By Michael Tierney, April 12, 2023
Let’s start by looking back at the evolutionary arc of the family office concept in U.S. history, from the 19th century industrial revolution to today’s digital revolution. Over that time, we observed the beginnings of some of the first family offices that were very expensive to run and maintain. Beginning in the 1970’s, due to the effects of commercialization, a family office became more affordable but less effective in the service of a family’s mission. Today, the past intersects with the present, the original model of the family office combined with modern digital technology produces a more effective and efficient solution. In the new model, one fiduciary, acting as head of the family office, leads the family and engages multiple professional organizations outside the family to provide the services that were once all in-house.
The first true Family Office (FO) formed in the 1800s when the Industrial Revolution gave birth to the titan families of industry. The overarching purpose of the FO was laid out by Nathan Mayer Rothschild in 1834: to minimize financial entropy (Entropy and Safeguarding Wealth – April 2021). It was almost 50 years later when in 1882, J.D. Rockefeller, widely credited with establishing the first in the U.S., launched his own full-service single-family office. His fortune stood at $1.4 billion at his death in 1937, equivalent to over $250 billion today.
In the first half of the 20th Century, other very successful families, such as the Carnegies and Vanderbilts, followed suit and formed single-family offices. These titan family offices were well staffed and very expensive, even for billionaires. But their execution against financial entropy, the primary mission, was high, and the family office paid for itself many times over.
To defray high costs, some enterprising families invited other families into their FO circle and the private multifamily office (Private MFO) was born. This was evolutionary but not revolutionary. The early Private-MFO’s were still enormous, a little less costly, and still effective at combating financial entropy.
In the 1970’s, private banks with their customized services were already popular, and many of them formed what is now known as commercial multifamily offices (MFO’s). These became far more common than their private predecessor. MFO’s were designed to turn out a profit for the services provided to multiple wealthy families under its client umbrella. The MFO is considerably less expensive per family, but less effective executing against the family mission – to minimize wealth decay. The MFO’s proposition to families is cheap, one-stop shopping. It is a bundled family office services proposition. When in human history has the term “bundled” meant anything other than an expensive convenience. It is a profit-first, mission-second solution for the bank.
As the 21st century rolled in, so did the digital age. Family office services went viral, along with the acronyms that describe them. The virtual family office (VFO) was born, and the name made the family office seem intangible. The outsourced family office (OFO) came next which asked the question, how does one outsource trust, the bedrock of any family office? In truth, these are all good commercial businesses but not for families of all sizes. VFO’s, OFO’s and MFO’s today all have a place along the personal wealth spectrum where they add value.
At the upper end of the spectrum of wealth, for families with hundreds of millions in net worth, their complexity demands customized services and strategies from leading firms in legal, accounting and investment management. These are the three core areas of family office services; large families will likely need more than three as circumstances dictate. Best-in-class offerings in these three core areas for family office services do not exist under one roof, no matter what multi-million-dollar marketing budgets might argue. It is axiomatic. For example, when an estate lawyer leaves law to join a private bank, that lawyer had not been, nor will be, offering best-in-class legal advice. In the realm of extreme wealth, families do not need elementary estate planning solutions a non-law firm would recommend, thus leading to the new model for family offices.
There is a hybrid model for family offices now that leverages today’s technology advances with the values and mission of the original family offices of the 19th Century. Place a fiduciary as the head of the family office, and at a minimum, she (or he) must know and have arms-distance relationships with best-in-class providers at the three core competencies of family offices – legal, accounting, and investment management. Digital technology will provide all the administrative glue required to link those outside services to the fiduciary and the family. The advantage of this new hybrid model is there is no loss of thought leadership in legal, accounting and investment management, and it is less expensive than any other family office configuration. This modern hybrid model may be best for billionaire families but is also now an attractive option for all families with a current family office or considering one.