Demystifying the "Family Office"

“Family wealth is not self-perpetuating.  Without careful planning and stewardship, a hard-earned fortune can easily be dissipated within a generation or two.”[1]

First Principles: What Exactly is a “Family Office?”

Family offices are private business entities established by successful individuals or families to manage, preserve, and grow their wealth.[2]  Notably, “family offices” are not a legally distinct type of business entity—unlike partnerships, corporations, or trusts—but rather a label put on those entities.[3] They range from small operations with a few employees assisting the founder and their immediate household to massive, sophisticated enterprises spanning multiple generations.[4] Regardless of their complexity, or lack thereof, a family office’s primary function is financial asset management.[5] While 90% of family offices keep family members closely involved in decision-making, 75% rely on non-family member employees to serve on their investment committee and 44% utilize third parties.[6]

An Evolving Landscape: Amending the Investment Advisers Act

In comes the Investment Advisers Act of 1940 (the “Advisers Act”), which was designed to protect investors from fraudulent business practices by regulating investment advisers and companies that provide financial advice.[7] Regulation includes registration and reporting obligations with the Securities and Exchange Commission (SEC).[8] However, the SEC expressed concerns that these obligations “intrude on the privacy of family members.”[9] 

Historically, family offices either relied on the Advisers Act’s “private adviser exemption” to avoid registration or sought an SEC declaration that they did not qualify as an investment adviser under the Act.[10] Due to this practice, Congress directed the SEC—through the Dodd-Frank Act[11]—to create a new definition of “family office” consistent with its prior exemptive policy and to accommodate the broad range of organizational, managerial, and employment structures found in family offices.[12] The primary reason for providing an exclusion for family offices is because the SEC did not consider them to be the type of organization the Advisers Act intended to regulate, unlike other investment advisers or companies holding themselves out to the general public.[13] On June 22, 2011, the SEC adopted Rule 202(a)(11)(G)-1, which defined a family office as a company that is wholly owned and controlled by family clients, serves only family clients, and does not publicly hold itself out as an adviser.[14]

A Modern Look: Investment Scope, Succession, and Costs of Family Offices

In recent years, many family offices have continued to expand their investment scope, with 45% of the average portfolio allocated to alternative assets such as private equity, venture capital, and hedge funds—as opposed to public equities like stocks—with a target return of 11%.[15] Beyond investments, 70% of family offices prioritize succession planning and next-generation education, while 31% note deficiencies in these areas.[16] Family offices also have high nominal operating expenses, with the average annual operating budget for large, sophisticated offices totaling more than $6 million, and 25% of offices exceeding $10 million.[17]

Looking Ahead: Increased Sophistication and Market Sentiment

As of today, UBS foresees benefits for family offices in the “next stage” of the post-pandemic “Roaring 20s,” fueled by U.S. economic growth, decreasing interest rates, and ongoing AI-related innovations.[18] However, this mid-to-long-term optimism must be qualified by effects that geopolitical tension and tariffs have on the economy.[19] Also, short-term dips in the markets should not dissuade family offices from rebalancing their positions to take advantage of cheaper equities or alternatives in the meantime.[20] Another interesting alternative segment to watch is art due to the art market’s cooldown since the COVID-19 pandemic.[21] Overall, as family offices proliferate, there is a parallel rise in specialized providers, software tools, and best-practice frameworks, granting smaller family offices access to institutional-level sophistication.[22]

