NY Times - A Family Office for the Superrich

STEVEN A. COHEN, the billionaire hedge fund manager, has been in the news for a string of insider trading convictions of current or former portfolio managers at his SAC Capital Advisors. But less attention has been given to his decision to convert his hedge fund into a family office to free himself from Securities and Exchange Commission regulations.

To do so, he has to return all the money that does not belong to him or to key employees — although many of those outside investors have already asked for it back. He’ll be left with about $9 billion and 800 employees to pay without the revenue from hefty management fees from outside investors.

While this may sound like the realm of billionaires — and it is, for sure — the purpose of family offices is broader than just avoiding oversight. Real ones do much more than just manage money, as a hedge fund does: They have to take into account family relationships, taxes and, of course, employees who can be privy to personal information. How family offices work well — and sometimes not so well — is also instructive for people whose wealth wouldn’t even cover the annual expenses of a family office.

Family offices date to the 19th century in the United States — with John D. Rockefeller’s being the most famous — but few family office advisers can agree on a precise definition of the services a family office should provide or how much money a person even needs to start one. (The range is $100 million to closer to $1 billion for it to be worth the associated costs.)

They can operate as a premium concierge service — booking vacations to far-flung locales and scheduling dog grooming appointments — or be purely financial in focus, with rows of analysts poring over a family’s every possible investment option.

They are just as likely to be used to find outside managers for the family’s wealth, pay bills and taxes and coordinate meetings among generations of family members.

on Carroll, president and chief executive of Family Office Metrics, a business consultant to family offices, said the best ones act like multidisciplinary professional services firms with experts in investments, auditing, legal services, tax preparation and compliance all under one roof, with the family as the only point of concern.

Not all of them are so complex. Some family offices have only an accountant and an assistant to keep track of statements and help the family.

Either way, they can be costly. Charlie Grace, managing director at the Family Office Exchange, said the annual costs could run from $400,000 for a couple of employees for a $100 million family office — which would be on top of investment management fees — up to $8 million to $12 million per year for 30 or 40 employees at a multibillion-dollar office.

 

“As the family gets larger, family office members have less wealth or there is an imbalance of wealth, since someone was more entrepreneurial or someone had five children and someone else had one,” said Mindy Rosenthal, president of the Institute for Private Investors (IPI), a membership organization of wealthy investors. “You’re going to find different levels of wealth in a family and it gets harder to hold everything together.”

 

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