Setting Up a Family Office

Many wealthy families with investable assets exceeding $100 million find themselves asking the question if a family office is a suitable tool to manage their family’s wealth and investments. While it may be a reasonable consideration for some families, it should be noted that as alluring as it may seem it may not always be a feasible solution for them.

We will be explaining what exactly a family office is, what it takes to create one and who this would be ideal for. We will also be exploring the various types of family offices and what benefits they hold for the ultra-high net worth client who opts to create one.

What is a Family Office?

A family office is any collection of professionals, whether separate from a family business or not, which provides dedicated personal and/or professional services to a family. This includes one or more individuals managing the operational aspects of family life, including but not limited to their residences, travel, and asset collections. Family offices can also cover the professional staff managing certain financial services such as accounting services, tax planning and preparation, estate planning, etc. The professionals managing the family office can consist of as few as two, or as many as 350+ people who typically perform these services in-house.

Types of Family Offices

Each family office may be unique; however, each family office shares many common attributes concerning operational practices and service delivery methods. The uniqueness of each family office may be due to the values, interests, needs, and characteristics of the family it serves. The variety in family governance, family engagement and communication practices will determine the degree to which the family office enriches the lives of family members.

There is a wide range of family office models in use today. Single-family offices differ from multi-family offices in a lot of key ways. Single-family offices typically cater to one family, while multi-family offices serve several unrelated families. Both of these types of family offices provide most services in-house and limit the outsourcing of services as much as possible.

There are also private family trust companies that are legally constituted in a form that maximizes tax and estate planning along with long-term fiduciary oversight. The private trust company may be close to a family office or operate as a standalone entity.

There is also the family investment company which often undertakes investment activities on behalf of the family. However, they do not offer the support services (these support services include residence management, legal, accounting and other financial services, etc.) that the traditional family offices do, however, they provide these services by means of outsourcing. Regardless of the lack of support services, the common denominator is that the office serves only one family, which may include multiple generations or family branches. This type of family office is referred to as an outsourced family office.

What is a Family Office Structure?

Regardless of the type of family office which may be selected, there are three key factors that form and define a family office. These factors are detailed below:

  • The size: This refers to the number of professionals employed to provide the services and manage the family office client(s);
  • The complexity: This refers to the legal structures, investment types, number of generations, and other nuances surrounding the family being serviced;
  • The autonomy of the office: This is the degree to which professional functions such as investment management, legal, or accounting services have been outsourced to third parties or carried out internally by the staff members of the family office.

Who Needs a Family Office: Three Factors to Consider

When considering the suitability of a family office, most advisors focus on quantitative factors such as the balance sheet of the family. However, qualitative factors such as diversification, staffing, geographic disparity, family dynamics, etc., should also be carefully considered. These qualitative factors can be grouped into the three categories discussed below.

  1. The Size of Your Wealth

As mentioned above, most advisors will consider the balance sheet as a measure of the feasibility of a family office; however, it has been found that income is the most important factor, not net worth or assets.

A family’s sustainable income (the income from private investments or an extensive liquid portfolio after paying all lifestyle needs and expenses) must cover the overhead of the staff they want to hire. Should the costs of running the family office exceed the sustainable income, this would constitute a business venture that requires excess market returns to fund itself – i.e., a private equity firm.

Conventional wisdom still dictates that a traditional family office should be considered if the total net worth is at a minimum of $100 million. In some cases, a net worth of more than $250 million is required.

  1. The Complexity of Your Life

The nature of assets held by the family also dictates whether or not a family office is required. Should a family own a single, extensive portfolio of stocks and bonds, the management of this portfolio would be less complex, and a single financial advisor would be capable of managing this investment more easily. If the family wealth is held in a single, family-owned business, a family office may be redundant as the management team at the firm is already working to drive value for the company.

When the family owns multiple businesses across many different industries, or there is an overweight of personal assets (such as a combination of real estate, multiple stock and bond portfolios, etc), the complexities arising from the various portfolios, businesses, and assets may require a family office to manage them efficiently.

Traditional and multi-family offices may offer bill pay functions, which provides clients with the peace of mind that bills are paid, especially when personal receipts and expenses resemble a small business more than a small household.

