend the client’s goals and objectives. Think of a family office as a gigantic financial advisor who has their client’s goals and objectives in mind, and streamline the process accordingly. The family office might have staff such as private equity managers, financial advisors, lawyers, tax and estate specialists, and even someone to manage venture capital investments.

One of the ways to protect money while generating a return is to diversify investments as much as possible. In the case of family offices, this includes being able to diversify around the globe. For instance, a family office might direct its clients to commercial property in London, a private equity deal in Singapore, and perhaps a portfolio of inexpensive ETFs to boot. In many cases, HNWIs and UHNWIs will set up a family office just to diversify as much as possible. Many times, family offices will look for income-producing assets in first-tier cities (those with the most-developed real estate markets).

Nicole Beauchamp, a real estate professional in New York, has seen clients look for cash flow strategies all over the city. “Location, market trends, and maintenance/management costs are three key factors to think about when evaluating opportunities,” she says. “Often clients will approach initially thinking of one area, but based on their goals, considering areas where there’s high demand (which can be a leading indicator for steady cash flow through rental income), may mean considering commercial real estate or residential multi-unit/family properties. Investing in real estate investment trusts (REITs) or rental properties in high-demand areas can be worthwhile for generating cash flow.

Rachel Goldman is an associate at SVN Commercial Advisors who advises family offices on purchases they make in the commercial space. She thinks family offices are looking more toward commercial real estate. “The returns in CRE by far surpass the residential returns,” she says. “First-tier cities are still recovering from the pandemic; there continues to be economic disruption in global cities. If anything, while the cities suffer, secondary and tertiary markets continue to thrive and see massive population growth. Investments in secondary markets is a safe middle ground.”

The family office’s main priority is to preserve capital as well as generate a return. However, many family offices will provide much more than that, including estate planning, corporate structuring, insurance, and tax advice. Many family office investors will opt to create a family office for the suite of services in addition to investment management. This holds particularly true when it comes to estate planning. There are even private companies, such as Estate Space, that offer a full suite of services for clients with multiple assets and multiple goals. Estate Space has developed a platform that allows affluent family offices to streamline their approach to family offices. They have a track record of being able to handle everything from property and estates, to high end construction, to other services that are more geared towards family office.

As a family office is a firm or company often set up under a corporation or LLC structure, it can benefit from tax deductions applicable for qualified businesses. As long as the family has “operations in a continuous and business-like manner for the purpose of earning a profit, and it [provides] valuable services to its clients for compensation,” it can qualify.

It’s well known in the industry that if you are an accredited HNWI, you’ll need to pay to get a spot in hedge funds or private equity funds, for example. These fees are typically 2% of the assets under management and 20% of the profit, although they can differ. In 2016, a white paper by Credit Suisse said that overall costs could range from 30-120 basis points, or around the 1% mark. This is significantly cheaper than what a hedge fund would charge.

Family offices are easier to manage as they are excluded from the Advisers Act, which pertains to managing other people’s money. This is why family offices are the vehicle of choice for HNWIs who were previously finance professionals.

There are several ways to structure a family office. Here are some of the most common variations.

The original family office is just a single-family office set up for one individual or one family and its family members. The family office staff is solely dedicated to preserving and growing the wealth attributed to one family. The family office might have staff such as an accountant, financial advisor, tax specialist, estate planner, and more.

A multifamily office will manage the wealth of multiple families, not just one. A multifamily office might be preferred by those individuals who consider themselves high-net-worth and not ultra-high-net-worth. One advantage of a multifamily office is that although they are not solely for the benefit of one client, they might have better connections to a global asset pool because of their history with other clients. For example, if one client had a private equity placement that went well in Singapore, chances are they will open it up for another client.

An embedded family office is a cheaper option for HNWIs and their families than a separate independent family office. The embedded family office will most likely be embedded in an enterprise that already exists. Many times the “staff” of the EFO won’t be solely dedicated to the owning family’s wealth management. Instead, they might be an existing finance or tax compliance professional that handles family office responsibilities as well.

An outsourced family office isn’t really a “family office” per se; it’s more of a streamlined financial services and wealth management platform. It’s a collection of lawyers, tax specialists, financial advisors, and others that are responsible for tending to the client’s needs. Many times, it might be one point of contact who has connections to all the rest, which will then help streamline the process.

If you have a family of high earners, you can learn more about how wealth management works and compare your options for wealth management firms. You may also want to seek out an investment advisor to help you manage your finances.

A family office focuses on managing the assets of high- or ultra-high-net-worth individuals. It also offers an all-in-one, streamlined approach to various aspects of wealth management. Furthermore, most family offices will include a full suite of staff and services dedicated to protecting and optimizing the wealth of the family.

Pretty much anything under the sun, in terms of investments, can be managed by a family office. This includes but is not limited to financial assets, real estate assets, private equity investments, and alternative investments like crypto holdings.

One strategy is to diversify as much as possible on a global scale to both chase yield and wealth protection. For instance, a family office might have real estate holdings in London, a private equity deal in Singapore, and various other investments located around the world.

For a traditional family office or even a multifamily office, an individual or family must be a HNWI or UHNWI. The costs are not as prohibitive for embedded and outsourced family offices. Therefore, it might be best to start off with a cheaper version of a family office and then work your way up to a full single-family office.

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