Ask These Questions if You’re Considering a Family Office or Virtual Family Office
Key Takeaways:
Family offices are right for some affluent families—but certainly not all of them.
Comparing single- and multifamily offices is a good step.
Some affluent families may be best served by a virtual family office.
As the number of affluent American households continues to rise, so does interest in professional family offices designed to address their many and often complex needs—both financial and otherwise.
It’s not entirely clear just how many virtual family offices exist in the U.S. One study by Capgemini estimates there are around 3,000 single-family offices—each one catering to a single family—and roughly 150 multifamily offices that serve more than one family. Another report estimates there are more than 7,000 single-family offices around the globe.
And of course, the rise of virtual family offices in recent years means that some wealth management firms that aren’t technically classified as family offices have a real family office look and feel.
But family offices aren’t a panacea for every wealthy family. Key questions must be asked and important considerations must be assessed when families start thinking about possibly getting involved with a family office of some kind.
That’s true even if you’re not part of the Super Rich (net worth of $500 million or more) community to whom family offices tend to cater. Today, even many “merely affluent” families can work with their wealth managers to create virtual family offices that feature many of the capabilities of the more traditional options.
Single-family office considerations
Some things to think about if you’re exploring the idea of a family office include the following:
1. Single-family offices provide a menu of deliverables to a wealthy family, either directly or by engaging with external experts.
Are there areas of expertise you feel would benefit you and your family that you do not have access to today, at the performance levels you expect? If so, what are those areas?
Are these areas of expertise best addressed by establishing your own single-family office, by becoming a client of a multifamily office or by dealing with these matters in some other manner?
2. Single-family offices are in a position to oversee and work with an array of external experts in a coordinated, synchronized manner.
Are the professionals you currently work with providing an integrated set of solutions to address the various necessities and desires of your family?
How might you and your family benefit if you were able to ensure there was greater harmonization and synergistic coordination among these professionals?
3. Working with professionals who are leading authorities in their respective fields requires a belief in their integrity and abilities.
How comfortable are you in delegating financial and personal matters—particularly the critical ones—to properly vetted specialists?
How comfortable are you and your family in following the advice of such experts?
4. The role of family members in a single-family office can prove very beneficial, very problematic or (usually) something in between.
Are there members of your family who have the skills and knowledge to be involved operationally in your single-family office?
Are there family members who should play an oversight role in your single-family office?
Reasons to avoid the SFO route
Despite the advantages that single-family offices can bring, there are a wide variety of reasons wealthy families should not establish single-family offices. The following are some of the questions that (depending on the answers) might indicate that a single-family office is a poor choice.
Are the expectations of what a single-family office can accomplish impracticable and unfeasible?
The expectations of the wealthy family and the capabilities of the single-family office need to be aligned, with every effort being made to ensure this alignment is maintained perpetually.
Are there deeply ingrained, grave, and truly irreparable conflicts within the family?
If a family is riddled with domestic battles, it’s very unlikely that the single-family office will operate effectively—unless, for example, it is completely controlled by one person.
Is the single-family office explicitly and purposefully understood to be a boutique business?
A single-family office works best for a wealthy family if it’s run like a for-profit business—even if it doesn’t make a profit—rather than as a hobby that lacks goals, objectives, and accountability.
Are the lines of communication open and working well?
We see that operational failures at single-family offices are many times a function of a lack of clarity brought on by miscommunications between family members, and between family members and the senior office staff.
So, where does that leave wealthy families?
Based on our experiences working with wealthy families that either want an SFO or already have one, it has become apparent that for a meaningful number of affluent families, this business model is not appropriate. In addition to these broad issues, there are others that can easily erode the value of a single-family office—or worse, make it a costly disaster.
In a survey of 114 single-family offices, only about one in five family members involved in strategic oversight said their family office is performing well (see Exhibit 1). These single-family offices were exceeding the expectations of their families.
The majority reported that their single-family offices were performing adequately—in other words, generally in line with what was expected of them.
Meanwhile, about a quarter of the single-family offices were seen as underperforming expectations.
Five foundational considerations
Despite good intentions, some wealthy families create Frankenstein family offices—patchwork networks of unaligned service providers loosely sewn together. Single-family office formation is not a science project but an exercise in engineering and social management.
A single-family office needs to be geared for precision and customized with premium components for responsiveness. Choosing the right structure allows the family to put all the pieces in place more quickly, efficiently, and cost-effectively. Customizable, turnkey approaches are also gaining traction among established SFO operations that are looking to enhance client service capabilities.
Whatever the choice of operational structure for a new single-family office, there are five interconnected, related characteristics that are foundational.
Family direction. A newly established single-family office should involve family participation. This can include family members in operational positions. However, at a minimum, there should be extensive family oversight.
Goal-achievement orientation. Goals need to be specified, and the operational structure needs to match up with those goals. Moreover, by being attentive to the goals on an ongoing basis, the single-family office is better positioned to accommodate the family’s needs, wants and preferences.
High adaptability. Due to a plethora of factors—from family dynamics to economic conditions—the single-family office needs to be as flexible as possible in its agenda. There is little doubt that the single-family office will need to adapt to changing circumstances over time, especially when multiple generations become involved.
Cost-effectiveness. The aim should be to get the best results from whatever operational structure is chosen while mitigating the cost. This will usually involve certain trade-offs. Some of the most important deal with what services are provided internally and what services are outsourced to leading experts.
Ongoing monitoring with metrics. Continuous critical evaluations are required for a single-family office in order to achieve the goals of the wealthy family, to adapt when necessary, and to ensure it is providing high-caliber deliverables cost-effectively. Comparisons between expectations and actual results help ensure the single-family office is operating as desired.
Ultimately, it doesn’t matter if you’re exploring a single-family office, a multi-family office or a virtual family office facilitated through a wealth manager. If you arm yourself with these questions and considerations going into the process, you can conduct more effective and more insightful due diligence on the option that may be appropriate for you and your family.
Silvertree uses comprehensive financial planning in a Virtual Family Office (VFO) framework to set goals, define your investment strategy, and guide you toward retirement with clarity and purpose. Our team can help you centralize your wealth by focusing on goal-based planning and investing, tax strategies and planning, wealth strategy and liquidity planning, and estate, philanthropy, and legacy planning. Schedule a strategy session with our office today to learn more!
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2022 by AES Nation, LLC.
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