The complexity of the estate plan is another factor to take into account when considering the need for a family office. The plan and legal entities should never factor into the decision to form a family office. The principal’s desires on how to best leave a legacy for the next generation is taken into consideration in the estate plan, and should there be multiple family limited partnerships, foundations, and an array of trust structures, a professional staff may help implement the complex strategy set out in the principal’s estate plan. Many of the largest family offices across the nation have existed for multiple generations and continue to carry out the founder’s wishes to this day.

  1. The Priorities of Your Family

While it is possible for a single individual with no heirs to have the resources and requirements to form a family office, most family offices are centered around the family and the legacy they want to leave the world.

One of the advantages of the formal family office is the flexibility it gives to parents of adult children. Should the individual want their children involved in the daily business of managing the family’s wealth, the office will have built-in roles for their children. The opposite can also be true, as the founders can stipulate that family members are not allowed to be involved in the daily management of the family’s wealth. This enables the descendants to expand the family wealth by breaking into new industries and allows the family office employees to grow and protect the wealth without the drama of family politics.

Another important aspect when considering forming a family office is trust and confidentiality, as the family takes on these risks when an outside firm is hired. The family will share sensitive information with the CPA, attorney, or financial advisor managing the family office, and their expectation and hope are that the information will remain confidential. The principal needs to be aware that the tradeoff of having a family office that provides a higher level of oversight and control over the flow of information is that the external employees will become extremely close to the family and will be exposed to personal information that they may want to keep private. Furthermore, with the advancement of technology and digitization of most companies, there is the threat of cyber-attacks and firms need to ensure that they have adequate cybersecurity measures in place to maintain the privacy of the families they service.

Finally, the family may also want to weigh the benefits of the family office services against the resources spent managing the enterprise.

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Questions to Ask Before Setting Up a Family Office: What Should I Consider When Setting Up a Family Office?

 When the determination has been made that a family office would be suitable for the founder and their family, they would need to make the considerations listed below to ensure that the family office suits their needs.

  1. What is the Objective of Your Family Office?

When outlining the objectives of the family office, it is essential to determine the goals at both a family-wide level and a household level. A goals-based approach assists with the family’s current and future needs and expectations. Families typically like their family office to focus on their investment goals and promote family engagement and continuity.

  1. What is the Scope of Your Family Office?

The family office’s scope must translate the family’s goals and needs into a service offering. This service offering will typically include individual services, although integrated wealth management services should be harnessed to serve the entire family. While the services that each family may require may be different, the core family office services typically offered include (but are not limited to):

  • Financial reporting and accounting (including cost control)
  • Cash management and Budget/Bill Pay
  • Tax Preparation
  • Estate and Tax Planning
  • Trusteeship
  1. What is the Family Office’s Role, and What Skills Are Needed?

A family office’s role is to manage a family’s administrative, financial, and future planning activities by a central, coordinated team of professionals overseen by the family. Family offices have evolved to offer a wide range of benefits and services to support the family from a financial and non-financial perspective.

Single-family offices will typically require a Chief Investment Officer (CIO) to manage the investments and wealth of the family while also serving as the “CEO” dealing with the day-to-day operations of the family office.

Larger family offices/multi-family offices will have a CIO who manages and oversees an investment team, along with operations professionals who provide the services and skills required based on the scope needed for the family.

  1. How Will Future Decisions About the Family Office Be Made?

Family owners must decide on the transfer of assets, roles, and capabilities, which will typically be detailed in a succession plan. The assets of the family office should always align with the purpose and goals of the family. However, it is also safe to assume that these may change across a generational transition. When the founder’s succession plan is considered, a generational transition is a good time to reassess the overall family governance, including how to engage the next generation in the family office.

  1. What Do You Want in a Partner?

When choosing a professional partner to manage the family office, the founder will consider the service offering available to the family and the fees involved in managing their investable assets. The family will typically want a knowledgeable and experienced firm if they join a multi-family office, or if a single-family office is formed, a CIO with experience with wealth and investment management can head a team sufficiently. As the partner managing the family office will be privy to information that may be very sensitive and private to the family, they will also require someone they can trust and rely on to ensure that all information remains confidential. The professional firm/CIO and the family will also need to undertake due diligence procedures before entering into the business relationship with one another.

