It has been my experience dealing with families of significant means that they all have their individual levels of complexity which have changed over each family’s evolutionary life cycle. These complex structures are needed to address the delicate balance that exists between tax and estate matters, asset protection and income splitting issues as well as current lifestyle versus longer term succession and philanthropic goals.
To address these subtle, and sometimes not so subtle matters, these families have had to surround themselves with a myriad of professional practitioners, such as lawyers, accountants, investment advisors and consultants, to provide the technical expertise in each specific area of their wealth continuum such as estate laws, tax laws, tax accounting, risk management and investments. Often it has been left to the families to try to synthesize the various solutions provided to them, but unfortunately, most often they remained unintegrated. As a result, on a stand-alone basis these solutions are often very technically sound but as a cohesive solution to support the family’s purpose and journey in life, they often ended up to be somewhat less than effective.
In order to combat some the complexity and to close the gaps between the various elements of their structures, many of these families have adopted a family office solution that would bring better integration and cohesion with enough simplicity and transparency to provide them with the comfort and peace of mind that only comes from being confident about one’s environment. Three broad types of family office solutions often used are:
Single Family Office: Many families with significant wealth have formed their own Family Offices (also known as a Single Family Office – SFO) with most of the required competencies. These were usually headed and staffed primarily with accountant and/or legal professionals. On rare occasions, they would also include an Investment Professional, but given the cost of employing an experienced, proven investment management professional, it is not surprising that this happens infrequently. As with the first option, the primary limitation, of the Family Office, is the competencies and depth of competencies of the staff hired. The added complexities include maintaining the competency level of professional staff hired as well as the overall cost of operating a private family office. The costs alone restrict this option to families with at least $100 Million.
Multiple Family Office: The Multi-Family Office (MFO) is where two or more families come together to share the costs of operating a Family Office, thus reducing the impact on each family individually. This alternative possesses all the same issues as the first option with the added complexity of all families agreeing on costs and staff hired as well as organizing the MFO to meet the needs of each family.
Virtual Family Office: Most families that I have worked with have established relationships with various professional practitioners, such as lawyers, accountants and consultants, who provide technical expertise in specific functional areas of wealth management such as legal, accounting, insurance, risk management and tax. The reality is that many of these solutions, although technically sound, can remain unintegrated and, therefore, many times, disconnected from a family’s overall purpose. In addition, many families work with multiple investment advisors who often provide conflicting advice and the family is left in the position of trying to determine how best to knit all of these ideas together. Not only is it challenging to determine how best to coordinate all of this advice to meet the family’s specific needs, but it can also be very time-consuming and expensive. For this reason, a growing number of families are opting to create a ‘virtual’ family office in which they create an integrated team of their professional advisors who collectively act in a coordinated manner to provide holistic and enduring advice to the family on an advisory/consulting basis. Given the variable cost nature of the Virtual Family Office approach, families with assets less than the Single and Multiple Family Office thresholds (i.e.: roughly $100 Million) can economically access these services.
As each of these family office solutions has their own ‘pros and cons’, it’s critical that affluent families select a solution that matches their family objectives while balancing their own economic reality.