With apologies to Woody Allen, this is Everything You Always Wanted To Know About Family Offices (but were afraid to ask).
The purpose of this document is to provide a general guide to the ins and outs of the world of family offices. It’s not everything you need to know. It’s an ideal introduction for people who are seeking to learn and/or considering whether they want a family office. Even if you already know plenty about family offices, it’s worth a skim for any additional learnings.
People define family offices (FOs) differently, and there isn’t necessarily consensus. The purpose of a FO is to professionally manage the affairs of a family, typically of significant wealth. Professionally doesn’t necessarily imply external management, rather a more formal approach to the task. I prefer a broader definition of a FO as a set of services provided to a family. On that basis, a family office is: an organisation that professionally provides a set of services (generally pertaining to wealth, legal and lifestyle) for a family.
In the wake of the Industrial Revolution and the creation of significant wealth for a number of US families. Families such as JP Morgan and JD Rockefeller established formal entities to manage their wealth, and these are considered the forebears of the modern family office. But the concept dates back to Europe in the Middle Ages, where families employed a steward to manage their affairs – from the household to the family wealth and everything in between.
FOs come in all shapes and sizes, as do the set of services they provide. They broadly fall into a few categories:
Where the family has an operating business, the broader functions of managing the family’s diversified wealth and other affairs are embedded within the operating business. In practice that means that the FO is run by the owners with the support of staff who are employed by the operating business in other roles. For example, the CFO may also be responsible for managing some investments and estate or tax work, a EA/PA may co-ordinate the family holiday home or other concierge functions for the broader family.
This is how many FOs get started, certainly when there is an operating business, and it can work quite effectively. One challenge is that the costs of running the FO are absorbed in the operating business expenses and therefore not readily quantifiable. If the business is to be sold, then the accounts to not reflect its true value. Not having dedicated resources can also mean staff can be distracted or have competing priorities for their time.
In this model, the FO functions are all done by a dedicated entity and team separate from any operating business. If there is an operating business, the SFO might share resources (e.g. the same physical office), but it would have dedicated staff and may pay its fair share of rent. This way, there is a clear understanding of the true cost of managing the family’s affairs, the the resources employed to do this are dedicated to that role.
Because having a team to do this comes at a high fixed cost, this model is generally only considered suitable for a family where the size and complexity of the wealth can justify the expense. Even so, this model can have key person and knowledge concentration risks.
This is something of a variation of the single family office. Rather than employing a full in-house team to do everything, some functions are outsourced to external professionals such as accounting, legal and wealth management firms. This can help mitigate some of the risks outlined above, and also reduce the fixed costs making the model more suitable for certain levels of wealth.
A multi family office is an organisation that provides the set of FO services to other families. In many cases, multi family offices grow from single family offices: a family establishes an office for themselves, which brings a degree of professionalism, systems and processes, and the decide to spin this out as a business where they are the initial client, and they offer these same services to other families. Some MFOs are born from a few founder families combining to get economies of scale and share resources, and then expanding and offering their service to others. This can be a more efficient model for families and mitigates a number of the business risks associated with doing it yourself. What comes with that is a loss of control – the MFO offers what it offers, but if you want something more specialised, it may not be possible.
MFOs themselves offer a wide spectrum of services. Many offer deal syndication or aggregated access to deal flow and call themselves MFOs, but they are really just boutique investment platforms.
Here are the broad categories of services provided by family offices.
This ranges from investment policy and asset allocation to actual investment – either done in-house or by selecting/monitoring managers or a combination of these. Related areas are rebalancing, research, custody and structuring of investment vehicles.
Investment tends to be a large component of what family offices do because family office investment is qualitatively different to investment on a smaller scale. Families have longer-term objectives in investment, and often have a bias and therefore a large allocation towards private markets and alternatives, particularly property. All this means that the ‘menu’ of investments offered by wealth firms and private banks may not fully meet the needs of families, and the resources to assess and manage certain types of investments are more effective when they are with the family – on the “buy side”.
Families will often syndicate to other like-minded investors, and share deal flow with other families. Trust is a big factor: finding others who share your goals and have skin in the game makes things easier, especially for people who are often hounded by people ‘selling’ something.
Accounting functions such as tax and income planning, financial and cashflow analysis, treasury (balance sheet, financing and dealing with banks). Producing reports for the family such as consolidated assets, investment performance, and maintaining records of personal assets. Planning includes longer-term work associated with wealth transition. Also insurance for the full gamut of family assets and personal security.
Managing the family’s personal needs: bill paying, domestic help, and management of lifestyle assets like properties, boats, aircraft. Travel and other concierge services.
Family governance, co-ordinating meetings, and communication. Education and leadership development, coaching, mentoring and career support.
This starts with strategy and vision/mission, and setting long-term objectives for the family. It includes governance, foundation management, grant selection and administration.
The intent here is to give a flavour to the range of services that FOs offer. These categories are broad and somewhat arbitrary. How functions are grouped/combined and whether they are insourced or outsourced varies widely. There is no right or wrong way to do things, rather what best works to meet the needs of the family.
This is a question so many families ask. In part it’s driven by a lack of understanding or clear definition of family offices – the fact that they are often very customised. In part it’s because of the media mystique, industry opacity, and mimetic desire – having a family office can be something of a status symbol. Because of this perception, some families are the reverse: “we don’t need a family office” when in fact they have one in all but name.
A good start would be to ask yourself some questions about how you currently manage family matters such as investment, accounting & reporting, and concierge/lifestyle:
While there are certain profiles of families that tend to have family offices, these questions are more useful because it’s really about whether you have the appropriate structures to support the needs of your family now and in the future.
