6 Essential Considerations for Establishing a Family Office
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Your family’s financial success has brought you to the point where you are considering whether or not it would be prudent to establish a family office to manage your family’s wealth. For families with investable financial assets in excess of $100 million, this may be a viable solution. In this article we’ll discuss the potential benefits and drawbacks of establishing a family office and whether or not it might be the right decision for your family’s wealth.
Family Office Defined
In general terms, a family office is an institution created to manage the specific investment and wealth management needs for a particular family.
While some family offices focus solely on the family’s investment needs, others offer additional services, such as wealth planning, bill payment, accounting, and other solutions tailored to the family’s lifestyle. The benefit of being able to customize the services to meet the unique needs of the family are what make them such a viable solution.
What Should I Consider Before Establishing a Family Office?
A family office may not be right for everyone. For some families, hiring a private wealth manager may be a better alternative. Prior to moving forward, there are several issues that should be addressed.
What services are you considering?
Do you have a particular investment philosophy in mind? Do you want to have your family office manage tasks such as bill payment, travel arrangements, accounting, legal expenses, and other services? You will want to analyze the cost of hiring the personnel to oversee each process. Compare this with the cost of hiring a private wealth manager and other professionals to manage your financial and personal matters.
Establishing a family office is similar to creating and running a family business. The setup will require significant time and money. This includes the establishment of a physical location, payroll costs, investment and accounting systems, administrative systems, cybersecurity, human resources, and other critical functions.
In addition, a family office typically needs a board of directors, compliance and audit committees and other governance infrastructure in order to oversee the operation of the family office.
How much in investable assets does your family have?
“For families with $50 to $100 million in investable assets, hiring a private wealth manager may offer the services that the family needs at a lower cost than establishing a family office” comments Bruce K. Lee of Chicago’s Keebeck Wealth Management. Working with a multi-family office may also be a suitable option.
What is your Investment Philosophy?
Managing your family’s wealth will be centered around your investment philosophy. You should have a clear vision of your family’s wealth management goals as this will serve as the foundation for how the office operates. This covers everything from the types of investments that you will consider to any third-party investment managers you will be willing to partner with.
Please note that your family’s asset level will likely impact the ability of your investment officer to implement your investment philosophy as many top-tier investment managers require a minimum level of assets, which can impact the ability to create a diversified portfolio in line with your investment philosophy.
Types of Family Offices
In general, there are eight different types of single-family offices, though most combine two or more types in creating their own entity.
- Founder’s Office – supports families running a business enterprise, including ownership structure and other financial issues impacting business founders
- Shareholder’s Office – provides financial and tax services for family members who are focused on growing and overseeing the operations of the family business
- Philanthropy Office – supports family members in efficiently distributing a significant portion of their wealth to charitable causes
- Trustee Office – oversees the fiduciary duties of maintaining trusts on behalf of their trustees and beneficiaries. This includes the administration, tax compliance, and record keeping of these entities
- Compliance Office – assists families with multiple branches or who are a part of multi-family offices. The compliance office is the most challenging to operate as it typically requires the support of the largest variety of services for the greatest number of clients.
- Family Enterprise Office – supports a family across a broader range of services including wealth management, business operations, and philanthropic endeavors
- Multi-Generation Office – supports services for multiple branches of a family. This includes the oversight of wealth creation, wealth preservation, and wealth transfer across generations.
- Investment Office – supports the family’s investment philosophy, allowing them to leverage their pooled resources and increasing their buying power with both public and private equity investments
There are numerous pros and cons to establishing a family office. The ability to tailor the services specifically for your family can be appealing. However, the amount of time to set up and operate a family office can be a drawback.
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