Here’s another in my series of ‘Answers to Questions People ask me”
This month’s question is “What is a Family Office?”
While this sounds like an easy one, it’s not. Over the last decade ‘family office’ has emerged as a buzz-phrase. Wherever you look, you see family offices where before there were none. But these words describe all manner of different things. Many of these things are excellent. Some are not. This article will therefore serve not just as an educational tool, but also as a consumer warning about some traps to avoid.
Let’s start with the basics to try to make sense of this.
Wealthy families always have a team of experts to help them manage their wealth. Who exactly is on the team will depend a lot on the nature of the family and the kind of assets they own. The team is almost always going to include a lawyer and an accountant or tax adviser. Other members of the team can include investment management specialists, portfolio managers, real estate managers, estate and farm managers, trust and foundation specialists, family succession experts, and others including business advisers, art specialists and so on.
The starting point is that these activities are outsourced to third parties, and someone in the family (usually the founder of the family business) is responsible for managing this panel of experts and calling them in, as required, to solve problems.
But after a while, as family wealth grows, this fragmented outsourcing approach can stop making sense because:
- There is just too much going on – “wrangling” all these advisers is taking up too much time
- A more centralised and coordinated approach is needed. The advisers tend to be task-driven and sometimes a ‘bigger picture’ and more focused approach is needed
- The advisers don’t work together as a proper team
- The founder doesn’t have time to ‘waste’ on managing the family wealth. Instead, he or she wants to concentrate on the business (or the golf course).
- Some of the advisers are occupied largely with the family’s work – to the exclusion of other clients. When this happens, what is the sense of paying their firm when you could simply employ them directly yourself?
- If the founder is no longer around, there can be nobody else to perform this coordinating role
When these things start to happen, a family office makes sense.
In this context, a family office means bringing some or even all of these external advisers in-house, under the control and supervision of a manager or coordinator of some sort. At a certain point, doing it this way not only improves efficiency but can also actually reduce cost. Another plus is the elimination of conflict of interest. Family office professionals do not work for other families or for external firms. Instead, they are focused exclusively on your family’s wealth and your family’s success.
For the aristocracy, the family office concept is not new. For centuries, noble families have had Estate Managers and Estate Offices – primarily to look after family land holdings. It is a very natural step for these to evolve from Estate Offices to Family Offices, still looking after the family land, but now also their wealth. The Duchy of Lancaster is a great example of this. Established in 1351, it does not describe itself as a family office – but that is exactly what it is.
So what does it look like?
The smallest family offices consist of a single person managing wealth on behalf of a single family under the legal umbrella of a company, or sometimes a trust or foundation. In this case, the single person (let’s call her the CEO) is still managing most of the team of outsourced experts we talked about above, but she is probably performing some of the most important functions herself. She is also keeping everyone focused on the family goals and strategy and making the founder’s life much simpler by taking most of the hassle off his hands. This model is sometimes a beginning point from which things will develop in the future as family wealth grows.
A more typical size for a small family office would be around five people, and then it goes upwards from there. In some of the largest family offices, you will see a team of 50 employees or more. As well as these professional staff, you will also find support staff – drivers, security specialists (bodyguards), personal assistants, and yacht crew. In this model, the family office is not just looking after the family wealth, it’s looking after everything.
So we see that there is no ‘one size fits all’ solution. Much depends on the nature and internal expertise of your family, and much also depends on the nature of your family’s wealth. For example, a passive investment portfolio requires less intensive focus than an active portfolio of start-ups, venture capital, or real estate development. These things dictate not only the size of the family office, but also who exactly the professional staff will be. But above all, each of those people is focused on the family strategy and goals.
Family office structures also allow you to focus capital on the industries from which you made your wealth. If you can truly understand something, you are far more likely to succeed. Finally, family office structures allow you to fully embrace the environmental, social, and philanthropic themes that are important to your family.
