Should You Consider a Family Office?

Starting a family office can make sense if:

  1. Your family has sizable assets.
  2. Those assets are not part of an operating business.

Many families manage wealth much like individual investors: with the use of stock brokers or financial planners.  A family office is a different strategy from investing via a stock broker or financial planner.  Often, a family office starts out as a small operation to manage excess liquidity and cash that are held outside of a successful family business.  The people responsible may be the founder with help from a bookkeeper and/or accountant. At this stage, investment ideas come from external advisers who either manufacture or distribute products for the firms they work at. These may include private-equity deals or investment management services at one of the major banks or brokers.

The results:

This is a fine model for many investors.  Investors should consider the lack of transparency and access to an open-architecture investment platform, which can result in excessive fees and fewer high-quality opportunities for a family to diversify their assets. The family could find themselves maintaining a patched together portfolio that lacks due diligence, risk management, and an overall strategy.  This method might not adequately preserve wealth for the long term, and the goal of a family office should be to preserve wealth for the next century.

Consider the family:

A family wishing to preserve wealth for generations must first consider the family itself and not the “family office.” What does the family want to do with their capital?  Is there a desire to not simply maintain funds but capitalize on financial, human, cultural and social capital?  Once that direction is established, a mission statement is drafted for the family office as the roadmap to accomplish the family’s goals and objectives.

Should a stand-alone family office be established?  A good rule of thumb is that a dedicated, full-service family office typically doesn’t make financial sense until the family’s net worth exceeds $500 million.  A dedicated family office will cost the family anywhere from $250,000 to $1 million per year for a full-time chief investment officer alone.  For this reason, many families opt for joining a multi-family office (MFO).

Multi-Family Offices:

Most families will not need a stand-alone family office.  MFO firms are independent, and not associated with large firms such as banks, investment dealers, trusts or insurance companies. These MFO firms are a fiduciary to the families and have great value because the operating costs are shared across multiple families.  An MFO is a good option where the family’s assets are substantial enough to require assistance for most efficient management, yet require a cost-effective method for maintaining the family’s wealth.