  1. What are Your Asset Levels?

When deciding to start a family office that may require a number of family office services, a sizable percentage of the family’s assets may need to be spent as the fee charged by a multi-family office. If the family’s net worth is between $ 50 million and $ 100 million, it would be most beneficial to hire a multi-family office as this typically benefits from greater asset levels and may provide access to a broader service suite.

A family with a higher net worth may benefit from a single-family office that may provide personalized services at a lower fee than what it would pay to a multi-family office. This is the case for families worth billions of dollars or if the family offices are “nonprofits,” meaning they are not meant to create a profit.

Family office assets typically diminish over time while complexities may increase. This is because future generations are typically withdrawers instead of contributors. As the family expands through the future generations, more family members require more client and account service professionals. To offset the diminishing asset base and increased expenses, most family offices merge into multi-family offices, which may result in a certain level of lost autonomy compared to single-family offices.

  1. What Services are You Seeking?

One of the biggest draws of setting up a family office is the ability to pick and choose which services a family wants in order to create a personalized experience. A well-resourced staff dedicated solely to one’s family may result in valued advice, excellent service, and meaningful relationships if the firm employs individuals who truly understand the needs and motivations of the family.

  1. How Much are You Willing to Spend to Receive Those Services?

The type of family office and scope of services will be determining factors of the fees charged to manage the family office on your behalf. When considering the cost/benefit of having a family office in place, the founder and future generations need to ensure that their wealth does not diminish at an increasing rate to ensure that the family office is operational.

  1. How Important to You is Client Service?

Whether a single-family or multi-family office is elected, the benefit to the family comes down to the employees servicing and devoting their time to client relationships. The most significant benefit of multi-family office models is the knowledge that may arise from their experience working with many families. This can be used to find the best possible solutions for clients across the board.

  1. Do You Have An Interest in “Creating a Sustainable Business”?

The steps involved in building a family office amount to starting and running a successful business. Single-family offices typically require implementing a governance infrastructure, which includes establishing a board of directors and committees (e.g. audit and compliance committees). Governance will assist the family with risk-management, succession planning and prepare the next generation for inheriting wealth. It will also help maintain transparency across the family, prevent potential disputes by having mediated family meetings as when needed and prevent regulatory violations or misappropriation of funds.

  1. Do You Have the Time to Devote to the Creation of a Family Office and Successors Who Will Continue to Oversee It?

If the decision is made to create and run a family office, it must be determined whether the business will be sustainable. The sustainability of the family office throughout multiple generations after the passing of the founder will require a successful succession plan to be in place to ensure that the family office will remain intact when the transition from one generation to the next occurs.

  1. Do You Have a Strong Point of View on Investing and an Interest in Being Involved in Investment Decisions for You and Your Family?

Families need to determine their level of interest and involvement in investment, which could be the foundation for creating a family office. Wealth management is a key focus point for most family offices and defining the family’s goals and investment philosophy would be an important first step.

Experienced multi-family offices can help families determine their investment objectives (i.e their asset allocation) and philosophy, risk appetite, investment strategy and performance expectations. If a family has a clear vision of their investment philosophy, they might consider hiring an experienced external CIO to manage the investments of the family office. The size of the family office may affect the ability of the CIO to implement their defined investment philosophy without additional team members. If this is the case, a multi-family office would be more beneficial as they already employ an entire team of dedicated staff.

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Setting Up a Family Office Steps: How Do I Start a Family Office?

 There are a number of steps to follow to set up a family office and when approaching a firm or CIO to create the family office, the factors listed below will form part of the setup of the family office to ensure that it is tailored specifically to the family.

  1. Scope, Asset Levels, and Costs of a Family Office

A family owner will determine the objectives and goals of the family and their planned family office and approach a firm/CIO who can provide them with the services they need to form the family office’s scope.

Typically, the value of the investable assets may affect and determine the cost of the services to manage the family office. Furthermore, if more specialized services are required, the cost of running the family office may also increase.

  1. The Importance of Client Service

A family with more complex business and investment structures forming part of their family office may require more time and devotion from the firm/CIO running the family office. When deciding what type of family office would be most suitable for the family, the family owner will have to determine if the CIO/firm they hire have adequate resources to provide the family with the quality of service they require.