Having a family office can deliver the following benefits to the family
Having made the decision that you want a family office, what to do next? How to get started?
First step is to understand the current context and factors influencing the decision to establish a FO. How are you already managing the family’s affairs (you probably are in some way)? What about the current state of things or upcoming/recent events (e.g. sale of an operating business, wealth transition) is a factor in seeking a change?
Talking to other families who have gone on a similar journey is very helpful. They can be readily found through your own network, or member organisations. In such safe spaces, people are usually generous with their time and happy to share of their own experience. When you have a network of others who have travelled a similar journey, their feedback can be very helpful through other stages of the process.
Often, the current way things are being managed is haphazard, bottom-up, and driven by specific needs. It’s time to step back and think more top-down: that means vision, mission and purpose. If you’ve not yet articulated that for the family itself, that is almost a prerequisite. What you are building is there to serve the family’s needs for the long term, and needs to be aligned with the family’s purpose as a collective.
Once you have articulated the FO’s purpose, you can then move on to defining scope (what services are to be included) and goals (financial and non-financial). That process will help drive the next decision around what model will best serve the family’s needs: single, virtual, multi or some combination.
Then you will start to delve into some of the detail. Where the FO should be located, how should it be staffed, how to determine appropriate costs (benchmarking can be helpful up to a point).
If all of that wasn’t hard enough, running a family office has regular challenges.
Compliance is one function of a FO, and an area that becomes more complex for families that large and/or geographically diverse. Consideration is needed regarding residence and citizenship of family members, even though the family and its wealth may be largely domiciled in one country.
Like any operating business, the challenge of succession planning is an important one for family offices. While operating businesses may come and go, a family office is designed to endure and serve the family for generations. That means it needs a succession strategy. It’s important that if family member work for the FO, they are there by choice rather than by obligation. Further, there may be some FO functions where it’s best not to have a family member in order to maintain confidentiality regarding services provided to other family members.
Risk management for a family office is broad: in addition to investment risk, it should cover personal security, insurance and lifestyle assets, and key person risk.
It can be hard for FOs to find qualified professionals who will stay. This can be a function of FO size and also remuneration policies. It may be necessary to offer ‘carry’, co-investment opportunities or other such incentives to retain people. This also comes under key person risk.
Family offices are an evolving space, and the number of FOs is expected to grow driven by trends of ongoing wealth concentration, exits/liquidity events for both family businesses and venture-backed startups, and the generational wealth transition currently taking place.
This evolution takes place at different rates across the world. The US has a well-developed FO industry, and the industries in other countries are learning from that experience and adapting it to their own circumstance.
Around Dec-Jan each year, media will publish articles of the form “[insert trend/topic] for family offices in [insert year]”. It would be interesting to collect all of these and review them a year later. Those articles are fillers and generally don’t have too much to add. There will always be “hot” topics for FOs, and they are often centred around what happens to be “hot” in the investment world at the time. It’s akin to the fashion industry.
One of the attributes of family capital is its “patience”. Families usually do things for the long term, so it makes more sense to look at trends over 5-10 years rather than a single year.
On that basis, here are some things to be thinking about
What services do family offices provide? They provide a range of services including investment management, accounting & reporting, compliance, lifestyle and concierge, succession planning, and philanthropy. Importantly, a FO doesn’t have to do all of these to be one.
How is a single family office different from a multi family office? The principle difference is that a single family office (SFO) serves one family group (which may contain several branches). A multi family office (MFO) serves more than one family group, and usually does this as a business.
What is the difference between a virtual family office and a traditional family office? In a virtual family office, some or all of the services to the family are provided ‘virtually’, typically by outsourcing.
Do family offices only manage investments? No. Family offices manage any number of things on behalf of a family. Note: there are some family offices that only manage investments, just as there are some family offices that only manage lifestyle services.
How can family offices help with philanthropy? Family offices can provide a variety of services relating to philanthropy from strategy and purpose to grant screening and administration, to educating family members.
Why should I get a family office? You should get a family office if your family would benefit from these services being provided in a more professional manner, or in a distinct and purpose-built structure.
Do people who aren’t super wealthy need or can benefit from a family office? Yes. A family office is essentially a professional approach to managing the affairs of a family. While they have historically been the domain of the very wealthy, new service models mean that they can be relevant to a wider range of families.
Some other FAQs from reasonably unbiased sources can be found here and here. If you have any questions you’d like added to this section, please ask me via the contact page, and I will add them to this section.
Family offices are an important piece of infrastructure that helps manage the diversity of a family’s affairs in a professional way, and with the long-term perspective that many families have. Whether or not you have one, or may consider one in the future, it’s a space worth understanding and tracking to be aware of industry trends.
By their nature, family office services are personalised and bespoke. While families are different and have different needs, there are plenty of features of FOs that are common, which is why learning from others is an important part of the journey.
Here are some of my favourite articles about family offices
There are plenty of good networks where you can meet, share experiences with and learn from other families. Rather than list them, this guide is a very helpful listing of a number of FO networks with a description and link to each. There are lots of these around, and this can help you find the right one that meets your family’s needs.
Sign in the rubble of the Hezbollah HQ in Beirut: May contain traces of Nasrallah
Family Business Conflict is More Complex Than You Think.
How we deal with conflict in family business is totally different to a regular workplace.
https://davidwerdiger.com/family-conflict-resolution/family-business-conflict/
The headlines are everywhere – a high percentage of family businesses have no formal succession plan.
Then the story launches in to the usual tropes about estate planning, life insurance, choosing a successor, etc.
https://davidwerdiger.com/succession-planning/upside-down-succession/
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