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Wealth Management: The Family Business

Harvey Laney

Money does indeed change everything: Financial challenges mount exponentially as you add more digits to your bottom line. Investment portfolios. Trust funds. Endowments. Retirement plans. Tax planning. Estate management. The list of responsibilities is almost endless. Paper-work alone can bury even the most financially savvy family. Keep in mind, though, resources are called assets for a reason.

The goal is to prevent the accumulation of your assets from becoming a personal liability or even a burden.

A family office may be the answer. Family offices remove the complications from managing assets and are particularly attractive for families with significant wealth and considerable reporting requirements. “When you have this much wealth, it’s more than a full-time job for any one person—or even a dozen people,” says Colleen McGuire, vice president for the family office group at Mellon Private Wealth Management in Pittsburgh, Pa. “You want to be removed from the complexity, and you want somebody to do it for you so you can go out and enjoy some of that wealth.”

Family offices are not suitable for everyone, however. A dedicated family office is financially prudent only for families with at least $100 million in liquid, investable assets. “In the last 10 years, the landscape has changed,” says Mary Jane Fredrickson, senior vice president at Family Office Exchange LLC (www.foxexchange.com), a consulting organization that helps families identify their asset management needs and the best ways in which to meet them. “In 1989, the benchmark for considering establishing a family office was about $50 million. Now, more often than not, that number is going to be $100 million to $200 million.” The reasons, she says, include inflation, but also a changing definition of what constitutes exceptional wealth and the emergence of alternative financial management tools for smaller-wealth families. It may be easier to recognize a family office than to define one because of the numerous duties that may be performed. Because of the variances, it is also difficult to determine how many family offices exist in the United States. The Family Office Exchange, which counts about 350 family offices as members of its organization, believes the number is somewhere between 2,500 and 3,000 and growing at a rate of about 10 percent annually. The organization clarifies that its definition of a family office omits smaller offices and organizations that offer family-office services to families and individuals with relatively modest assets. Another 6,000 offices are believed to exist informally within family business structures.


“Is a family office a small office with one person doing the bookkeeping? For some people, the answer to that is going to be yes,” says Fredrickson. For larger families with more complex needs, however, a family office requires an entire staff of experts in a variety of fields—financial, legal, accounting, and more.

Between the two extremes, there are offices of varying sizes, characteristics (brick-and-mortar office space vs. online offices, for example), and duties. Some family offices focus entirely on wealth management; others outsource that responsibility and concentrate primarily on services often associated with estate managers: scheduling appointments, maintaining the household, arranging transportation, and overseeing recreational assets such as yachts or vacation homes. Still others cater to families and individuals with less wealth, grouping them into multi-family offices that offer the same advantages of single-family offices. “There is a huge trend toward people demanding one-stop shopping,” says Renno Peterson, cofounder of the Estate & Wealth Strategies Institute at Michigan State University. “They don’t want to go one place for the accounting and one place for the legal work and another place for financial advice because there are so many conflicting opinions. They get to a point where they say, ‘I’m getting 15 to 20 different statements. I’ve got to consolidate. I’ve got to find a way to simplify my life.’ ”

Perhaps the most common mistake families make when establishing an office is moving too quickly. It is human nature to want to act decisively and as fast as possible where huge sums of money are involved. Yet the wiser course of action is to take a cautious approach. In the long run, deliberate, measured steps will save time and money, observes Fredrickson. “When the question is asked, ‘If you had to plan how to deal with exceptional liquid wealth all over again, what would you do differently?’ the recurring response we hear is, ‘I would take plenty of time. I wouldn’t be in such a hurry,’ ” she says. In much the same way that a business is built over time rather than overnight, building a family office should be an exercise in patience and diligence.


This becomes even more critical in new-wealth families, which are not accustomed to dealing with sizable wealth and are frequently unprepared when it arrives. “It seems like there’s a fair amount of urgency when you have a liquidity event,” says McGuire. “You’ve got all this money, and there’s this mad pace to say, ‘I’ve got to build the office and I’ve got to hire these people. I’m going to get this money invested really fast; I’m going to buy the systems that I need.’ ” Instead, she advises, take a deep breath, invest the money in a short-term tax-managed cache to avoid losing interest, and then consult with as many parties as possible about what options and items need to be thought through prior to establishing an office (see sidebar, “Where to Turn”). A primary consideration is cost. Dedicated family offices are expensive to maintain. For a family mulling over whether to establish one, a good rule of thumb is that the office will consume as much as 1 percent or more of your available liquid assets annually. If the office will be staffed with dozens of high-priced advisers and use the latest technology, that cost can rise substantially higher. Joining a multifamily office—in which families pool assets to enhance their financial clout while minimizing their expenses—can be a costly venture as well (see sidebar, “Multi-Family Offices”).