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[1] See James E. Hughes Jr., Family Wealth--Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations 3 (Rev. and expanded ed. 2004) (prefacing his book with realities of wealth preservation).  Hughes underscores this message by quoting ubiquitous proverbs among mankind: the American “shirtsleeves to shirtsleeves in three generations,” the Irish “clogs to clogs in three generations,” and the Chinese “rice paddy to rice paddy in three generations.”  See id. at 3, 7 (providing examples of the shirtsleeves proverb found around the world.  Interestingly, Hughes points out that this life cycle mirrors the laws of physics as well: energy combines to form something new, it enjoys a period of consistency or equilibrium, and then it decays.  See id. at 7 (stating that issue for families is to extend period of stasis, or avoid chaos, for as long as possible).  Further variations of the shirtsleeves proverb can be found in Italian culture (“dale stalle alle stelle alle stalle”—“from the stalls to the stars back to the stalls”), and in Mexican culture (“padre bodeguero, hijo caballero, nieto pordiosero”—"father merchant, son gentlemen, grandson beggar”).  See Nathan Crow & Gregory S. Crespi, The Family Office Exclusion Under the Investment Advisers Act of 1940, 69 SMU L. Rev. 97, 98-99 (2016) (providing proverbs as illustration to how rare—only about 10%—it is for family businesses to survive third generation).  

[2] See Family Offices, Investment Advisers Act Release No. 3220, 101 SEC Docket 1449, n.2 (June 22, 2011) (hereinafter “Final Rule”) (defining “family offices”).  Additionally, family offices usually provide highly customized guidance on other areas like estate planning, tax consulting, philanthropy, family governance, and whatever else the family may need.  See Crow, supra note 1, at 99 (listing further priorities of family offices).

[3] See, e.g., Choose a Business Structure, U.S. Small Bus. Admin., https://www.sba.gov/business-guide/launch-your-business/choose-business-structure#combine-different-business-structures (last visited Apr. 6, 2025) (omitting “family offices” as a type of business entity).

[4] See Jonathan Hommer, Managing Your Family Legacy Through a Family Office, Bank of America Private Bank, https://www.privatebank.bankofamerica.com/articles/managing-your-family-legacy-through-a-family-office.html (last visited Apr. 11, 2025) (discussing what family offices are); J.P. Morgan Private Bank, 2024 Global Family Office Report 6 (2024) (reporting on global family office industry). 

[5] See id. at 6 (indicating that over 90% of family offices offer financial asset management services); see also Paul Westall, The Main Purpose of Family Offices, Forbes, https://www.forbes.com/sites/paulwestall/2024/10/15/the-main-purpose-of-family-offices/ (Oct. 15, 2024) (noting primary purpose of family offices is managing family wealth).

[6] See J.P. Morgan Private Bank, 2024 Global Family Office Report 6 (2024) 40 (providing statistics on investment decision making). 

[7] See Ryan M. Harding and Elise J. McGee, To Register or Not? Sec Investment Adviser Guidance for "Family Offices", 26 Prob. & Prop. 22 (2012) (explaining how family offices can rely on Securities and Exchange Commission’s “Family Office Rule” to avoid investment advisor registration under Investment Advisors Act of 1940).

[8] See 15 U.S.C. § 80b-2 (“‘Investment adviser’ means any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities[.]”); 15 U.S.C. § 80b-3 (declaring it unlawful, baring certain exemptions, for investment advisers to do business without registering with SEC); 15 U.S.C. § 80b-3 (requiring investment advisers to furnish certain periodic reports to SEC).

[9] See Family Offices, Investment Advisers Act Release No. 3098, 99 S.E.C. Docket 2015, 5 (Oct. 12, 2010) (providing reasoning why family offices are exempt from obligations associated with “investment advisers”); see also Harding, supra note Error! Bookmark not defined., at 22 (explaining that reporting and registration is “unattractive” for family offices).

[10] See Family Offices, Investment Advisers Act Release No. 3220, 101 SEC Docket 1449, 2–3 (June 22, 2011) (providing background on SEC’s adoption of definitive “family office” rule).

[11] 15 U.S.C. § 78U-6 (2010)

[12] See id. at 3 (acknowledging inefficiencies with obtaining individual exemptions for family offices). 

[13] See id. at 4–5 (explaining reason for exclusion). 

