How to Start a Family Office
By: Laura LaVecchia, CPA & Michael T. Oliveri, CFO
Family offices are growing in popularity as the number of ultra-high-net-worth individuals (UHNWIs) increases worldwide. In 2019 there were an estimated 7,300 family offices worldwide, which was up a whopping 38% from the year before. Forty-two percent of these family offices were located in North America, 31.5% were located in Europe and 17.8% were located in Asia.
If you’re an ultra-high-net-worth individual, you may be wondering if you should start a family office. The following article will help you decide if this is a smart move for you by explaining the purpose and role of family offices, the different types of family offices, the criteria for starting a family office and how to establish one.
What is a Family Office?
You might be familiar with some of the mega-sized family offices in existence like Bill and Melinda Gates’ Cascade Investment, Jeff Bezos’ Bezos Expeditions, and Sergey Brin’s Bayshore Global Management. But most family offices are smaller than these multi-billion-dollar behemoths.
A family office is a unique family business created to meet the sophisticated wealth and investment needs of UHNW individuals and their families. Creating a family office allows these families to benefit from highly specialized financial and investment services including:
- Investment strategy and asset allocation
- Third-party investment manager selection
- Wealth management
- Financial planning
- Bookkeeping, accounting, cash management
- Bill-Pay and vendor management
- Tax strategy, planning, and compliance
- Household staff management and payroll
- Succession and estate planning
- Legacy planning and next gen education
- Guidance in giving and philanthropy
- Risk management and insurance
- Lifestyle management
A family office provides professional, private and unbiased management of the family’s financial, philanthropic, and business affairs.
Types of Family Offices
There are several different types of family offices, including the following:
Traditional Single-Family Office (SFO)
This entity manages the affairs of a single wealthy family, as opposed to a group of wealthy families. As such, it offers the highest levels of confidentiality, privacy, and customization. SFOs are the most expensive type of family office and are usually only appropriate for the wealthiest families.
Multi-Family Office (MFO)
The growing popularity of family offices has led to the creation of multi-family offices. These entities manage the financial affairs of a several wealthy families. Creating an MFO may enable UHNW families to benefit from economies of scale by leveraging investment buying power while gaining more control over the investment management process. Rather than creating an MFO between families, some may seek an established professional services organization that offers their MFO capabilities as a service. Levels and types of services may differ across multi-family offices, and they typically offer less customization and control than an SFO. However, they are more cost-effective, which usually makes them a better choice for families that aren’t in the top tier of wealth.
Virtual Family Office (VFO)
This is an outsourced family office model in which tasks are handled by supporting players including a financial advisor for investment management, an attorney for estate planning and a CPA for tax planning and accounting needs. As the principal, you will choose one individual to lead the team and must authorize the individuals to communicate with each other on your behalf. This is usually the most cost-effective option, but it also offers the least customization and control. Therefore, it is most appropriate for families whose needs are less complex.
What Does a Family Office Do?
So, what, specifically, does a family office do? Family offices typically provide the following services to UHNW families:
Investment strategy: Creating an investment policy statement and devising investing plans based on family members’ short-, medium- and long-term financial goals. This includes gauging risk tolerance levels, determining investing time frames, planning asset allocation strategies, and rebalancing investment portfolios to keep them in alignment with goals.
Long-term wealth management: Helping manage and preserve family wealth both for current and future generations via strategic planning and the creation of formal governance structures.
Financial planning: Assisting with all aspects of family financial planning including cash flow management and budgeting, personal and business tax planning, and retirement and college planning.
Pay household bills: UHNWIs and family members can be responsible for paying dozens of household bills each month. A family office can relieve them of this duty.
Compliance and regulatory support: Ensuring compliance with any and all regulations related to assets, investments, and business operations.
Succession and estate planning: Creating and managing trusts and estates to ensure that assets are transferred to future generations according to the patriarch/matriarch’s wishes and in the most tax-efficient manner possible. Also helping plan ownership and management succession strategies for family-owned businesses.
Legacy planning: Understanding the patriarch/matriarch’s long-term vision and values for their family wealth and helping them devise plans to ensure that their legacy extends to future generations.
Philanthropic planning: Helping families set goals and priorities related to giving and philanthropy and devise strategies to ensure that assets are distributed to preferred charities and other organizations as smoothly and tax-efficiently as possible.
Privacy and confidentiality: Ensuring that everything related to family members’ personal information, activities and financial matters is kept in the strictest confidence.
Should You Start a Family Office?
There are several important factors you should consider when deciding whether it makes sense to start a family office, the most obvious being your level of wealth. Establishing a family office is expensive so you need a minimum level of income and assets to cost-justify the expense.
How expensive? It could cost between $1 million and $2 million per year to operate a small family office with up to six employees, between $3 million and $4 million per year to operate a medium-sized family office with 15 employees, and between $8 million and $10 million per year to operate a large family office with 25 employees.
