Peter Begalla: We’re here with Bobby Stover from EY and we’re talking family offices. This is part one in a series where we go in-depth as to what a family office is and the types of family offices there are. So, Bobby, we’re in part one. Tell us what a family office is.
Bobby Stover: Well, Peter, thanks for having me. Probably the modern definition really started with J.P. Morgan when he J formed the house of Morgan in the late 1800s. And that was the first modern family office. What is it definitionally? It’s an organization that’s built to serve the needs of the family, however the family defines that. If we think in modern regulatory times, most people look to a family office definition which sits in the 1940 Banking Act, and I’ll come more to that when we talk about the types of family office.
Peter Begalla: SI would imagine because there are so many different types of families and so many different types of needs within these multigenerational or financial families that there are probably different types of structures for family offices.
Bobby Stover: There are single-family offices, and multi-family offices, and we hear about virtual family offices. Then people often ask: do I buy or build it? So a single-family office is an organization that works for a single family. The 1940 Investment Advisers Act says that a family office starts with a certain generation and can go ten generations beneath that. So you could think of that as a single family. There are also different types of single-family offices. Some are embedded in the operating company, you could have an administrative or tax office only. You could have an investment office that just handles your investments, or it could be full-service and handle numerous things. And then finally, Peter, we’re now seeing private trust companies which handle trust administration being thought of as family offices. Then we go to multi-family offices, which are defined as an office that works for multiple unrelated families. Several of these are regulated and registered in the United States because they have to be. And then finally, virtual. Everybody’s got a virtual family office in today’s Brave New World and has some sort of hybrid of people they hire internally and externally.
Peter Begalla: When does the family know that they need to do this work? Why are they setting up a family office, either a single or a multi?
Bobby Stover: Peter, I think it comes down to complexity. There’s no one answer. But generally it’s when the complexity of the business of the family starts to take away from other priorities. So that’s number one. Number two, privacy has become a huge issue. So if I have multiple advisors and things kind of all over the place, I’d like to have that in one place so I can manage it all. Who’s touching my data and my information in a multi-generational family business is the third one. As families grow, the family becomes more complex than when it was just me and my two siblings. When we have cousins and multiple cousins, you may want to have an office to support that.
Peter Begalla: What does a family office do?
Bobby Stover: What I like to say to people is take an inventory of your family’s life. So think about what your business does for you. What are your advisors doing for you? Who does your tax returns? Who does your investments? Who helps you with your property taxes? Or auto insurance? Once you have that full inventory, any and all of those things could go into the family office. Once you look at that, then you could prioritize them on importance versus risk and then decide what items would lead you to put things into a family office.
Peter Begalla: So you can create a menu of services custom tailored to each family.
Bobby Stover That’s right, Peter. And it’s the best way to go about it, because then you know what the office is going to do. And once you have that menu of services, it’s easier to decide: Do I build it myself? Do I build part of it myself, or do I fully outsource it?