So every family office is different – but there is one important feature they (should) all share. Family offices are not profit centres. Yes, they are all about managing, protecting, and growing family wealth, but they themselves are not ‘for-profit’ business ventures. Instead, they are cost centres. Running a family office costs money. For some families that’s a worthwhile cost. For others, not.
Should I have one?
If you think a family office might make sense for your family the first question is whether the cost, as we discuss above, is justified by the potential benefits.
As a rule of thumb, many people recommend that the ‘trigger point’ for establishing a family office is a family wealth of around EUR 100 million. At that point, the cost of a smaller family office (cca. EUR 1 million per annum) starts to make sense, given the relative savings in professional and other fees.
My feeling is that in the CEE region because our costs are lower, the target number is closer to EUR 40 million.
Of course, once family wealth grows to bigger numbers, then justification of the cost vs benefit equation is less and less challenging. Jeff Bezos’ family office, Bezos Expeditions, is the largest in the US. It manages assets of USD 100 billion, so a few extra million spent here or there on the 159 employees is relatively trivial.
Too much commitment?
There is another model that is relatively popular; the Multi-family Office (MFO).
As the name suggests, a MFO is a family office that looks after two or more families rather than one, and is often presented as a ‘stepping stone’ towards a standalone single-family office. In its purest sense, it is a true ‘cooperative’ between the families involved and follows the same ‘cost centre’ financial model as a single-family office.
A MFO can sometimes make sense, especially if the families involved are close to each other and/or very similar in terms of their objectives and goals. Doing it this way has some advantages. It lowers the cost threshold, and to some extent allows sharing of expertise and skills. It can also allow families to access bigger teams with a wider range of skills and experience. By pooling financial resources MFOs can also sometimes open doors that might otherwise be closed to individual families.
On the other hand, a MFO system also dilutes some of the family office benefits we outlined above – especially the purity of focus specifically on your family goals. The more families there are in the MFO, the more the benefits dilute. MFOs with two or three families can work really well. Anything above five is quite challenging.
So yes, a well-thought-out MFO structure can work really well for some families. But beware . .
Not every “family office” is a family office
Over the last decade, many wealth management companies and financial advisers have seized on the buzz surrounding the family office concept and rebranded themselves (or a part of their business) as “XYZ Multi Family Office”. In doing this they hope to emphasise their claims to provide a comprehensive set of professional solutions in-house or at least in a coordinated way.
Despite this branding, these companies are not true family offices in the sense described above. They are not run by the families, for the benefit of the families. Instead, they are business entities owned by others. That’s not necessarily a problem, but it is a reason to be cautious and aware:
- A true family office prioritises your family’s goals and strategies. A wealth manager has multiple clients and shareholders. Your goals are no doubt important, but you are not the priority
- A true family office is a cost centre. It does not seek to make a profit in its own right. A wealth manager on the other hand is focused on making money for its own shareholders. Of course, there can be benefits from depth and economies of scale, but in the end, a wealth manager’s services will cost more because there are more mouths to feed.
- Wealth managers have sales and marketing departments and invest energy in attracting more clients. True family offices do not do this
- As with any wealth manager or financial adviser, due diligence is needed before investing. There are very many recently rebranded “Multi Family Offices” which lack the skills (and in some cases even the families) to do justice to the term.
Having said that, there are also some excellent commercial multi-family offices out there offering professional and capable service. In the Czech context, good examples include J&T Family Office and Emun. Wherever you go, caveat emptor – do your homework before you commit.
How do I set up my own family office?
If you think setting up your own family office might make sense, the first step is to define your and your family’s goals – both in the short term and also over the longer term. A family office structure can often be a part of a wider family succession strategy – creating a structure to manage family wealth for not just this, but also for future generations.
Before you decide on the type and scope of your new family office, it is obviously important to prepare a budget. You can then consider if the concept makes sense financially for your family and if necessary, how to tailor it so that it does.
Once you have set your goals, creating a family office is similar to establishing any other business entity. I am also happy to help you with this. Please feel free to contact me if you would like any guidance or assistance in this area.
