Successfully managing a family's wealth and its enduring legacy can be a challenge without a family office. According to The Family Firm Institute, only about 30 percent of family businesses survive into the second generation, 12 percent are viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. This statistics make a case for a family office more compelling. A properly functioning family office can provide the structure and focus that is needed to properly navigate the wealth management landscape largely due to its freedom from conflict of interest, as it pursues no commercial interests of its own. In this article, we examine the concept of family office, the different types of structures and their role in supporting family wealth preservation.
What is a Family Office
There is no globally accepted definition of a family office. One of the reasons is that family offices can be set up in different ways to pursue varying objectives. Notwithstanding, a family office can be described as an entity established or engaged by a single family or a group of families to manage their wealth. The focus of the family office is on managing, building and sustaining wealth for current and future generations. It also plays a major role in risk management by building a diversified portfolio and ensuring that this portfolio is properly managed.
Setting up a Family Office
The journey to setting up a family office that will meet the wealth preservation needs of a High Net worth Individual or a wealthy family starts with a clear definition of the purpose and the role of the family office.
Wealthy families often set up family offices to:
- preserve family wealth and provide support for inter-generational wealth management in a consolidated, controlled and professionally managed organization
- manage complexity and ensure efficiency in the short term, while improving prospects for eventual successful wealth transfer
- achieve excellence in investment management
- leverage and nurture unique skill sets of the family (e.g. real estate expertise and networks in a specific location)
- support family businesses and pursue new family business ventures
- support entrepreneurship in the family and other strategies for growing wealth
- provide a forum for uniting the family and developing talent
- serve as a hub or an endowment for family philanthropy and social enterprise
- manage the family's strategic planning for multigenerational success
Structures and Models of Family Office
There's a saying in the wealth management industry that "if you've seen one family office, you've seen one family office," because the structure and function of these enterprises can vary widely. The following are the alternative types of family offices that could come into consideration:
- Single family office – A
company that manages the wealth and/or affairs of a single family.
It is usually owned and operated by the founding family for their
own benefit. It provides both strategic and tactical oversight, in
addition to support services identified to meet the family's
day-to-day needs. Comprised of full time staff responsible for a
myriad of tasks including but not limited to wealth management,
charitable and philanthropic projects, as well as tax
The staffing of a single family office is based on the family's particular needs and requirements. It however typically includes investment professionals who manage the family's financial (including accounting and investment activities) as well as, legal affairs. Though the primary focus is on these professional services, many single family offices will expand to also include staff specifically devoted to managing a broader range of tasks – including personal assistants, nannies, general domestic staff, estate managers and others who provide more concierge type support and will oversee assets such as real estate, yachts, aircrafts, vineyards, ranches and others.
- Commercial multi-family office
– This is a third party owned business which serves multiple
families usually ten to fifty, or even more for some of the larger
operations. It is operated by the founders to make an operational
profit. It is the most common type of multi-family office. It is
sometimes also called a 'multi-client family office'. A
significant percentage of multi-family offices, wherever located,
are commercial multi-family offices. They aim to provide an
independent and holistic approach to managing wealth and supporting
with all other needs and wishes, while charging a fee.
A commercial multi-family office would normally have professionals with different educational backgrounds and experience cooperating under one roof. As these multi-family offices are commercially operated, they mostly aim to provide services to a considerable number of families.
- Family-owned multi-family office
– A company that manages the wealth and affairs of a few
families. They are typically owned and operated by the founding
families for their collective benefit or initially established by
one of these families and joined by other families at a later stage
to share the costs. Sometimes this type of multifamily office is
also referred to as a 'closed' family office. The
difference between a family-owned multi-family office and a
commercial multi-family office is the operating fees. The family
office provides services without the actual objective of making a
profit for the owner or the office management/staff.
Family-owned multi-family offices are rare because of a number of reasons. To start with, it is relatively difficult to find other likeminded families with approximately the same amount of wealth to jointly establish such an office. As different families have different needs, it can be difficult to decide which services should be provided and in which way. How should the costs be divided by the families, who will ultimately be responsible for the operations of the family office and how will that responsibility be compensated?
- Virtual family office – The
virtual family office is a group of independent professionals that
co-operate together, acting as if they are a multifamily office. It
is a relatively new concept and very much a niche service.
Contrary to the commercial multi-family office, most of these professionals are employed in their own firms, but advise families in a coordinated and holistic way, taking into account the expertise and input of the other professionals. One might best compare a virtual family office with a multifamily office that outsources all its services. A virtual family office always operates commercially. There are several benefits to the virtual multifamily office. The costs should be lower as there are few fixed costs (related to staff and facilities) due to the fact that the advisors operate their own firm as well as serving other clients as independent advisors. The team can also be formed or adapted according to the family's needs, offering flexibility
The choice of the structure to be adopted by a family will depend on a wide variety of factors. For instance, families with lower wealth are more likely to choose a virtual family office or a commercial multi-family office. The larger and more complex a family becomes, the harder it is for virtual family offices and some multi-family offices to cope. "Complexity" in a family system is primarily driven by the number of active family members, generations being served and geographical spread. Other factors such as the nature of business, assets or legacy issues can also increase complexity. A family with large commonly held fortunes and members living worldwide may find a single family office is the only option that works for them. For smaller families with needs limited to investment services, estate planning or simple concierge services, a multi-family office or a commercial multi-family office may well be the appropriate and cost-efficient solution.
The task of managing the assets and investments of wealthy families can be onerous. This is why an increasing number of ultra-high-net-worth families are creating family offices to take over their wealth management. In spite of the benefits of setting up a family office such as greater control over wealth, more privacy, and access to customized services, it also has many challenges. One of them is the significant family office cost (set up and continuous operation). How they are dealt with can be a highly sensitive and potentially divisive issue. It is advisable to address this early, clearly and to review the funding regularly.
Other critical issues such as selecting a structure that is appropriate for the family, determining what the family office should do, location of the family office, recruitment of retention of key talents, identifying the services that will be outsourced are all important aspects that need to be addressed. Family businesses can seek for the support of experienced external advisers to support them in this journey so that the objectives of setting up the family offices can be achieved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.