Managing family wealth is a complicated and building a family office is certainly one of the best ways to manage this complexity. Until recently, families have typically only started to consider a customized wealth management approach as they reach $100M in investable assets, however, with the advent of virtual and multi-family-offices, we’ve seen many more and more families start their own version of a family office to support their long-term wealth goals.
The primary goal of a family office is to preserve, invest and grow a family’s wealth through public and private investments and the management of other asset classes. As anyone with significant wealth could tell you, managing this wealth in a productive and efficient manner is a full-time job. It requires specific experience that is beyond the reach of most individual financial advisors, which is why wealthy families join or create their own family office.
Setting up and running a successful family office doesn’t come cheap: expenses typically run 1% to 2% of the value of the family’s wealth (meaning that a family with assets totaling $100 million would typically spend $1-2M annually on the administration of their family office). Even with significant wealth, there comes an important decision, which is how to manage your personal wealth in a way that achieves the goals of your family, represents your values and prepares for the future. Let’s explore further the four categories of family offices and look closer at the pros and cons of each structure.
The Embedded Family Office
An embedded family office typically isn’t built intentionally, but tangentially to the growth of a successful family business. The reason it’s called an “embedded” family office is that it is typically a part of the family’s business, evolving and growing organically as the business grows. For example, a company’s accounting staff may, over time, take on payroll, filing taxes or paying bills on behalf of the family. Other professionals may be hired to invest, handle operations or administrative activities and more. Eventually, this group of employees is embedded in the family’s business, but is essentially devoted entirely to the management of the family’s personal wealth. A pro to this style of family office is that is saves costs, as much of the administrative burden of shared resources can be absorbed by the family’s business. It also offers a large degree of control, continuity and support to the family, as well as to the family office employees themselves, as there is built in overlap in responsibilities between family office staff and the family’s business. In terms of cons, it can be difficult to maintain the family’s privacy, and the family’s personal finances can get mixed up or co-mingled with the family’s business. There can also be tax risks if the company’s employees are doing significant work for family members but being expensed as part of their business.
At some point the family may decide that it is in their best interests to separate the embedded family office from the family business. After several generations there are simply too many family members to serve, the need for more privacy becomes paramount or the risk in terms of taxes, or if the company is taken public, is too high. Regardless, separating an embedded family office from the business needs to be addressed before selling the business or bringing in outside investors.
The Single-Family Office
The next level of sophistication, beyond the embedded family office, is the creation of an independent single-family office that serves the needs of one family or multiple generations of the founding family. A single-family office either hires the necessary talent and expertise in-house, or outsources some or all its needs to a range of trusted professionals to assist with investing, paying taxes, overseeing philanthropic activities, managing their trusts/estate/insurance/cybersecurity and more.
The most significant pro of a dedicated single-family office is that it is independent of the business that created the wealth and is solely focused on the wealth administration of the family. But it takes a lot of work on the part of family members to run a single-family office, particularly the founding generation who might be at a point in their lives where they’re thinking of retiring, or at least not working full time. Administration costs are typically quite a bit higher with a single-family office as opposed to an embedded family office.
The Multi-Family Office
For some families the best option is joining a multi-family office, a term that describes a broad range of firms and services to wealthy families. Excluding the largest family offices, a multi-family office typically offers the most comprehensive services, because it provides the broadest range of both financial and family-centric services, enhanced cybersecurity, and access to best-in-class service providers. Ultimately, because resources are shared, a multi-family office is almost always a less expensive option than running a single-family office.
But the downside of a multi-family office is that the family often has less control than they would with an embedded or single-family office. For that reason, a family should determine in advance whether a particular multi-family office will meet their needs.
The Virtual Family Office
The last structure is by far the easiest to launch and can be very effective for families with assets ranging between $25 million and $100 million. In many cases, a virtual family office involves one or two family members. They are fully engaged in managing the family’s finances while working with a range of outside service providers such as investment advisors, CPAs, and attorneys. The virtual family office arrangement differs from an independent single-family office that uses outsourced providers because in this case family members are doing all the coordination.
While a virtual family office is the most affordable solution, it often doesn’t work beyond the first generation. This is because most families with this level of wealth, and sophistication in their wealth management activities, typically desire greater control or a more customized solution for their needs. Virtual family offices exist at all different levels, however, and some significantly exceed others in terms of services offered, skilled staff, and cost.
Overall, each type of family office offers a variety of advantages and disadvantages to wealthy families, and they should carefully consider their own needs and resources in choosing the most appropriate option. For help deciding on the right option, get in touch with Old State Staffing’s family office team. Or set up an introductory meeting to get started thinking about the structure of your family office.
