The Ultimate Guide to Operating a Private Family Office
Opening a family office can be a complex process. However, it’s easy with good advice.
Here, we run through the steps you need to take to make it happen.
First, we explore what a family office is, why you might open one, and how to do it.
What Is A Family Office?
Family offices are structures or corporations that manage the assets of ultra-high-net-worth individuals (UHNWIs) with over $300 million. These organizations seek to maintain, leverage, and diversify wealth to secure the family’s financial future.
Managers personalize family offices to the needs of their clients, differentiating this form of wealth management from others. Wealthy households employ teams of specialists and experts to manage assets on their behalf.
Family offices primarily deal with financial issues, including investments, insurance, charitable giving, tax services, and planning and budgeting.
However, they can also manage other aspects of family life. Roles may include home management, cleaning and maintenance, travel arrangements, and private schooling.
Financial experts will often differentiate between single and multi-family offices. Single-family structures take care of one wealthy family, and multi-family offices take care of many.
Ultra-high-net-worth individuals usually choose to set up a single-family office. That’s because multi-family offices replicate many traditional private wealth management practices they want to avoid.
Why Open A Family Office?
UHNWIs set up family offices to receive better service. These structures offer more personalization than generic wealth management methods.
They also improve privacy. Households can keep all their personal information in one place, limiting access to third parties.
Perpetuity is another reason to choose family offices. The institution continues even if family members pass away. It can establish a purpose that echoes down the generations, making it easier to establish a legacy.
Lastly, family offices build prosperity. Managers try to balance the financial needs of the present generation with those of younger or future generations. They may also actively manage assets to reduce risk, increase returns, or take advantage of investment opportunities.
There is no obligation for UHNWIs to set up family offices. They may wish to manage their money independently for improved privacy. However, this approach may entail an unacceptable amount of time.
Who Administers A Family Office?
Family offices are corporate entities. Therefore, they tend to have a similar management structure.
The individual or household that commissions the family office owns it. Therefore, the management structure follows that of a typical firm. Roles include:
- A chief executive officer (CEO) with ultimate responsibility for the decisions the office makes
- A chief financial officer (CFO) who specializes in financial matters, particularly accounting and tax preparation
- A chief investment officer (CIO) with skills to manage asset classes, diversify funds, and invest lucratively
- An in-house General Counsel or legal expert who can advise the family on the decisions they make
Serving under these primary roles are teams of secretaries, accountants, portfolio managers, wealth planning, trust officers, investment managers, and tax experts. The wealth of the family determines the size of the team. Families with more than $5 billion in liquid assets tend to have the most extensive staff list.
Family offices also employ non-financial staff. These may include nannies, housekeepers, groundskeepers, estate managers, property managers, private jet crews, chauffeurs, and gardeners. Hence, family offices facilitate UHNWI’s lifestyle as much as they manage their wealth.
How To Open A Family Office
Setting up a family office is often something that happens slowly over time. Wealthy families gradually increase the sophistication of their wealth management until it morphs into a family office.
However, some individuals need to set up family offices quickly. These include:
- Entrepreneurs who sell their companies for large sums of money
- Inheritors or beneficiaries of a large estate
- Individuals who win a major lottery jackpot
- Long-term wealthy individuals who recognize they are mismanaging their money
Setting up a family office requires going through several well-defined steps. Following them carefully increases the chances of a successful outcome.
Step 1: Managing Your Needs And Expectations
The first step is to manage your needs and expectations. Family offices are great tools but can’t solve all your financial problems. Furthermore, a directionless office could put your wealth and lifestyle in jeopardy.
Start With A Vision
Start by writing down your goals and vision for your family office. Include things like:
- What is the purpose of your family’s wealth?
- How much wealth do you want to accumulate, and by when?
- How will you use the money in the future?
- Who will be the beneficiaries?
- Who will have control rights over the family office?
Once you understand the needs and purpose of your family office, the next step is to manage expectations. Family offices can provide you with excellent advice and management practices. However, they cannot guarantee you will build or maintain your wealth. That depends on the specific investment decisions you make.
Investments often look good on paper but can disappoint in reality. Your portfolio might follow every academic standard but may still fail to yield the results you want.
You should also ensure your vision for your family office is sufficiently comprehensive. Do you want to use it for wealth management exclusively? Or would you like it to manage aspects of your personal life, such as your children’s schooling?
Understand The Features And Functions Of Family Offices
You should also explore the features and functions of a family office during the planning stage. The more you can get a grip on the services it offers, the more benefits it will bring.
Here’s a list of items you should consider:
- The cost of running a family office. Add up the total expenses involved in setting up a family office and ask whether it is worth the money long-term. Remember, family office costs are equivalent to expense ratios in traditional investment funds. Family offices should not consume more than 2 percent of assets under management per year. Market-beating rates should more than compensate for fees.
