Is Setting up a Family Office Right for You?

The Rise of the Family Office

It’s no surprise that one particular type of office has increased globally in recent years: the family office. The pandemic spurred a rise in business sales and the largest transfer of generational wealth in history began.

Receiving a windfall from a business sale or inheritance is a life-changing event. Suddenly, you’re flooded with investment decisions, estate planning, and tax optimization methods – not to mention the changing family dynamics that often accompany liquidity events.

According to Deloitte, there are some 8,030 single-family offices (SFOs) in the world today, up from about 6,130 in 2019. The figure is projected to hit 10,720 by 2030.

But is a this type of office right for you after a liquidity event? It will depend on several factors like the size of your windfall, what services you need, and whether you’re willing to pay for them.

Here’s a quick guide on what family offices are, what they offer, alternative wealth management structures, and other considerations when determining the best fit for your situation.

What Is a Family Office?

A family office is a private company established to manage the financial and non-financial affairs of a single family. They can offer some or all of the following:

Investment Management: Asset allocation, manager selection, and reporting.
Liability Management: Debt management and financing strategies.
Risk Management: Insurance and cybersecurity.
Estate and Tax Planning: Tax-efficient strategies and trust management.
Philanthropy: Charitable giving and legacy planning.
Record Keeping and Reporting: Financial administration.
Lifestyle Management: Home, staff, and travel management.
Family Education: Wealth management and skills training.

This type of office treats your wealth like a business, leveraging both sides of the balance sheet to provide you and your family members with the most cost-efficient income, liquidity and loans. They can also bring financial discipline and purpose to family members, and establish family core values, philanthropic standards, or life goals. Additionally, they bring children into the fold by educating them on wealth management and how to build wealth for future generations.

When Do You Need a Family Office?

The need for a family office depends on several factors:

Asset Size

Generally, a minimum of $100 million of investable assets is considered necessary to justify the minimum costs of running this type of office. Some experts say the cutoff should be $300 million, and increasingly the view is that a single-family office makes the most sense for families with over $1 billion in net worth.

Cost of Services

Full-service family offices typically charge annual fees running at around 1% to 3% of assets under management.

Complexity of Wealth

Families with complex finances involving multiple businesses, homes and other real estate tend to benefit from a holistic and confidential approach to wealth and family that a single-family office can provide.

Some Alternatives

A single-family office is by no means your only choice. You may find you can manage your finances more cost-effectively by outsourcing financial, estate and taxation needs to professionals.

Multi-family offices (MFOs) pose another option. This type of office typically has lower fees at around 0.3%-0.7%, since families can share costs.

Registered Investment Advisors (RIAs) provide an additional structure. Unlike MFOs, this type of professional is regulated by the SEC and held to a fiduciary standard. MFOs may also be registered, but they tend to service families rather than individual clients.

The lines between the various family office and wealth management structures are sometimes blurred as the competition for talented professionals, the cost of new technologies, and the desire to offer a full range of services fuels hybrid combinations. SFOs are joining forces with MFOs to access better talent and technology. MFOs are registering with the SEC and RIAs often provide additional wealth management services like estate planning and family support.

Whatever your financial and family needs are, the wealth management industry is sure to provide you with a customized solution. As the complexities of running businesses and families grow, so do the wealth services and solutions to take care of your windfall.

Sources:

Business Insider: What Is a Bull Market?

Morgan Lewis: 10 Frequently Asked Questions on Starting a Family Office

Barrons: The Economic Size and Influence of Family Offices Have Never Been Greater

Deloitte: The Family Office Insights Series – Global Edition

FINTRX: Family Offices and RIAs

Schwab: Do You Need a Family Office?

Deloitte: Family Office Fundamentals

Bessemer Trust: Is a Family Office Right for You?