[14] See 17 C.F.R. §§ 275.202(a)(11)(G)-1(b)(1)-(3) (defining requirements of “family office” definition).  There is also a grandfathering provision for family offices advising a narrow set of non-family clients—such as certain former employees or affiliated entities—so long as the arrangement predates January 2010 and meets other specified conditions.  See 17 C.F.R. § 275.202(a)(11)(G)-1(c) (qualifying grandfathering provision with subjection to anti-fraud provisions in Advisers Act).  The new rule also defines key terms essential to the family office exemption such as “family client” (which includes specific categories such as family members, former family members, key employees, spouses or equivalents under limited circumstances, certain charitable organizations exclusively funded by family clients, estates of family members, irrevocable and revocable trusts of family members, and companies owned entirely by family clients).  See 17 C.F.R. § 275.202(a)(11)(G)-1(d) (defining “Family client”).  Moreover, it addresses how control and ownership must be kept within the family.  See id. (defining “Control”).

[15] See J.P. Morgan Private Bank, 2024 Global Family Office Report 3 (2024) (stating that these figures are number one takeaway of entire report).  The 11% figure comes in just above the roughly 10% average return of the S&P 500 index since 1957.  See J.B. Maverick, Julius Mansa & Vikki Velasquez, S&P 500 Average Returns and Historical Performance (last updated Dec. 26, 2024), Investopedia, https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp (providing historical S&P 500 returns).  The Standard and Poor’s 500 (S&P 500) is an index of the 500 leading U.S. publicly traded companies, primarily determined by their market cap.  See Will Kenton, Michael J. Boyle, & Jiwon Ma, S&P 500 Index: What It’s for and Why It’s Important in Investing (last updated June 12, 2024), Investopedia, https://www.investopedia.com/terms/s/sp500.asp (explaining what S&P 500 is). 

[16] See J.P. Morgan Private Bank, 2024 Global Family Office Report 3 (2024) (noting this as key takeaway number four). 

[17] See id. (providing key takeaway of family office report.)

[18] See UBS, UBS Family Office Quarterly, a Family Office Solutions Publication: First Quarter 2025 5–6 (2025) (noting 50% gain in global equities since 2020, 30% increase in nominal U.S. GDP, and 70% increase in U.S. corporate profits).

[19] See id. at 7–11 (noting that President Trump’s “peace through strength” approach to foreign policy may increase market volatility). 

[20] See Carolyn Barnette, How Tariffs May Affect Markets and Investment Portfolios (Mar. 5, 2025), BlackRock, https://www.blackrock.com/us/financial-professionals/insights/tariffs-and-investment-portfolios (illustrating how financial leaders recommend using sell-offs to buy undervalued assets, aligning with rebalancing strategies); Barbara A. Friedberg, Khadija Khartit, & Yarilet Perez, How to Rebalance Your Portfolio (last updated Mar. 2, 2025), Investopedia, https://www.investopedia.com/how-to-rebalance-your-portfolio-7973806 (noting how adjusting portfolio during market drops enables buying equities at lower prices); Angelo Kourkafas, Unpacking the Impact of Reciprocal Tariffs: Stay Diversified, Stay Invested (Apr. 3, 2025), EdwardJones, https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/market-pulse/unpacking-potential-impact-tariffs (using data to show that remaining in markets during volatility, rather than exiting, maximizes returns—key for family offices rebalancing to exploit cheap equities). 

[21] See UBS, UBS Family Office Quarterly, a Family Office Solutions Publication: First Quarter 2025 15–17 (2025) (suggesting massive opportunity for family offices to take advantage of reduced art market activity). 

[22] See id. at 25–26 (noting that “there are over thirty specialized software platforms for family offices that offer a range of services, from consolidated reporting to tax, estate and portfolio management.”).  In 2004, searching “family office” would yield 200,000 results compared to over 10 million today.  Id. at 26 (noting parallel increase in family office and wealth management services).