by Catherine Grum

In the fairytale, Goldilocks comes across the house of three bears as she is walking through the forest. She discovers that nobody is home and so enters, trying to find something to eat. Much to her delight, she finds three bowls of porridge sat on the table. However, when she tries the first bowl of porridge, it is too hot. The next one she tries is too cold. Only when she gets to the third bowl is it ‘just right’. 


Many would argue that Goldilocks was being a bit too fussy as there was nothing wrong with the first two bowls of porridge, they were simply seasoned to other people’s tastes. However, given that she had a choice, it is understandable that she did not just settle for the first one she tried.  


When it comes to family offices, there is no standard definition or typical structure. Some can be focused on financial investments and trading, others on managing businesses and real estate while yet more may be set up to provide concierge and lifestyle services. Therefore, the range of choice facing a family can feel almost infinite. It can be tempting in this situation to want to jump straight to a solution. The first question I’m frequently asked by families is what the best structure is for a family office or which jurisdiction it should be located in. 


These are important considerations, but they are not the starting point.  Given the wide spectrum, it is important to start by examining what you are hoping to achieve from creating a family office and how this aligns with your family’s vision and values before going on to address more detailed questions such as the legal form it should take. 


As a start, think of a family office as a concept, not a specific structure.


When I use the term family office, at its most general, I am talking about involving professional support to help manage a family’s assets and personal affairs. This is a pretty broad concept that can be achieved in a number of different ways. There may or may not need to be one or more legal structures to hold the assets such as a trust, company or partnership. However, in my opinion this in and of itself is not a family office.  You can have a family office without a trust and a trust without a family office.


A family office can therefore take many different forms. The one most people think of first is the all-singing, all-dancing family office that employs a whole team of different professionals, has complex trust structures and smart offices in several different countries. 


At the other end of the spectrum, you may find the finance director or another employee of the family business who has been asked to lend a hand with some of the family’s personal affairs, whether this is assisting with their growing real estate portfolio or managing their personal tax returns. Often these individuals have never heard of the term family office and wouldn’t necessarily associate their role with it even if they had, although this type of embedded family office is often the starting point for the family to create a more stand-alone version.  


Between these two extremes you have thousands of flavours of family offices from those where one family member has been asked to step in and take full-time responsibility for the family’s assets through to very modest set-ups with just one or two trusted professional advisers directly employed by the family to help them to manage things. 


When should you consider your own family office?


So, when is the right time to consider your own family office arrangements? This question comes up in a number of different circumstances, from the sale of a family business, as part of a discussion around succession planning or when the complexity and administration of managing everything yourself becomes too much. 


Creating a family office can be costly and if the exercise is being undertaken for the wrong reasons nobody is going to end up happy in the long run. There are a lot of different approaches that can be taken so it is helpful to run through the aspects to help ascertain whether a family office is the right answer for them at all and, assuming it is, what it should focus on in particular and what can be achieved just as well without it. Without this approach, you can find families sometimes end up with what we call the accidental family office. They started off with perhaps one or two advisers and before they know it they are employing the full cast of Downton Abbey!


So where do you start?


If your family were commissioning an architect to design a new house, before you discuss the construction materials you would expect there to be a conversation around the purpose(s) you wanted the house for and what your preferences and expectations were. Is it going to be a holiday home or your main residence? Is your family likely to grow significantly in the near future? Do you want lots of space for entertaining? Do you like open-plan? The list could go on. 


The same applies to the creation of a family office. The ideal starting point should therefore be around the family’s personal vision and values. There are four particular areas it may be helpful to consider:


Your overriding objectives. 


For example, is the primary goal to help transfer the family’s wealth safely across the generations? Is the intention to create something that will provide a shared purpose following the sale of a family business? Are you looking to develop some of your philanthropic ambitions? Do you simply want administrative support to help manage your affairs? Are you concerned more about enhancing confidentiality, privacy or personal security?

Your financial goals. 


Is the family office intended to facilitate further wealth creation? On the flip-side, are you simply looking to preserve your existing levels of wealth for future generations? How reliant are family members going to be on income from the family office versus other sources of wealth? 


Other needs. Consider the variety of assets (investments, real estate, personal assets) to be managed, the locations of these assets and of the family members themselves. Are administrative or lifestyle services required, from looking after the family’s tax compliance to theatre tickets and travel arrangements. 


Attitudes to control and delegation. 


Does the family expect a fully personalised and bespoke approach? Do you want to retain control of some or all of the activities or are you comfortable with delegation? If there are a number of family members, how will you make decisions?  Are you going to play a role within the family office yourselves and, if so, what expertise do you bring with you? How much information will different family members require? 


This is not meant to be an exhaustive list but hopefully helps to illustrate the sort of discussions that should be taking place. Going through this process carefully should help to ascertain what your family wants and needs from a family office (if indeed a family office is the right solution at all). This is particularly important if you have a larger family with multiple branches as each may have slightly different expectations and priorities. 



How much does a family office cost?


Even if the answers to all of the above questions are pointing positively towards the creation of a new family office, the benefits of doing so should be weighed against the costs and the alternatives examined. Could your needs be met by working with a multi-family office for example or is it going to prove too challenging to meet all your expectations? Could you achieve a balance by starting small and outsourcing some of the functions that are not central to achieving your objectives? For example, if your focus is on wealth creation and you see the family establishing a significant commercial property portfolio, you may need in-house expertise in property management but if you are simply looking for a succession-planning structure that happens to own some real estate, this might be an expensive luxury that you can probably forgo. 


I am always asked what level of wealth is required for a family to seriously consider their own family office. This obviously depends on the model of family office they are looking at. If someone from within the family is going to take on the responsibility and they are not looking to carry out investment-management in-house then the levels of wealth do not need to be very significant at all. However, if the plan is to develop any significant in-house investment management capability with traders and a CIO then you are probably looking at a minimum net worth of $500 million or more. However, if you aren’t planning to employ a large team but simply look to hire a trusted adviser and small support team and outsource most functions, the threshold will be much, much lower. 


In terms of the actual costs, there are a number of different surveys that try to benchmark this. The annual costs of running a reasonably full-service family office usually come out somewhere around 1% of the assets being managed. It may be more helpful to think of the range between 0.5% and 1.5% with the smaller family offices less able to benefit from economies of scale so sitting at the higher end of that range. 


As well as the bottom-line costs, cash flow must also be considered, and it is helpful if the family office establishes a business plan at the outset. For example, if you intend to carry out direct investing and therefore hire a number of executives with corporate finance or M&A experience, they might expect some form of carry or similar incentive plan as well as significant annual compensation. If the family’s approach to investments is more long-term and you are not therefore going to sell as frequently as a fund might, how do you intend to fund the executive compensation?


Another point to consider is whether you will still be able to achieve the same levels of quality if you look to perform certain functions in-house. Again, investment management is a good example - even if you hire a star CIO from a large financial institution, they may not have access to the same level of research and resources as they would have had at their previous firm and you may actually achieve better results outsourcing investment services with the family office providing oversight and coordination.


The answers to these questions are not necessarily black and white and you can also expect your family’s needs to evolve and change over time. It is however best to address them up-front so that you have a good idea of your own personal specifications and requirements before you go too far down the road of deciding on structures and locations on the basis of someone else’s preferences.

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