The term Family Office is increasingly resonating in the public domain. These Family Office entities are mainly associated (in various contexts) with the asset management of very successful entrepreneurs and their families. In the socio-economic realities of České republiky, however, this is a relatively new phenomenon.
Given the traditional and understandable interest in maintaining the discretion of Family Office operations, their functioning is nonetheless accompanied by a number of unknowns. So, what should one imagine under this term, and what are the key functions of a Family Office?
Generally, it can be said that this is a certain organized and personnel-secured form of management of private assets and related family matters. However, the forms and character of individual Family Office entities differ significantly in the scope of performed activities and the nature of managed assets.
History of Family Office
The concept of the Family Office has a fairly rich history. It is encountered wherever the scale of affluent families’ assets and the complexity of their management required a clear structure and organization. The foundations of organized family asset management through designated personnel reach back to ancient Rome. There, a key role in managing the most important affairs of the respective clan was played by the so-called maior domus (the highest-ranking servant).
The emergence of the first modern Family Office entities took place during the 19th century, directly related to the industrial revolution and the rapid growth of private wealth among the wealthiest families. Noteworthy examples of these Family Offices undoubtedly include the so-called House of Morgan, managing the assets of the J.P. Morgana family since 1838, or the Family Office established by Johnem D. Rockefellerem in 1882.
However, a more significant expansion of these structures occurred only in the 1980s, initially in Spojených státech and subsequently globally. This trend directly correlated with the then unprecedented rate of accumulation of private capital.
Basic Outlines of Contemporary Family Office Entities
Contemporary Family Office entities can be defined as specialized groups or independent entities established mainly for the purpose of managing and developing family assets (so-called wealth management) and meeting the financial or personal needs of family members.
The agenda of a Family Office typically covers a diverse spectrum of activities and services related to the strategic allocation and professionalized management of various types of assets, succession planning (so-called succession planning), including systematic education and development of the next generation, support for family members, or philanthropy.
For this purpose, a Family Office is appropriately staffed depending on the nature of managed assets and the needs of family members. The activities of the Family Office are ensured by a range of people from administrative staff to specialists in law, finance, taxes, accounting, and other areas. Part of the team usually operates in-house, and part of the activities is provided externally by cooperating entities. The structure, functioning, and scope of provided services differ considerably depending on the specific needs of family members.
Family Office entities can be classified according to several different criteria. First of all, it is necessary to distinguish between Single-Family Offices and Multi-Family Offices.
The traditional model is the Single Family Office (SFO), in which the respective entity, founded by the will of family members, provides comprehensive services exclusively for the benefit of one specific family. This model naturally has a more personal and confidential character.
The term Multi-Family Office (MFO) refers to a specialized entity serving the needs of multiple families. It usually arises from the joining of a group of wealthy families to share the costs of similar services or from the initiative of professionals and financial institutions offering services to their clients. In a number of Western countries, MFOs—unlike SFOs—are subject to stricter supervision and regulations.
This article is primarily focused on illuminating the reality of traditional SFOs.
Functioning and Activities of Family Office Entities
The functioning of a Family Office is based on coordinated cooperation among involved family members, the executive management of the office, and a team of experts usually in law, finance, accounting, and taxes, who provide the Family Office with specialized services.
A Family Office can also provide a range of other functions, e.g., in the area of lifestyle or personal and cyber security of family members. The relationship between the family and the (traditional) Family Office is usually very close and confidential. In fact, part of the Family Office's activities is often focused on organizing and supporting the family in private matters of everyday life, including relationship management and mediation among family members.
However, the agenda of a Family Office can also be, and often is, more narrowly focused, for example solely on the active management of an investment portfolio or equity stakes in business corporations and related activities.
Family Governance and Organizational Structure
At the highest level of Family Office organization, rules of communication and decision-making by family members are typically established regarding key questions of asset management and future direction (so-called Family Governance). Transparent regulation of these aspects helps prevent internal conflicts, integrates the interests of individual family members, and ensures the smooth transfer of assets across generations.
The platform for the participation of family members in the operation of a Family Office is usually a special body called the family council or family assembly. In larger families, it may happen that only some family members are selected or appointed, according to predetermined rules, to participate more intensively in the management of the Family Office in a narrower circle and to represent the interests of a broader circle of the family in operational matters.
The executive management of the Family Office and coordination of cooperating entities is usually entrusted to one person, who acts as a mediator between the family and the executive apparatus of the Family Office. Within the Family Office, there may also be specialized committees dealing with a particular range of issues (e.g., financial department, investment committee, or management committee for property administration and asset disposal).
Form of Family Office
A Family Office may take the form of many different entities or structures depending on the jurisdiction and legal framework under which they are established. Foreign (especially Western) legal frameworks, considering their long-term experience with intergenerational transfer of family assets, offer a relatively wide portfolio of entities adapted to this purpose (e.g., Liechtenstein foundations). It is not uncommon that assets of some Czech families are also managed through foreign entities for various reasons.
In the reality of the Czech legal framework, the concept of a Family Office is most closely approximated by private trust and foundation funds by their very nature. These entities typically directly own the managed assets, with all activities of the Family Office subsequently performed under their auspices.
Of course, it is not excluded that a Family Office may actually operate, for example, as an independent business corporation (in the form of a limited liability company or joint-stock company) or only “informally,” e.g., within one of the business corporations in family ownership.
The article was published on the website Ekonom.cz
Authors:
Adam Weisser, junior associate at Portos, advokátní kancelář s.r.o. and senior consultant at CCS Premium Trust a.s.
Jakub Hollmann, Owner of the Portos law firm and Chairman of the Board of Directors of CCS Premium Trust