  1. Are You Ready to Start and Run a Business?

As discussed above, running a family office as a family owner is akin to starting a business. Decisions will need to be made to ensure that the family office will be sustainable and survive the generational transitions, similar to a company. As the generational transition will be impactful on the success of the family office, a clear succession plan must be in place to ensure that the goals and needs of the founder can be carried out as best as possible going forward, with certain changes being incorporated to provide risk management for legislative changes which may lead to regulatory violations and keep up with the times.

  1. Investment Philosophy

The investment philosophy of the family needs to be clearly determined when setting up the family office. The quantitative factors (such as the family’s net worth), as well as the qualitative factors (the family’s needs, age of children and founders, etc.), need to be considered when the investment philosophy of the family is determined. Will they be more aggressive with their investment choices or more bearish? These are all crucial factors to consider and discuss with the professional managing the family office to ensure that all the expectations are met.

Tips for Setting Up a Family Office

 When setting up a family office, the management of financial capital and other aspects such as succession planning for the family is delegated to accountants, wealth managers and other professionals. In order to ensure that the family is comfortable with this, we have listed some tips below for families to take into consideration when setting up a family office.

  1. Understanding Your Capital

A family office helps facilitate a structured and independent approach to managing the family capital and private wealth and can assist a dispersed family with dispute resolution as and when needed. In the instance where a family business forms part of the family office, shareholders may not only be legally tied to the company, but they may also have emotional ties – this could pose the risk of passing up opportunities to expand, evolve or sell even when it may be in the best interest of the family and company to do so. This is where the family office may benefit the family, as the firm will be more objective when providing advice.

  1. Delegate Responsibilities

The fixed annual cost of setting up a family office may be considerable and employing suitable people to manage it is critical. Decisions relating to the set-up of a family office must utilize leading global expertise, allowing the family to achieve the benefits of a fully resourced and capable office without the investment and risk of ‘reinventing the wheel.’

A well-run family office can offer much more than simply evaluate the family’s financial capital; it can help adopt a global perspective towards best practices, facilitate independent family communication, and improve decision-making.

  1. Clarify Your Vision for Investment

Documentation can be created to clarify the family’s vision, objectives, values, mission, and goals, which can be used as a blueprint for any future investment decisions and a successful succession plan.

Measuring the performance of investments can be challenging and using existing benchmarks as comparatives can be a good idea. It is also recommended that the family evaluates how their capital is split between long-term and short-term assets, ensuring systems are in place to allow for easy transfer (liquidity) as and when your family requires it.

Although finding another family office with the same portfolio is highly unlikely, breaking assets down by type will allow the family to find corresponding, measurable targets to work against. This will assist the family members and asset managers in clarifying their return objectives and keeping track of performance.

  1. Take a Pro-Active Approach to Succession

Family offices can act as an intermediary and forum to help deal with family dynamics and the issues arising between the generations. Business and economic topics are typically discussed in family office meetings, empowering and providing younger members with the opportunity to engage. There is often more freedom to do this than in standard family business meetings, away from the influence of day-to-day operations.

Family owners can also benefit from having a new platform to share their hopes and visions for future generations and instill values in the next generation that will perpetuate the family’s legacy.

What Qualifies as a Family Office?

A family office is a privately held company that handles investment and wealth management for a wealthy family. The private company comprises a range of professionals providing services to the family to ensure the growth of existing wealth, manage family relationships and oversee the transfer of wealth across generations and in changing economies.

Why Do Family Offices Fail?

  • Some families have difficulty and discomfort when discussing succession, which leads to ineffective succession planning is in place at the time that the founder passes on;
  • In some cases, the founder is unwilling to relinquish control to the next generation. On the other hand, the next generation may not be qualified enough to manage family wealth.

To avoid this from happening, it is essential for the firm providing family office services to ensure that the family understands the importance of a succession plan, even if the topic is uncomfortable. They also need to foster trust between the generations to enable a smooth intergenerational transition.

People Also Want to Know:

How Much Money Do You Need To Start a Family Office?

Family offices are often targeted at ultra-high-net-worth families whose investable assets exceed $50 million.

 

For more advice on starting your own Family Office, reserve a consultation with one of our advisors in our Contact Us section to the right.

–Jean-Dré Tombisa

–Peter Harper