We are regularly approached by small and large business owners that are interested in setting up a family office to manage their wealth and/or streamlining their existing family office to enable a smooth transition in the event of a planned or unplanned succession event.
In the beginning many families that begin to acquire wealth manage both their business and personal finances under one roof. This approach works for some families as long as things are kept simple. As the family wealth grows, so does the complexity of the investment strategies and estate planning. After the lawyers enter the picture things can get very complicated really quick. The key to keeping your family office operation simple is to identify a strong financial professional that has a diverse background in business, finance, law, investments and organizational management. If this professional profile seems like a tall order…well it can be, but it is not mission impossible.
So then what should I consider when setting up a family office? There is no one size fits all solution when it comes to a family office. We typically advise our clients to keep things clean and simple for two reasons: 1) it is easier to transition leadership to a new family member with a streamlined family office operational structure and 2) if you must seek outside assistance to manage the family office you are less likely to get hit with expensive fees as long as your family office structure is not overly complex or convoluted.
Who should lead the family office? Well that depends…we advise our clients to approach this decision very much the same way that you would when deciding who should serve as the CEO. Determine whether or not someone in your family can take on that role or if you need to look outside the family to get the right person. Normally what we see happen is that a dominant family member oversees the wealth management function while also running the business. The problem that you run into here is that often times there is very little documentation around how the family office is managed, how investment and operational decisions are made and so on. This is very problematic when a change in leadership is required due to an unplanned life event, and the lack of documentation and structure can significantly increase the succession costs. You don’t want to waste your family wealth and resources hiring someone to figure out how things are set up and run.
What about simplifying my existing family office structure? The same advice above applies. We advise our clients to look for ways to cut down the number of entities and complexity of their estate plan so that it can be transitioned without significant delay. Clients often decide to go with corporate trustees as part of an operational transition plan; and we can tell you from experience that it will cost you a pretty penny to secure the services of an outside trustee if your family office is overly complex. An overly complex structure is the easiest way to drain your family office investment resources quickly…so please don’t add complexity that you don’t need.
So how can we minimize the risk and complexity of a family office? In our experience as advisers, the risk and complexity of a family office operation is heavily influenced by these six factors which we ranked in terms of most important to least important: 1) technical knowledge and expertise of key decision makers, 2) number of entities, 3) legal and tax structures chosen, 4) asset allocation or investment options, 5) personalities of key decision makers, 6) number of investment advisers.
Factors 1 and 2 are the most important and drive your family office oversight and compliance costs. Don’t allow your accountants, lawyers or advisers to talk to you into overly complex estate planning structures and investments that result in an unmanageable family office operation. Keep in mind that as the number of entities grow so does the compliance costs (i.e. accountants, attorneys and investment advisers) and internal record keeping and reporting costs. Our rule of thumb is to keep the number of legal entities you set up to an absolute minimum and consider whether your investment and/or charitable giving goals can be met using a consolidated approach.
Should I set up a family office? You ultimately have to decide if you want to (and have time to) manage it on your own or take advantage of a multifamily office operation. Setting up and running a family doesn’t have to be complicated or expensive. You can always first in source the operations by setting up a single family office and then eventually outsource using a multifamily office service. In our experience a family office evolves over time starting as an embedded family office within an existing business, then moves to a separate formal family office structure, and then as part of succession planning or rising complexity will move into a multifamily office setting. Be flexible and expect to change your answer to this question over time.
What are the pros and cons of a single family office vs. a multifamily office? There are lots of pros and cons to setting up a single family office or a multifamily office structure. Here is our two cents on the question. A single family office structure offers more control and direct oversight of your family office investments; however, you can face significant succession planning challenges finding qualified staff within your price range, and with the skills necessary to manage the family office. A multi-family office structure offers more scale, continuity and access to more qualified staff and professionals; however, you don’t have complete control over the process and must adhere to the policies and procedures of the organization.
I need some help, so what are my next steps? Give us a call and we can help walk you through our family office advisory service approach and provide an initial consultation on next steps.
Stay Tuned for the next edition of our 5 part series coming in May! The Family Office Series: Part II – Operational Structures and Reporting
Published on: April 8, 2020
Written by: Kito Mussa, CPA/CFF, CFE, CGMA
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