Expansion of family-office industry leads to blurring of distinctions

Here's a question: what is a family office anyway? There was a time, long ago, when the answer was pretty straightforward: a group of people employed by a family to look after their day-to-day financial affairs.

But with the proliferation in recent years of multifamily offices, private and investment banks with their own "family offices", not to mention hedge funds that have mysteriously morphed into family offices, the term has become extremely confusing.

These days, comparing different sorts of entities that call themselves family offices is not so much like comparing apples and oranges, says one person in the industry, but "all sorts of vegetables and all sorts of fruits".

Plenty of people are sceptical about the new breed of so-called family offices. David Murray, son of Scottish industrialist Sir David Murray, who at one point owned Rangers football club, runs his family's family office. "I know a few multifamily offices, and it does strike me they are really asset managers in disguise," he says. "There are more and more of them, especially in London, so I would question how much of a family office they really are."

A recent paper in The Journal of Wealth Management called "A family office by any other name" argued that a wealthy family "seeking a true family office experience and set of services" would be "unwise" to believe "they will receive it from a traditional wealth management firm just because it calls itself a family office".

Paul Kearney, a managing director at Kleinwort Benson who advises family offices, says: "The term has become so stretched that it covers any firm that has families as its clients."

Some history might help clarify matters. The family office was invented by wealthy American families - the Rockefellers are often credited with creating the first. They wanted something parallel to the "estate office" the landed gentry used to run their estates. That involved the land agent and estate manager who ran the commercial activities, and perhaps the butler and private secretary controlling the household.

The duties of the first family offices included functions such as dealing with tax, running the family's philanthropic activities, managing trusts and producing family constitutions, advising on art, architectural matters, property or direct investments, and housekeeping-like chores such as buying opera tickets, paying school fees, vetting chauffeurs and making sure the cleaner got paid.

Every family had its own needs, so the family office's function varied accordingly. As time went on, some families with similar needs pooled their single-family offices into multifamily offices.

If the family wealth is at an early stage of development, the office might also invest some liquid assets. "Family offices that manage investments tend to be more first or second generation," says Edward Collins, managing director of Hanson Asset Management, which grew out of the Hanson single-family office. Assets are still small at that stage and investing the money is a relatively straightforward job. When the wealth increases, it becomes uneconomical to do this in-house and wealth management is outsourced.

Wealth management, therefore, is a relatively minor part of the classic family office's function. And yet this activity has been seized upon by wealth managers who have badged themselves as family offices, or multifamily offices.

True, some, like London-based Stonehage, which recently merged with Fleming Family & Partners, began life helping wealthy South Africans move their assets overseas during the apartheid era and so have a wide range of expertise.

But many organisations that call themselves family offices are more or less pure-play investors of liquid assets. Whether they are family offices in any real sense is unclear.

Why has this confusion arisen? Largely because, as the Journal of Wealth Management article argues, the name "has been co-opted by the traditional financial services industry in its marketing and positioning efforts".

"It's a fashionable term, a bit like 'hedge fund'," says Mr Collins, "but there are all sorts of hedge funds." Mr Kearney adds: "It connotes a level of personalisation and sophistication that is a useful device to throw over your entire business proposition.

Regulation has also muddied the waters somewhat. Since 1940, US family offices have been exempt from much of the regulation that applies to wealth managers, and the Dodd-Frank Act of 2011 reiterated this.

It defined family offices as "entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services". In other words, only single-family offices count.

However, several hedge funds that invested the wealth of a single family have started calling themselves family offices. This has probably blurred the lines between the two types of entities in some minds. Adding to the confusion is that numerous single-family offices have converted to multifamily offices. Even the Rockefellers' now has 259 clients.

So, to put it bluntly, the answer to "does it matter?" is yes. Or, to put it less bluntly, caveat emptor.

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