Introduction to the Family Office

What is a family office?

A family office is a means by which a family coordinates its financial affairs. The need or wish for a family office is usually driven either by a requirement for coordination of the liquid portion of wealth or by a significant increase in family liquidity and the desire to retain some degree of control over the management of the proceeds of that occurrence. A family office is a means for a family to maintain control over the way they preserve and grow their wealth while at the same time being a focal point of contact for the family and their numerous advisors.

Definition of family office

At its essence, a family office exists to meet the unique needs of the family that it serves, and as such every office is different. There are many broad similarities that we can draw upon when defining our understanding of the family office. Generally, a family office is a separate entity committed to sustaining and building the long-term wealth of an individual family . It does this in several ways, by drawing upon a collection of advisors and a professional team to manage, sustain, and grow family assets while preparing future generations to be thoughtful and productive stewards of those assets. Family offices can provide a wide range of services based on a family’s needs, including but not limited to wealth management, estate and legacy planning, family education and governance, and tax compliance and filing.

Roles of a family office

A family office acts as a single conglomerate for the many systems required to manage family wealth, however; it can serve a number of roles on behalf of the family that go beyond the basics of wealth management. Three roles of the family office are “the keeper and executor”, “the guardian and confidant”, and the “brain trust” . These categories broadly define the most common functions that a family office will take when serving a family in its many capacities.

As Keeper and Executor, the family office serves the family by executing and archiving various transactions and legal documents related to family wealth. One of the benefits of a family office, is that it allows families to manage their wealth as a unique business. As such, the family office, rather than an individual family member, may manage tasks and transactions relating to family wealth.

The family office also provides a single, secure location to collect, amass, and archive all relevant family documents. This may include any tax, compliance, legal, business planning, investment planning, and estate planning documentation for the family office as an entity and for individual family members as members of the family office.

As Guardian and Confidant, the family office serves to protect the family from risk and to work in the best interests of the family as a whole. As a family accrues wealth, they also accrue risk as systems become increasingly complex. A family office allows wealth and family management systems to be integrated, allowing for increased communication between systems and more complex risk assessment and management.

The family office is first and foremost a protector and steward of family wealth, and part of that protection involves proper identification and mitigation of risks. A very simple way that family office mitigates risk is by creating an environment where advisors to various fields in family wealth management are given the ability and environment to share knowledge in service of the family. Research in the field of family business advising positively confirms that communication and knowledge sharing among advisors across multiple disciplines leads to more effective advising in all disciplines. In their research on the topic, Su and Dou remark that many issues that arise in family business relate to more than one component system – family,business, and ownership, and so needed to be addressed by multiple advisors to be correctly identified and resolved. Communication among advisors was found to be key to the identification, analysis, and solution of given problems and conflicts arising in the family business.

As Brain Trust the family office serves as a repository of family knowledge and development. Family wealth is not only measured in liquid assets, but also by the experience and knowledge that each family member possesses. The family office provides a structured organization to compile this knowledge and use it to further family and individual successes. This knowledge can be exchanged through family meetings, fostered through family education, and passed on by knowledgeable family members and trusted advisors. Having access to the wide network of family knowledge benefits each individual member of the family in achieving their personal goals and strengthens family bonds and communication by giving voice and value to the knowledge and experience of each family member.

Family Office Services

A family office provides a wide breadth of services at the election of the family. These services are designed to address the many needs of multigenerational wealth. There is a need to preserve and build family wealth, and an equal need to prepare the family to receive and become responsible stewards of this wealth.

Family office services most commonly include:

• Family meeting coordination;
• Development and maintenance of governance structures;
• Family education;
• Conflict prevention and conflict resolution, where required;
• Tax, estate and financial planning;
• Wealth transfer planning;
• Asset protection and other risk management;
• Investment consulting, monitoring and performance measurement;
• Philanthropic planning and foundation management; and
• Financial recordkeeping, compliance and consolidated reporting.

Who Needs a Family Office?

Starting a Family Office is not a requirement for wealthy individuals and families, but it is an effective model to maintain multigenerational wealth by coordinating wealth succession and education for future generations. Funding a family office is not an insignificant undertaking. In order to justify the operating costs, families need to contribute a significant amount of wealth to investment and growth opportunities that will provide financial return. The required asset allocation to fund and maintain a family office fluctuates based on the type of family office model that families chose, with private asset managers and multi-family offices generally operating at a lower cost than single-family offices.

How much do you need to fund a family office?

With that in mind, consideration should be made to how much wealth is needed to make a family office worthwhile. The oft-quoted figure by investment professionals for those interested in establishing a single-family office is a minimum $100 million in investable assets for a basic single-family office. Depending on the range of services the Family office will be seeking to accommodate, this figure can become significantly higher with up to $1 billion in investable assets advised for a “comprehensive” family office equipped in-house with all essential functions from administrative to strategic and management.

