The Three Types Of Family Office
In our study, we broke the family office universe into three types: the single-family office, where there is just one client family; the multifamily office, which works with a number of families, including an anchor family that controls at least 30% of the total assets; and a commercial family office, which works with a number of families but lacks an anchor family.
Of the 653 family offices in our survey, 92 were single-family offices, 234 were multifamily offices and 327 were commercial family offices. The number of families and assets varied dramatically among the three offices, with the single-family type the smallest and wealthiest (Exhibit 3).
Single-family and multifamily offices are typically run by an executive director while commercial family offices are run 234 by elite brokers, private bankers, accountants, boutique firms and investment management firms. Referring back to our levels of exceptional wealth, the low-end exceptionally wealthy are primarily candidates for commercial family offices, the mid-range for commercial family or multifamily offices and the high-end for all three types, though they naturally gravitate to the single-family office.
Why Open Or Join A Family Office?
When we looked more closely at family offices by office type, we found that far more than money separated them; they were also driven by very motivations.
As you can see from Exhibit 4, for single-family offices it's all about control, cited by every respondent. That was followed by economies of scale, mostly from investment management because family offices can get institutional pricing. Almost two-thirds of the executive directors cited the importance of serving as a buffer and gatekeeper for family members, and a similar number were motivated by access to otherwise unavailable investment opportunities as a result of the combined family fortune (personal and professional connections were also key in that regard).
The multifamily offices were also unanimous in citing control as the leading motivation, and economies of scale and accessing investments were again prominent on the list (Exhibit 5). But the number two motivation, generating a profit, didn't even appear on the list for single-family offices. That makes sense because the single-family office is all about the family, while the multifamily office is often a way for the anchor family to not only increase its leverage but also to make money.
Lastly, as we can see from Exhibit 6, commercial family offices may be of the same genus but they are an entirely different species. Control, for instance, was not on the list at all, and profit instead led the way. Again, this is understandable, as a commercial family office is, in effect, a retail business as opposed to, in the case of a single-family office, a private enterprise. There are too many families involved for control to be delivered on a family-by-family basis, but attention is another thing.
Commercial family offices operate in a highly competitive environment, and providing family office services is seen as a way to differentiate a firm and also deliver greater value for the family. That, in turn, can help win more affluent clients. And, again, those families can put their money together to get into investments that would otherwise be way over their wallets. In sum, families with "only" $5 million are now able to enjoy some of the benefits accorded the ultrawealthy, but they should not expect the same level of attention or service from a commercial family office that a single-family office provides.
(Next month we'll look at the investment management services that family offices use and those that they expect to be using in three years.)
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.