How The Wealthy Use Family Offices

How The Wealthy Use Family Offices by Jerry Fetta

First, I’ll start by letting you in on a little secret.

The ultra-wealthy DO NOT use financial advisors.

I know that sounds counter to what we are told, but it’s true.

They don’t invest in mutual funds, annuities, index life insurance products or any of the other Mainstream, Retail Financial Products & Services.

In fact, the Financial Advisor as we know it has only been around since about the 1960’s or 70’s.

Prior to that there were just Brokers. Brokers would sell you a stock, bond or insurance. But they got a bad rap because they’d sell you and I things that weren’t good for us just so they could make money (think Wolf of Wall Street).

So Wall Street and the Banks got together and came up with a plan to fix their negative Public Relations image and also create a massive distribution force called a Financial Advisor.

They created licenses, certifications and spent billions of dollars on branding and advertising so that you would not see that their Financial Advisors were really just glorified sales & distribution tools to lead you right back to them.

In fact, they did such a good job of this that most Financial Advisors don’t even realize they are just sales and distribution forces for the products and services created by Mainstream Financial Services.

So think about this. Do you think the guys who own and run the insurance companies, chain banks and Wall Street firms go and meet with one of the Financial Advisors who work for them to get instruction on what to do with their finances?

The thought of that is simply ridiculous. It would be like Elon Musk clocking out from a day at the office to ask one of his entry level mechanics how to run Tesla as a company. It would just never happen.

In fact, Warren Buffet, one of the wealthiest men in the world has this quote on the matter:

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

Alright well if the wealthy don’t use Financial Advisors, what do they do instead?

It’s called a Family Office.

A Family Office is actually a private corporation, owned and controlled by the family with the sole purpose of helping the family manage their financial affairs.

In other words, they investments and assets of the family are so large they created and staff their own company to help them run it.

This was first popularized by John D. Rockefeller in the late 1800s. As he transitioned out of operating Standard Oil, he began to focus full time on his family’s wealth. He formed a separate entity for it all, hired executives and staff to help him run it and the result…his net worth quadrupled after he left Standard Oil and today his estate is still worth a great deal of money and pays income to a great number of his heirs. He also has a separate trust for philanthropic endeavors. John D. Rockefeller died in 1937 (almost 100 years ago) and his wealth is still around today taking care of generations worth of his descendants and his been since 1937.

Think about the power of that!

Why wouldn’t he just hire a financial advisor though? Wouldn’t that be cheaper?

Not really.

Let’s say I have $10 million in assets and I decide I want to invest all of that with my trustee Wall Street salesman…I mean Financial Advisor….

The average Financial Advisor is probably going to charge me a 1% annual fee to manage my assets. Some may be higher, but let’s be conservative and say 1% and pretend there are no other fees (which there really are, but let’s give Wall Street the benefit of the doubt).

1% of $10 million is $100,000.

For $100,000 what am I getting?

A few hours per month, my Financial Advisor might look at charts that are easily available to me, click a few buttons to allocate funds into the places he or she thinks are going to perform best(their guess is as good as mine!) and then maybe meet with me for a few hours to give me bad coffee and read to me what my statement says.

In this meeting, if my investments are down they’ll say something like:

“This is a long term game. Never sell at a loss. At least everything is on sale. We should buy more.”

If my assets are up they’ll dawn themselves in false humility and say things like:

“We did quite well this month, but let’s be level headed and focus on the long term. We should rebalance some of our gains to stay diversified. We should invest more to catch the rest of this up-swing.”

They might send me holiday cards, ask how my kids are doing and maybe even offer me friendship. But that’s it.

I’m paying $100,000/yr. for that?

It get’s worse. The 1% fee represents more and more dollars as the assets grow. If they made me a 10% return in one year, I now have $11 million and they get a $10,000/yr. pay raise with no extra work!

But this fee also has opportunity cost. The money I pay them in fees obviously isn’t being reinvested (and it could be if it wasn’t going to them) and therefore isn’t compounding like it should be.

