A third-generation family office serves 47 family members across 14 branches. The founding patriarch wanted capital preservation. His grandchildren want impact investing. A 52-year-old branch funds three startups. A 19-year-old branch needs tuition next year. There is no single investor. There is a federation of goals, each with its own horizon, risk tolerance, and tax profile. The endowment model cannot answer who the portfolio is for.
A family office manages the capital and financial affairs of wealthy families. The curriculum draws one structural distinction.
- Single-family office (SFO). Management is dedicated to a single individual or family. Running one costs approximately 60 basis points of assets under management (AUM) per year.
- Multi-family office (MFO). Several families share one office, either to split operating and back-office costs or to combine investment ideas.
As a separate rough guide, running your own office makes sense from about $1 billion of AUM; a smaller family usually does better splitting costs with other families in an MFO.
Common mistakes
- Treating rules of thumb as thresholds. About $1 billion is a guideline for a dedicated office, and $30-50 million describes MFO families. Neither is mandatory.
- Optimizing pre-tax when the family pays tax. With a 40% ordinary rate and a 20% long-term rate, Section 1256 treatment cuts the effective rate from 40% to 28%.
- Assuming lifestyle assets must be rebalanced. When the family intends to keep them outside rebalancing, they can be treated as a fixed constraint, with growth and transfer buckets as balancing portfolios.
Bottom line
- Family offices are single-family or multi-family: an SFO costs about 60 bps of AUM per year and is a rule-of-thumb fit around $1 billion; an MFO pools UHNW families holding over $30-50 million
- No uniform model: offices differ in family involvement, infrastructure, internal versus external management, private-bank use, and outside clients, which can trigger SEC registration
- Generation shapes allocation: first-generation new money leans toward preserving concentrated wealth, while second-generation and later old money grows wealth with an after-tax, long-term-gain focus
- Taxes are a significant constraint: with 40% ordinary and 20% long-term rates, Section 1256 contracts (60% long-term, 40% short-term) cut the effective rate from 40% to 28%
Exam shortcut
Size the structure first: about 60 bps of AUM per year for an SFO, about $1 billion as a guideline, and MFOs for UHNW families over $30-50 million. Nonfamily capital means SEC registration, equal treatment, and higher operating costs. Use after-tax numbers. With 40% ordinary and 20% long-term rates, the blend is 28%.
The full lesson (about 6,599 words, 44 min read) adds 2 worked examples, all 4 common mistakes, a self-check, free in the app.
Learning objectives
- institutional owners
- saa risk return
- aa objectives constraints
- ips purpose roles
- ips return risk spending
- ips aa manager selection
- defining endowments
- intergenerational equity
- endowment model
- large endowment performance
- endowment risks
- liquidity rebalancing taa
- tail risk
- pension development types
- pension risk tolerance aa
- defined benefit
- social security
- db vs dc
- annuities retirement
- liability management interest rate
- sovereign wealth sources
- swf types
- swf establishment mgmt
- swf governance political
- swf analysis three
- identifying family offices
- fo goals benefits models
- fo generational goals
- fo macro exposures
- fo income taxes
- fo lifestyle assets
- fo governance
- charity philanthropy
- goals based investing
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