Funding a single-family office is not the only option for taking part in the family-office model, and many multi-family and private investment options are available to wealthy families who don’t yet meet the $100 million threshold. There is a less firm minimum when considering joining a multi-family office, as each office is run differently with differing investment and cost structures. A family with $5 – $50 million in investable assets should be able to find a multi-family office that serves their investment needs. Many managers and independent financial institutions, including Heritage Trust, offer family office services to families with $1 million of invested assets.

Family Office Structures

Family offices come in different forms and are an option for the integration and management of financial assets and other matters for families with significant wealth. For families with a cohesive and strategic approach to wealth management, they perform an important function for the maintenance of long-term wealth across generations.

Depending on a family’s needs and preferences, different family office models offer different advantages. The most common family office models available are the single-family office, the multi-family office, the private asset manager, and the customized family office. Each of these models offers different strengths and weaknesses and each appeals to different family needs and desires for their family office.

Single Family Office

A single-family office is dedicated to, as the name suggests, serving the needs of a single family. This family can be large and complex with multiple generations and family units taking part in building and managing combined wealth, or small and simple with a single generation or family unit developing methods to preserve wealth for future generations.

The simplest single-family offices may be operated as a part of an existing family business or out of a family’s home offices with a single owner/manager performing many of the day to day functions and out-sourcing more complex tax and investment functions. The most complex family offices employ a number of in-house professionals to perform everything from daily administrative tasks to legal, tax, and compliance services to CFO and dedicated investment services.

As discussed in the section above, funding a single-family office, or SFO, is no insignificant task. Industry professionals quote the cost of maintaining an SFO at upward of $1 million per year , in addition to the personal time commitment required to attract and hire personnel, locate an appropriate space, and manage the tech and software requirements of your office. While starting a single-family office is not an insignificant task, it offers the highest level of personal control and privacy of any family office model. Because a single-family office is developed by a single family, that family has complete control over how assets are handled by the family office. There is control over who is employed by the family office, ensuring that advisors are trusted by family leaders and that all staff understand and are aligned with the values of the family.

Multi-Family Office

A multi-family office is a family office that serves multiple families independently within the same organization and using the same resources. Families are still able to adjust their family office services to meet their own unique needs, while sharing in the responsibility of funding office utilities and services by contributing a fee to the operation of the family office. Multi-family offices can serve anywhere from a handful of families to hundreds of families, depending on their size and scope of services.

Many multi-family offices began as single-family offices serving high wealth families who, over time, expanded to offer services to other wealthy families as an additional method of building wealth. Families who opt for multi-family office services benefit from the lower cost of sharing resources like infrastructure, staff, and software. Multi-family offices have a level of stability that single-family offices cannot guarantee when it comes to employing staff. Because an SFO serves only a single family, it can be disbanded at any time if the family suffers a great loss of wealth or simply decides to no longer pursue the family office. MFOs exist as separate entities that do not rely on a single family and can continue operating as families come and go. This makes it easier for MFOs to attract and retain staff long term. There is a sacrifice to this; because families are sharing staff and resources there is a loss of privacy when compared to the single-family model. Staff are not solely focused on one family’s needs which has positive and negative implications. Advisors have seen more cases and are able to rely on concurrent and past experiences to offer unique solutions to a family, while at the same time the multitude of clients means that advisors are not available to accommodate every scheduling need resulting in a lower level of control over the timing and execution of decisions.

Private Bank and/or Asset Managers

Many financial institutions offer private investment and asset management services, and for those more focused on wealth preservation and growth aspects of the family office, this model can act as a cost-effective alternative to the traditional family office. Asset managers can offer a variety of services ranging from simple investment and reporting to acting as a personal CFO for family wealth.

Private banks often charge a flat annual fee for family office services, but financial advisors can choose to charge either a flat fee or a percentage of the assets managed annually. According to Investopedia this fee is around 1% for an account of $1 million and decreases as the size of your account grows.

While asset managers and private banks provide access to many of the financial services of a family office, such as wealth management and transfer, they are not always set up to provide the “softer” family side of the family office model, including family meetings and education.

Customized or Mixed Model

Because every family’s needs are unique, many family offices benefit from a more nuanced customized model that is designed specifically to meet the needs of the family it serves. As technology advances, the family office is beginning to take on new forms like the virtual family office that allows family members to share information and interface virtually from across the globe. Families are also able to create a “pick and choose” model of family office where certain services are handled in-house in an SFO setting, while other services are outsourced to MFO and asset management professionals who have access to more advanced technology and more detailed market information for a reduced fee.

Nicole Garton is president and co-founder of Heritage Trust.

Recognized by Best Lawyers in Canada for trusts and estates, she previously chaired the Canadian Bar Association Wills and Trusts Subsection (Vancouver).

Contact Nicole by email or phone at (778) 742-5005 x216.

Heritage Trust is a leading non-deposit taking financial institution, regulated by the BC Financial Services Authority (BCFSA), a government agency of the Province of British Columbia. Heritage Trust offers caring and professional executor, trustee, power of attorney, committee, escrow and family office services to BC resident clients.

We welcome you to contact us for any reason.