If I carry on a relationship like this for 20 years and I earn an average annual return of 10%, my total cost of fees is just over $13 million. That’s an average cost of $650,000 per year to me.

Instead of this, the wealthy will keep their $10 million and invest in things that:

  • They like
  • They understand
  • That fit them
  • That fit their goals
  • That are vital
  • That are not overpriced

At this level, they have it all down to a science and there are systems and procedures for everything.

Let’s say they’re good enough at investing their own money into real assets that they know how to earn a 12% annual yield. Well, that’s $1.2 million. If they run their investments like an ordinary business, they might spend 30% of their income on payroll, which means they have a budget of $360,000 to hire staff.

For $360,000 they could hire 3 high level executives to come work for them full time, 40 hours per week at $120,000/yr. base salary.

One of them could focus on creating systems, processes, and hiring more staff.

Another could focus on Treasury, investment acquisition and management.

Another could focus on acquiring new investment opportunities.

And the family would simply manage the people who manage the investments.

And each year, as they experienced more growth they could hire more staff.

This Family Office would handle everything financially for the family from:

  • Investments
  • Insurance
  • Estate Planning
  • Legal
  • Bookkeeping & Accounting
  • Taxes
  • Travel
  • Household help
  • Loans and Mortgages
  • Personal Financial Management

And really anything else the family wanted them to do.

Pretty amazing right?

But where do we start?

First, we actually have to be financially literate and solvent so that we can invest.

Second, we need to break free from the financial traps created by Wall Street, Chain Banks and the IRS (they’re all in cahoots to get us to give them as much of our money as possible for as long as possible).

Third, we need to invest for passive income! And keep doing it over and over and over so that we are saving 40% of our gross income (active and passive) to reinvest, and have excess left over to hire someone.

Our first hire?

Probably going to be an assistant. They’ll help with whatever we can delegate. Now the rule here is we don’t delegate what we haven’t already successfully done. So we aren’t hiring because we don’t know things and don’t want to learn them. We are hiring because we’ve done it, we have built organized systems and processes and we are ready to teach and train someone else to do it.

And as we hire the first assistant our time will get freed up to go do and organize more and more things. And we’ll continue on like that for the first handful of hires until we are managing people who do things instead of doing things ourselves. And some of those people we hired and now manage will be exceptional and we will make them managers of groups of 3–5 people and continue to hire and organize just like that.

Before you know it, you’ll be an Accredited Investor ($1 million net worth), achieve Financial Independence (Passive Income > Savings Expenses & Taxes), and then achieve the $10 million milestone where you are officially a fully staffed and fully organized Family Office.

Is this simplified beyond what it actually requires?

Sure! This is a blog article, not an instruction manual.

BUT, this is a real thing that wealthy families do and there are teams and systems in place to help you do this as well!

Where does it start? Financial Literacy. Realizing I don’t know it all and there is more that I can know. And then taking action to go know about it and apply what I’ve learned.

If you do that every day for even just 10 minutes, keep increasing your income, saving your income in real stores of value and then investing in passive income producing assets you’ll get there eventually.

If you’re reading this, I teach a weekly course on finances for free and I cover topics in depth just like this one.

It’s every Friday night at 10:00 pm EST and it lasts for an hour (if you come once per week, that averages just under 10 minutes per day of financial literacy).

So I want to invite you to attend!

Here is the last one I did:

If you’d like to register to attend for free, be my guest!

Click here to register!

Jerry Fetta

Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.

Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.

Learn more at www.WealthDynamX.com

(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)

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Jerry Fetta is the CEO and Founder of Wealth DynamX. Jerry’s mission in life is to help create millions of financially educated and wealthy families.

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Jerry Fetta

Jerry Fetta

Jerry Fetta is the CEO and Founder of Wealth DynamX. Jerry’s mission in life is to help create millions of financially educated and wealthy families.

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