- The technology you will use. Modern family offices use sophisticated software and automation techniques to lower costs and improve client outcomes. Therefore, UHNWIs should ask managers what technology solutions they offer and why.
- The governance of the family office. Proper family office governance is essential to avoid disputes and costly litigation. Therefore, you should define a clear legal structure covering duties, ownership, and access rights. Your family office might operate on behalf of your family, but that does not mean you need to cede control.
- The level of asset protection you require. Conservative family offices focus on maintaining wealth, while aggressive ones concentrate on building it. You will need to decide which approach is best for your family. You will also want to consider insurance and other tools to protect you against downside risks.
- The staff and talent you will hire. One purpose of family offices is to reduce your administrative burden. Therefore, you should employ talented staff who understand your wealth management needs. Hiring the wrong individuals could lead to significant losses.
- The tax efficiency of your arrangements. Setting up a family office in your home country is one option. However, you may find it more efficient to domicile abroad. An international tax expert can advise you on where and how to incorporate.
- The level of access to your funds. Family offices manage assets on your behalf. Therefore, you will need to entrust your team with direct access to your funds. Protecting yourself requires working with multiple independent professionals of sound character.
- The type of wealth management the family office will perform. You may want the family office to take care of some assets for you but not others. For example, staff could manage financial securities while you take direct control of a business interest you own and operate.
- The interview process you will use. Lastly, you will need a robust hiring method to ensure you can trust the individuals you employ. You will also need to consider which family members you want to include in your close circle and the level of control to give them.
Once you consider all these elements, you can decide whether to form a private family office. You will want to consider things like structure, costs, and priorities.
You don’t have to decide the form your family office takes immediately. Most UHNWIs build their offices slowly over time.
How much your family office costs depends on your wealth and the ability of the office to generate additional revenue.
- A small family office costs around $1 million to $2 million per year and hires up to six employees.
- A medium-sized office is between $3 million and $4 million annually and hires around fifteen people.
- Large family offices cost between $8 and $10 million annually and hire twenty-five employees.
Billionaires tend to operate the most substantial family offices. These may have up to 50 employees and cost $20 million annually. However, they make business sense. That’s because they generate more money than they consume over time.
Step 2: Creating The Foundations For Your Future Family Office
Once you decide there is a business case for a family office, you need to design and structure it. You want to create an entity that can achieve your vision or financial goals.
Defining legal structures. Several family office legal structures are available. Trust structures were the most common until the start of the twentieth century. However, these became less popular over time since they gave significant decision-making power to the trustee. Embedded family offices are another option, where the family office becomes part of a broader business interest operated by the family. The single-family office was a further innovation. HNWIs structured it as a stand-alone business to serve the family’s wealth management and lifestyle requirements.
Governance planning. A significant benefit of family offices is their ability to make quick decisions without going through complicated procedures. However, they need proper governance to facilitate this flexibility. Therefore, family offices must define how they will make decisions, which family members have control over what, and how they implement decisions. Such functions are similar to a board of directors in a regular LLC. You will also need to consider whether external professionals outside the family have decision-making capacity and how they must conduct themselves when operating on your behalf.
You may also want to include “softer” values outside standard corporate governance measures. These might be a statement of your family mission, philanthropy, or financial education.
Funding and cost. The cost of running a family office is usually more than $1 million yearly. Therefore, consider how you will fund it. Money can come from assets under management, or you may want to pay directly from business or personal income.
You should also define how much you want to spend on your family office. Solo entrepreneurs may only require minimal staff to manage their assets and lifestyle arrangements. Larger families may need more extensive teams.
Staffing. Employment matters because it determines what your family office can do. It can also play a role in whether you achieve your mission.
As the owner, you should define the corporate structure and roles from the outset. You may want to pass hiring responsibilities over to management and let them decide who you employ if you haven’t done it before.
Implementing technology. Technology helps family offices consolidate data, improve transparency, and build trust. Applications include report preparation, data amalgamation, improved security, and enhanced audit trails.
Modern software automates trust-building processes, reduces risks, and cuts total operational costs significantly. Examples of family office technology include customer relationship systems, portfolio management systems, ESG software, data aggregation programs, accounting systems, and governance/compliance systems.
Family offices should create a detailed plan for how they will implement technology. They should define their goals clearly (such as automated reporting or real-time data processing). They should then consult with technology experts to implement the desired arrangements.
Establish reporting requirements. Management of family offices serves the family. Therefore, establishing reporting requirements is essential. UHNWIs need to hold staff accountable.
How you structure reporting is entirely up to you. However, you will need to define the frequency and detail of reporting. You can also structure reporting formats to make them easier for professionals to understand.
Design workflow. How you define process flows depends on how you run your private family office. Putting a structure in place tells management what they should prioritize and how they should proceed.
