Family Offices Can’t Do It (All) on Their Own — How to Give Yours a Hand

Investopedia defines family offices as “private wealth management advisory firms that serve ultra-high-net-worth investors [and] offer a total outsourced solution to managing the financial and investment side of an affluent individual or family.” Family offices can handle a pretty broad range of financial services and clerical activities, including “budgeting, insurance, charitable giving, family-owned businesses, wealth transfer and tax services.”

While accurate, this definition doesn’t quite capture the total breadth of possibilities. Depending on client needs and resources, family offices can take several different forms — and, within each framework, provide fully customizable services.

If you’re looking for an alternative to mainstream wealth management, a family office may be a viable option. However, keep in mind it will take considerable resources to be run smoothly and effectively. This article discusses the basic functions of a family office, the two major types of family offices, and how to set yours up for success.

The Basics of a Family Office

At a core level, family offices are bespoke service providers.

“[Family office] services range from the relatively simple, such as bill pay and concierge work, to complicated ones like advising on investment opportunities and navigating the client through their various tax options or establishing trusts,” writes Forbes contributor Oliver Pursche.

Not all family offices are completely self-contained; many family office function as facilitators or nodes through which financial, legal, and clerical services are coordinated and executed. They tap specialized outside firms like Singapore-based Asiaciti Trust (a trust and corporate services provider) and UBS Wealth Management (a global wealth manager with subsidiaries in the United States and dozens of international markets) for expertise and scale that they simply can’t match.

Wealth Management

That said, the core function of any family office is wealth management. This is true whether the office has a full internal staff of portfolio managers; coordinates wealth management activities with outside specialists; or, shares resources using one of the structures outlined in the following section. A family office without the capacity to preserve and grow assets is a family office in name only. Bear in mind that wealth management is a broad-based function that includes long-term investment planning and estate planning.

Legacy-Building and Philanthropy

In recent years, a number of extremely wealthy individuals have pledged to endow the vast bulk of their fortunes to charities, rather than their surviving heirs. Most family offices incorporate legacy-building and philanthropy into their activities as well. These functions may be ancillary to the primary mission of preserving and growing wealth, or they may account for the lion’s share of the office’s activities. (Very high net worth families generally establish separate trusts or foundations to manage charitable endowments; their main family offices may be tasked with getting these structures off the ground.)

Lifestyle Management

Family offices may also fulfill an important administrative function: helping high net worth families (and their descendants) manage personal financial reserves for immediate and long-term use. Depending on the needs of the family, this might include setting aside funds for medical planning, risk management and kidnapping insurances; or more lifestyle-interest-based activities such as home and mobile security, travel arrangements, collectible investments, and more. Family offices may also make arrangements for cash disbursements to younger or less capable family members to maintain sustainable living standards.

Family Office Options: Sharing Some (or Most) of the Load

Extremely wealthy families can afford completely bespoke, self-contained, all-encompassing family office operations. Other high net worth families may choose more cost-effective, smaller scale options. Before setting up your own office, you’ll need to speak with a financial advisor to determine what’s practical and efficient for your family’s circumstances and objectives.

There are two main types of family offices: single-family offices and multi-family offices.

Single-Family Offices

Single-family offices serve one distinct family. (The size of the family tree is another matter; some single-family offices focus narrowly on nuclear units, while others are far more expansive.)

The size of the office depends on the needs of the client family and its resources. Most financial experts recommend that families devote roughly 1% of assets under management to the office’s operational expenses: USD$1 million annually for a USD$100 million portfolio, and so on.

In theory, a single-family office allows for completely customized wealth management. It’s also an advantage in complex situations or to achieve specific medium-to-long-term objectives, such as mitigating geopolitical risk or pursuing new lines of business. Hire accordingly — prioritizing talent with prior family office experience, if possible.

Multi-Family Offices

Multi-family offices offer wealth management services to several high-net-worth families by a group of dedicated specialists. Naturally, multi-family offices don’t offer the same degree of personalization or attention, but they do allow families to share costly operations.

When joining a multi-family office, it’s important to seek out like-minded families whose goals and objectives align with yours. If you’re joining an existing office, vet its current and past activities to assess fit. If you’re starting one from the ground up with other principals, you’ll need to have a frank meeting of the minds.

Outsourcing Non-Core Services

Bear in mind that neither single-family offices nor multi-family offices require all services to be performed in-house. As we’ve seen, families often benefit from outsourcing certain family office functions — such as the establishment and ongoing management of purpose trusts or foundations — to external specialists. Other commonly outsourced family office functions include:

  • Legal services
  • Basic bookkeeping and accounting services
  • Tax management and preparation services
  • Registration and reporting services
  • Philanthropic activities, including charitable trust management

Give Your Family Office a Hand

Whether your family office remains a middle-term objective or a functioning reality, it could probably use some adjustment — or at least close, ongoing scrutiny. If nothing else, your efforts to improve its operation could help clear the air ahead of your next family gathering. That alone should make the effort worthwhile.