Do You Need a Family Office?

January 26, 2024 Paul Ferguson
A family office can shoulder many of the complexities, both financial and non-financial, that ultra-high-net-worth families deal with every day. Is it right for you?

When a family accumulates generational wealth, managing financial assets and non-financial matters can become a complex undertaking. Whether it's overseeing investments and real estate, handling recordkeeping and financial reporting, managing households, or philanthropic planning, meeting these complex needs takes time.

For this reason, many ultra-high-net-worth families offload critical responsibilities to family offices, which are businesses that offer services to meet each family's financial and non-financial needs. Of course, such bespoke services come at a cost, so determining whether a family office is right for your family will require an analysis of your needs relative to the cost of meeting them.

Here's what to consider when deciding whether a family office makes sense for you.

Which services do you need?

There's no industry standard for what constitutes a family office, which has created a good deal of confusion in the marketplace. While many investment management and wealth advisory firms cast themselves as viable substitutes to family offices, most can't offer the full spectrum of services provided by a family office, which typically includes:

  • Investment management: Asset allocation, manager selection and due diligence, and performance reporting.
  • Estate and tax planning: Sophisticated estate-planning strategy design and coordination, income tax planning and preparation of annual income tax returns.
  • Liability management: Help families leverage their assets to obtain traditional or specialty financing, as well as manage and monitor their overall debt exposure.
  • Risk management: Help protect physical and digital assets by helping them acquire property and casualty insurance, personal security, and cybersecurity.
  • Philanthropy: Advise on family philanthropy—such as creating the right giving vehicles and conducting grantmaking due diligence—while providing administration and bookkeeping.
  • Recordkeeping and reporting: Manage day-to-day finances, from paying household staff and other service providers to producing financial statements. 
  • Lifestyle management: Manage primary households and vacation homes, as well as provide many concierge services including health care and travel support.
  • Family dynamics and education: Provide support in setting up family meetings, educating family members on financial and other matters, and developing the family's mission, vision, and values.

Many family offices offer dozens of services. Whether a family office is right for you depends on your specific needs and budget, but also how much value you put on factors such as privacy and control. 

What level of support do you require?

There are two main types of family offices:

  • Single-family offices (SFOs) are organizations created by a single ultra-high-net-worth family to meet their specific financial and lifestyle needs. SFOs are typically structured as a business entity (LLC, C Corp, or S Corp), with the number and expertise of staff depending on the family's needs. The benefits of an SFO include privacy, control, and complete alignment of the interests of the family and the employees of the SFO. As a general rule of thumb, creating an SFO only makes sense for families that have more than $100 million in net worth, since the annual cost comes to about 1% to 3% of that sum.
  • Multi-family offices (MFOs) are registered investment advisors (RIAs) created to meet the needs of more than one family. Most MFOs have a minimum assets under management (AUM), net worth, or fee level threshold—with most working for families with over $30 million in net worth. Some MFOs use an a la carte model, allowing you to pick and choose among their various services. And because they spread their services—and their related expenses—among multiple clients, their fees tend to be much lower than SFOs. Investment management from an MFO generally costs between 0.30% and 0.70% of the assets under management, whereas the fees for non-investment services vary substantially by service and provider. In addition to a lower price tag, MFOs also offer broad expertise and access to specialized talent, whereas an SFO usually has to partner with outside resources to meet all of the family's needs.  

Historically, families of significant wealth have undertaken a cost-benefit analysis to determine if they should create an SFO or hire an MFO. However, because of increasing complexities involved with managing wealth—more regulations, the cost of technology, and the difficulty in finding specialized talent—many SFOs have moved to a hybrid model in which they outsource certain functions. MFOs have stepped in to fill these voids, allowing many SFOs to streamline their operations and rely solely on one or two employees, reducing their cost. In fact, many in the business now say that a full-fledged SFO with eight or more employees should not be built unless the family is worth at least $1 billion. 

Here to help

If you are in the process of deciding on whether to create an SFO or tap some MFO services, please reach out to your financial or wealth consultant. Your consultant, along with a specialist in the family office business will help guide you through the decision-making process.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

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