Some family offices use task management firms. These generate flexible workflow and task systems that custom-fit your organization. They provide deeper operational visibility, improved technology implementation, and better control.
Task management firms can also assist employees with integrations. Establishing centralized communications and software management reduces inefficiencies and builds skills.
Locate your facilities. Family offices require physical premises to operate efficiently and professionally. Therefore, you will need to decide on a location for your team.
Because you are the client, the state of your premises is not a primary concern. However, you need facilities located close to skilled employees. You also need attractive offices to make talented people proud of working for you.
Create job descriptions. You can get external services to write family office job descriptions for you. However, HNWIs who want more control often write them on their own.
Job descriptions should clearly define the individual’s role, responsibilities, and authority. They should also make sense in the context of your business. Therefore, always hire in sensible ratios. Avoid putting too much responsibility on a single individual.
Select contractors and support services. Like other businesses, family offices require external services to enhance operations. Therefore, consider hiring catering firms, IT consultants, or team training professionals to assist your team.
Define core services. Lastly, write down what your family office will do. You could give it multiple functions, including wealth management, estate management, intergenerational wealth planning, accounting, tax planning, and insurance. You may also detail non-financial services, such as household cleaning, private jet itinerary management, and chauffeur services.
Getting managers to perform these functions directly is one option. You can also ask them to manage related expenses only.
Defining Your Roadmap
Writing down and defining your roadmap helps you move closer to implementation. Understanding what you need to do next can assist enormously and reduce total costs.
Include legal and jurisdictional analysis throughout the process. Consider setting up a family office with the help of an experienced lawyer who can guide you toward an optimal outcome.
Step 3: Build Your Family Office
The next step is to build your family office and make it a reality. This step involves implementing the planning discussed in the previous step. You will need to consider hiring staff, testing your financial models, setting up your office, and sourcing qualified IT practitioners.
Hire workers. How you hire your team depends on you. Most UHNWIs like to appoint people they know and trust. However, you can also source talented individuals by referral or job listings.
Hiring workers may require you to conduct interviews personally (especially for senior staff). You can also work with a recruiter to write job descriptions and conduct interviews for you.
Build your policy framework. Writing down a charter and employee handbook for your private family office is a good policy. It lets you run the enterprise like a regular company and apply quality governance practices. Important policies include:
- Workflow, processes, and procedures
- Reporting requirements
- Dismissal policy
- Absence policy
- Vacation policy
- Internet and social media policy
- Compensation and benefits policy
- Employee code of conduct policy
- Hybrid working policy
- Performance management policy
Build your communication policies. How you communicate with your family office matters. Managers should contact you regularly or during set times. You may also want to define situations in which they can communicate with you (such as emergencies), and how (i.e. email, telephone, etc.).
Implement your technology. Implementing technology is one of the most challenging phases of any family office launch. Most UHNWIs prefer to work with experienced IT professionals who understand the systems they want to implement. They may also hire a chief information officer (CIO) to manage outsourcing, implementation, and software costs.
Modern family offices prefer cloud-based technologies. These reduce on-prem risks while eliminating troublesome software updates and migrations. Managed IT companies can arrange security and implement effective staff permissions structures.
Define your financial models. Depending on your background and experience, you may wish to define the financial models for your family office. Some UHNWIs want family offices to operate similarly to traditional mutual funds but at a lower cost. Research shows mutual funds charge around 200 basis points, while family offices operate under 117. Others are more bespoke. For example, UHNWIs with domain expertise may want to focus on asset allocations in specific sectors such as energy or finance.
You also want to define the time horizon of your private family office. You may need it to support your family for the next ten years or continue providing services for several generations.
Determine your service launch schedule. You don’t have to launch all your family office services at once. Staggering them is a possibility.
You may want to begin with wealth management and then move into other areas, such as private schooling arrangements or philanthropy. Always define an implementation itinerary to check you are on schedule.
Prepare your business for disaster. Family offices can experience disasters, just like any other business. Therefore, preparedness is critical.
Before you proceed, ensure you have insurance and business continuity plans in place. Don’t rely on a single individual to manage your affairs. They may become sick, leave, or behave criminally. Create backup plans and ensure all team members and functions are replaceable.
Deter cyber threats. The best way to deter cyber threats is to work with a managed security service provider (MSSP). These agencies provide the skills and tools required to prevent digital security threats twenty-four-seven.
You can manage cyber threats in-house. However, that may significantly increase your wage bills. Cybersecurity experts demand high compensation, increasing overall running costs significantly.
By the end of this step, you should have a fully functioning and operational private family office. You will experience some teething pains and set-up costs. However, the result should be a well-functioning structure that regularly communicates with you and other structures.
Ultimately, the family office should help your original vision come to fruition. Decision-making processes should reflect your values and priorities.