As you consider establishing a family office, first determine the tasks that need to be performed. Although the mission of a family office is to simplify the financial lives of its members, the ways in which it goes about achieving this can vary. In addition to concierge-type services and day-to-day tasks, the office may oversee other duties, including wealth creation, estate planning, tax planning, philanthropy, and wealth management. And as more generations become involved, it is possible that the family office’s role will evolve. For example, an office’s focus could shift from tax planning and wealth preservation in the initial generation to philanthropy and estate planning in future generations.


Next, the reporting and hierarchy structure must be considered. Your family may treat the office as an arm’s-length entity, leaving the day-to-day decisions and governance to staff members, or there may be considerable input from one or more family members. “Are family members going to want to retire and go off on their yachts and not be actively involved, or—as in many instances when you have an entrepreneur who sold a business—are they going to be into micromanaging?” asks Greg Kushner, president of Lido Consulting, a family office consulting firm in California that works directly with about 15 families and is associated with dozens more.

How your family answers that question will help determine not only the structure of its office, but also its size, expense, and mission.

The more hands-off you are, the more essential it becomes for you to exercise due diligence when determining who is best suited to manage your family office. That means checking credentials and thoroughly researching the backgrounds and experiences of potential advisers and family office managers. “If somebody tells you, ‘I can handle this because I know everything,’ that’s a person to run from,” says Peterson. “The one thing we tell our clients is if you don’t know your jewels, know your jeweler.” Often, a family realizes after the fact that a longtime trusted adviser who adequately fulfilled their needs is ill-equipped to handle them within an office—particularly if the amount of wealth has risen greatly.

Regardless of how your family office is staffed, it is vital to keep in mind that its assets belong to you and your family. “Trouble begins to happen, whether it’s a really wealthy athlete or movie star or family, when they absent themselves,” says Peterson. “There are a lot of examples of people being ripped off because they were too trusting. The fact is that there has to be some mechanism where somebody [in the family] is looking after the family jewels. The family has to be interested.”


Failing to do so puts family members in a tenuous position. According to psychiatrist Carol Kaufman of Family Legacy Services in Boston, it is important to deal with your money from a position of authority. “Being aware of your money and psychologically owning it, despite who is actually managing it, is key,” she says. “It’s not so much the actual delegation, but your attitude. The pitfall is if you lose your own sense of empowerment. It’s very important when you’re delegating this authority to be doing so from a position of inner strength.”

Where To Turn
If you decide to establish a family office, the best places to look, at least initially, are organizations that offer objective advice. The Family Office Exchange was founded in 1989 with the goal of helping families evaluate whether an office makes financial sense—and if so, how best to structure that office. FOX does not offer for-fee family office services, so its counsel is truly unbiased. “We believe that having an independent resource as a sounding board, whoever it may be, is probably a good idea,” says Mary Jane Fredrickson, senior vice president of FOX. “That’s one of the reasons [the organization] was founded—so that there is a private community of peers that can share information among themselves and learn from one another.”

Other sources of guidance include your current financial and legal advisers. These experts are already intimately familiar with your wealth and long-term goals and should be able to help determine the best course of action. Your attorney, accountant, or financial adviser should be able to recognize when the job has outgrown him or her. Renno Peterson, cofounder of the Estate & Wealth Strategies Institute, says that an adviser needs to be “collaborative in the way he or she thinks—willing to recognize that he or she doesn’t have all the knowledge,” and willing to work within a larger group to best identify and serve a family’s needs.


Finally, when establishing a management team, be wary of companies that, in an attempt to lure you as a customer, hawk their ability to make a lot of money while running your office. What you are really looking for, after all, is information. “In the end, most wealthy people aren’t so much worried about making a huge amount more,” says Peterson. “They just want to keep what they have.”

Multi-Family Offices
The trend toward multi-family offices is growing for a couple of reasons, including an MFO’s ability to create larger, more powerful asset pools. By merging resources, families with liquid assets in the $20 million to $100 million range increase their purchasing clout when shopping for financial services and advisers. Expertise tends to gravitate toward the wealthiest family offices, according to Thomas Andersen, a CPA with Rothstein, Kass & Co., an agency with offices in California, New York, and Texas. “It’s still going to take graduated money to get the best.” By joining an MFO, you stand a better chance of attracting the top talent to manage your assets.

In addition, being part of a multi-family office means you share the expenses—from technology to staffing to reporting—with other members of the office. There is one notable downside to joining an MFO. Instead of being the client, you are just one of many. In the end, the office’s primary job is to benefit and provide service to all of its members, not just you.

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