Family goals should drive family office decisions

By Bill Rudnick
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The “office” in a family office is not necessarily a physical structure. Rather, it is a shared and agreed-upon approach to managing the family’s wealth.

Family offices take many forms. They can be fully staffed, stand-alone operations. They can be entirely virtual, outsourced organizations under the direction of the family. Or they can be something in between. As the saying goes, “If you’ve seen one family office, you’ve seen one family office.” In other words, a family office is unique to the family it serves.

More families are creating family offices to serve their specific needs. According to a 2019 Campden Research report, the number of single-family offices in North America grew by 41% over the previous two years.

Despite the growth in popularity of family offices, many families with multigenerational wealth still struggle with whether to create a family office at all. Is it needed? Does the family have the time and capacity to manage a family office? At what level of wealth does a family office make sense?

Define your goals
As with any significant endeavor, follow the advice of Stephen Covey: Begin with the end in mind. Ask yourself (and the broader family): What does the family hope to accomplish by establishing a family office? What are the goals for investments? Should there be goals related to next-generation education? How about philanthropic goals?

Additional issues to consider
Architecture, governance, succession planning and education: With goals in place, explore how the family office would be governed. No off-the-shelf structure exists for a family office, precisely because there is no off-the-shelf set of goals for a family office. Governance should be informed by, and in service of, the goals of the family.

Address questions such as whether assets should be held directly or in trusts, and whether some or all of those trusts should be dynasty trusts. Discuss whether the older generation will be in complete control of the office or whether younger generations will be involved with governance and decision making.

As every generation eventually will pass, identify future leaders of the family office, how they will be chosen and whether future leadership will be concentrated in a single leader or a committee. As families inevitably expand over the generations, build in the ability to adapt to meet the needs of those future generations. What works today may or may not (likely not) work three or four generations from now.

Complexity of life versus complexity of structure: With any major decision — and the creation of a family office ranks up there with big decisions —  it is important to weigh the pros and cons. Compare the potential financial benefits against the complexity that could be added to your life (and your family’s).

“Renting” versus “owning” family office resources: Family offices take many forms. They can be fully staffed, stand-alone operations where the family “owns” all aspects of the office. That can provide for more control and autonomy. It can also be a waste of resources. For example, if the family isn’t large, it may not make sense for a single-family office to develop family education programming. It may be more practical to “rent” this function from a firm that offers next-generation family education.

It also might make sense to outsource family meeting facilitation. Family meetings require honesty and transparency. If the facilitator’s income is solely dependent on the family, that can create a conflict of interest. An employee of the family should not be the one to tell Grandma and Grandpa that decisions they have made are hurtful to other family members.

Weighing costs and benefits
The conventional wisdom states that a family office doesn’t make sense if a family’s net worth is less than $500 million. That is oversimplified. The better question to ask is, “Given the family’s net worth, and considering the family’s goals, what should the family ‘rent’ and what should the family ‘own’ in terms of a family office?”

For example, you may decide to hire a full-time CFO (who often is also the family business’s CFO), but you may decide to “rent” an impact investing or philanthropy consultant. Don’t get hung up on attaching the need for a family office solely to your family’s net worth. Rather, make the decision based on your family’s specific goals and needs.

Bill Rudnick is senior partner, general counsel, and co-head of family office services at Cresset Capital Management (www.cressetcapital.com).

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