The Wall Street Journal reports that since 2011, “three dozen hedge funds have converted into family offices.”[1] Recent statistics indicate that family offices hold a combined assets under management (AUM) of over $4 trillion.[2] And yet, they are largely operating under the radar, as news coverage and public knowledge regarding family offices is scarce. This blog post will explore (1) the origins of family offices; (2) their current legal status under U.S. securities regulations; and (3) the implications of their recent surge in popularity.
The Family Office Exchange defines a family office as “a unique family business that is created to provide tailored wealth management solutions in an integrated fashion while promoting and preserving the identity and values of the family.”[3] The entities currently referred to as “family offices” are said to have originated in Europe.[4] Scholars posit that affluent families have been entrusting family offices with the management of their vast wealth as far back as the Renaissance.[5] Their function was not merely limited to traditional banking services. Family offices dealt with complex questions including “the strategic management of the family’s business, the management of and risk assessment concerning significant sections of their business, and estate planning and fulfillment of the differing requirements of family members.”[6] And while the concept originated in Europe, it was not long before it was transplanted to the United States. Experts agree the first movers in the U.S. was the House of Morgan, with the Rockefellers adopting it soon thereafter.[7]
As you are reading this, you may be asking to yourself why retail investors or corporate lawyers should be concerned with the ways in which the affluent manage their wealth. The answer lies in the recent proliferation of family offices as a mechanism to deploy exponentially-increasing amounts of capital. Ernst and Young report that the number of operating single-family offices almost doubled over the past fifteen years.[8] Moreover, U.S. securities regulations tend to give family offices favorable treatment. In 2011, the Securities and Exchange Commission (“SEC”) approved rule 202(a)(11)(g)-1 (“Family Office Rule”).[9] Essentially, the Family Office Rule exempts family offices from onerous registration requirements under the Investment Advisors Act.[10] This lack of regulatory oversight is beneficial to family offices, as it enables them to preserve a significant level of control and privacy over other methods of operating.[11]
These benefits have led to the recent surge in the use of family offices as an investment vehicle, as opposed to private equity funds and hedge funds. As the number of high net worth individuals continues increase, so will the prevalence of family funds being used as an investment vehicle.[12] However, this newfound popularity reflects an economic trend where the disparity in wealth distribution has become exacerbated.[13] Accordingly, it is crucial that regulators closely monitor the ways in which family offices deploy capital so that potential abuses can be deterred.
[1] Anupreeta Das & Juliet Chung, New Force on Wall Street: The ‘Family Office, Wall St. J.(Mar. 10, 2017), https://www.wsj.com/articles/the-new-force-on-wall-street-family-offices-1488991396.
[2] Francois Botha, The Rise of the Family Office: Where Do They Go Beyond 2019?, Forbes (Dec. 17, 2018), https://www.forbes.com/sites/francoisbotha/2018/12/17/the-rise-of-the-family-office-where-do-they-go-beyond-2019/#426044f55795.
[3] Family Office Exchange, FOX Guide To The Professional Family Office (2014), https://www.familyoffice.com/sites/default/files/public_resources/F00132_FOX%20Guide%20to%20The%20Professional%20Family%20Office_Introduction.pdf.
[4] See Botha, supra note 2.
[5] See Andreas J. Bär, Daniel Bader, & Daniel Leu, Single Family Offices in Switzerland, Practical Law UK Practice Note 9-522-0304 (Oct. 1, 2012).
[6] Id.
[7] See Botha, supra note 2.
[8] Ernst & Young, EY Family Office Guide, at 5 (2016), https://www.ey.com/Publication/vwLUAssets/ey-family-office-guide/$FILE/1006031-family-office-guide-hr.pdf.
[9] See Investment Advisers Act of 1940 § 202(a)(11)(G), 15 U.S.C. § 80b-2(a)(11)(G) (2015); Family Offices, Advisers Act Rule 202(a)(11)(G)-I, 17 C.F.R. § 275.202(a)(11)(G)-I (2015).
[10] See id.
[11] For a more detailed analysis of the Family Office Rule, see Nathan Crow & Greg S, Crespi, The Family Office Exclusion Under the Investment Advisers Act of 1940, 69 SMU L. Rev. 97 (2016).
[12] See generally UBS, Billionaires Report 2018, https://www.ubs.com/global/en/wealth-management/uhnw/billionaires-report.html;The Number of Millionaires Continues to Increase, Investopedia, https://www.investopedia.com/news/number-millionaires-continues-increase/(last visited Apr. 7, 2019).
[13] See, e.g., Facundo Alvaredo et al., World Inequality Report 87 (2018).