Between $50 million and $100 million in assets is generally considered to be the minimum for establishing a family office in order to cover the expenses and overhead cost-effectively. For families with assets in this range, a multi-family office or virtual family office is usually the most cost-efficient option. Once a family’s assets exceed $100 million-$200 million, then it might be reasonable to consider starting a single-family office.
Another factor is the complexity of your financial life. Just because an individual or family qualifies as UHNW doesn’t mean their financial life is complicated. For example, some entrepreneurs have the majority of their wealth tied up in their business, while other UHNW families have relatively simple (though large) investment portfolios and assets. A family office probably isn’t necessary in situations like these.
Of course, some UHNW families have very complicated financial lives that include diverse real estate holdings, sophisticated investments, multiple business interests, expensive “toys” like yachts and private aircraft, blended families, and complex trust structures to distribute assets to future generations and charitable causes. A family office may be beneficial and worth the cost in situations like these.
Your priorities and goals are yet another factor in considering whether to establish a family office. As the name implies, most family offices are built around a family and its legacy. When thinking through what’s most important to you, imagine how each of the various family office structures might be suited to support your goals. For example, if you intend on traveling the world and being completely free of your finances, an SFO with you at the helm likely doesn’t support that vision. Similarly, a single individual with no heirs may have enough wealth and complexity to justify creating a family office, but there might not be a practical reason for doing so.
The formal structure of a family office gives patriarch/matriarchs a tremendous amount of flexibility when it comes to involving family members in legacy and wealth planning. For example, you can give your children and grandchildren roles serving in the family office if you’d like for them to be actively involved in the business of managing the family’s wealth.
Steps to Starting a Family Office
Following are the main steps involved in establishing a family office. Note: You may want to involve your business and financial advisors, attorney, accountant, and other professional advisors in the process of starting your family office.
1. Determine feasibility and establish your vision
Perform a feasibility study using factors listed above to determine if starting a family office is financially realistic or not. Assuming it is, define your vision and purpose for your family’s legacy and wealth. Map out the family office’s structure, staffing, governance, technology, and operations around how each of these areas will support your vision and goals.
2. Define the structure and determine processes
Create a detailed business plan based on the feasibility study performed in the first step. Your goal is to develop a step-by-step roadmap that will guide implementation of the family office to ensure that the right structures are designed to support your goals and vision and that costs are accurately reflected.
Determine what kinds of facilities, technology (hardware and software), staffing and outsourced contractors will be required to operate your family office successfully. Also define legal and tax structures, as well as governance and reporting protocols and operational and reporting processes that will need to be followed.
3. Finalize the framework
With a functioning business plan now in place, you can refine and finalize your operational models, framework and processes. This is the time to dig into the details by charting operational processes and workflows and developing a formal framework for governance. It is imperative that your technology supports and enhances the framework you define. You will also need to source your required resources by finalizing job descriptions, recruiting and hiring staff, assigning outsourced services and securing your technology partner.
4. Test your systems and processes
Before launching your family office, it’s critical to test everything and make sure that what you have designed on paper actually works in the real world. Stress-test your IT infrastructure and systems to make sure that everything is in working order and there are adequate protections against cyber threats. Create business continuity and contingency plans in case there are any major disruptions to your operations.
5. Launch your family office
Once testing has been completed to your satisfaction, you can launch your family office, perhaps using a phased approach. Be sure to review your people, processes, and procedures periodically to make sure everything is still functioning as it should while assessing outcomes against your goals and best practices. Look for opportunities to evolve and improve in order to remain as cost-effective and efficient as possible.
Making the Right Choice
Family offices can be beneficial for ultra-high-net-worth families in the right circumstances by providing highly specialized and customized financial, investment and legacy planning services. But they aren’t the right choice for every wealthy family. Starting and maintaining a family office is expensive and time-consuming so you must perform a cost-benefit analysis to determine if a family office is feasible given your situation.
It’s often smart to work with a team of experts when establishing a family office. This includes a financial planner, wealth manager, attorney and accountant, among others. Simon Quick serves as a multi-family office for a number of clients, and an outsourced investment solution for single family offices.
We can help you decide if starting a family office or joining a multi-family office like Simon Quick is the right move for you and your family at this time. Visit us online, call us at (973) 525-1000 or send an email to info@simonquickadvisors.com to discuss your situation in detail.
About Laura LaVecchia
Laura joined Simon Quick in April 2021 and is now the Director of Finance. In this role, she is responsible for assisting the CFO with the oversight of the financial operations, including long-range strategic planning, budgets, audits, tax and other financial activities of the firm. She is also responsible for the oversight of the family office services, ensuring optimal client service that helps individuals and their families achieve their financial objectives by building and preserving wealth. To learn more about Laura, connect with her on LinkedIn.
About Michael Oliveri
As Chief Financial Officer, Mr. Oliveri manages the daily operations, and oversees the accounting, investment, financial planning, treasury, audit and tax functions of the Family Office. He manages and integrates all aspects of business and personal financial management for optimal efficiency, from cash flow management to philanthropic management. Mr. Oliveri is passionate about helping individuals and their families achieve their financial objectives by building and preserving wealth. To learn more about Michael visit his LinkedIn.
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