Step 4: Monitoring And Operating Your Family Office
Family offices require you to operate and monitor them to ensure they fulfill your objectives. You should review processes and governance regularly and compare them to best practices. Investing further in your procedures and processes can deliver more desirable outcomes.
Refine your digital capabilities. Most firms build their digital capabilities over time. Therefore, adding software to your existing stack to provide more functions and improve efficiency is a good policy.
You can also implement new IT systems. For example, you could migrate from on-prem to the cloud or hire security firms that manage staff permissions for you.
Audit your processes. You should regularly audit processes in your family office to ensure it delivers your desired outcomes. Unfortunately, only a minority of UHNWIs ever do this.
You should regularly check:
- Indirect tax issues related to goods and services purchases, lifestyle assets, and customers and border control reporting
- Residency issues, including foreign home documentation, travel, and legal domicile
- Other significant assets, including antiques, aircraft, and jewelry
- Income, estate, and gift taxes
Family office audits should identify issues that could become the focus of an official examination. They should also develop systems for addressing questions from revenue authorities. This task should be ongoing.
Measure progress towards family goals. The purpose of private family offices is to achieve the family mission. Therefore, you should conduct regular appraisals to determine if you are achieving your objectives.
Ideally, you should build this capability into your reporting metrics. Family office managers should tell you if you are getting closer to your goals.
Failing that you can arrange regular evaluations every quarter or year. You can then chart progress yourself.
Monitor communication quality. You might have communication protocols in place, but they may be defective. Managers might not understand what you want to achieve or when they should contact you.
Therefore, monitor communication quality and seek improvements. Look at where you are currently failing and what you can do instead.
Look for ESG alignment. Your family office doesn’t have to meet environmental, social, or governance (ESG) standards. However, you may find it helps long-term. Operating with these issues in mind can protect your family name and brand.
Benchmark against leading practices. Periodically review whether your home office is operating in an industry-leading manner. Find out whether other family offices are using more advanced techniques than you.
Achieving benchmark standards in all areas will help the enterprise operate optimally. It will also allow you to develop further capabilities.
As you operate your family office, you will discover problems. However, building on the solid foundation described above makes these easier to resolve.
Successful family offices engage in continual improvement. Setting them up isn’t the end of the road. There’s always room to make them better.
What Common Mistakes Do Family Offices Make?
Family offices don’t get everything right. Unfortunately, they can make mistakes. Here we list the most common:
Bad Hiring Practices
Hiring the wrong people to your family office can create various confidentiality, privacy, and competency issues. Therefore, always perform thorough interviews and background checks on new staff. Ensure you get reviews from former employers, preferably other single-family offices. Take time to obtain the necessary referrals before taking on anyone as a permanent employee.
Failure To Consult Advisors
Setting up a family office is a complex process. Unfortunately, many UHNWIs don’t consult advisors. Consequently, they make basic mistakes, even if they have significant business experience.
Advisors provide a valuable third-party perspective on your family office. They avoid conflicts of interest that can disrupt operations.
Lack Of Transparency
Family offices can sometimes fall short of full transparency with family clients. Lack of communication increases the risk of a divergence of interests or outright fraud. Failure to communicate also makes it challenging for family offices to build rapport with all family members.
Therefore, always invest in your communication policies and systems. Ensure managers regularly communicate with relevant family members to maintain trust and the office’s longevity.
Failing To Manage Data Security Risks
Failure to manage cybersecurity risks is another common mistake family offices make. Neither owners nor managers understand the value of data integrity. Unfortunately, breaches can lead to a lack of privacy and even theft of funds.
Therefore, always work with an experienced cybersecurity professional or managed service provider. Don’t rely on in-house solutions alone.
Failing To Convert The Family Office Into A Business
Some UHNWIs view family offices as side projects or elaborate butler services. However, that’s a mistake. That’s because they aren’t just services; they are enterprises.
To avoid this issue, always operationalize your family office. Give it a proper business structure, routines, and processes. Ensure it meets standard reporting requirements and has systems in place to reduce errors.
Failing To Give Your Family Office Enough Flexibility
While you want your family office to have structure, it also needs flexibility. You need to consider both near- and long-term goals and how you will nurture and support the business. Ensure you can respond to familial, regulatory, and market changes.
Trying To Do It All In One Go
Lastly, UHNWIs sometimes try to implement every family office feature at setup. This approach, though, is unwise unless your team already has tremendous experience. Rushed decisions increase the risk of errors significantly.
Operating a private family office requires tremendous planning and attention to detail. However, the results can be spectacular. You may see risk-adjusted returns that are significantly higher than what conventional asset management could achieve.
Family offices also provide you with a better lifestyle. They let you offload the administrative burden of wealth to others, letting you enjoy your wealth more. For that reason alone, they are worth considering.