How family offices serve families' needs

By Maureen Milford

Family offices have been around since the 18th century, but they remain a mystery to many. Here’s the lowdown on the different types of family offices and the services they can provide. 

Five years after her entrepreneur husband died in 2000, Michele Rollins decided her children needed to be brought in on the family’s financial arrangements.

The late John W. Rollins Sr. had built an empire of companies involved in trucking, environmental services and pest control. He also owned racetracks and hospitality complexes.

“The kids needed to know more,” explains Rollins, the chairman of Rollins Jamaica Ltd., the holding company for the island nation’s Rose Hall Developments Ltd.

To accomplish that, Rollins, who holds a law degree and a master’s degree in taxation, created a small family office. When Rollins was chosen by the Delaware GOP to run for the state’s congressional seat in 2010, her family fortune was reported to be as much as $350 million.

For help, Rollins reached out to a separate family office created by the family of her late husband’s brother — the billionaire branch of the Rollins clan in Atlanta that is behind the pest control empire anchored by Orkin. (Michele Rollins’ branch is not part of that family office.)

Rollins describes the creation process as gradual; her family office eventually grew to include investment management, taxes, bill payments and day-to-day administrative matters.

“It wasn’t a conscious decision to have a family office. It just evolved. We kept adding more and more things,” she says.

Family office nuts and bolts
A family office can be an amorphous concept. Even some successful family business owners confess to not knowing what the term means.

Weighing your family office options

•  Begin the process by having a family meeting to determine your family’s goals. This should be memorialized in a mission statement and family constitution. It might be helpful to bring in an outside facilitator to work through the process. The cost for a facilitator could be $1,000 to $10,000, depending on the amount of work done.

•  Decide whether the family wants to contract for professional services with various individuals or prefers to have most of the services coordinated under one umbrella. You may find the services you need don’t require a family office but can be handled by private banking or other methods.

•  Ask other high-net-worth families what they have done.

•  When looking for a multi-family office, do your due diligence about the organization and the professionals with whom you’ll be entrusting your family’s affairs. Check with other families who have used the services.

•  If you’re thinking about joining a multi-family office, be clear about the services you want the organization to perform for you.

“A lot of times you say ‘family office’ and people say, ‘Huh?’” says Judy Lau, founder of Lau Associates, a multi-family office that is an independently operated subsidiary of Bryn Mawr Bank Corporation.

That’s a testament to how little publicity these entities have received. But over the past eight years or so, family offices have been emerging from obscurity.

The concept gained more notice in 2010, when the New York Times reported that Oprah Winfrey was starting a family office. Over the past year or so, the names of family offices — and the families whose assets they manage — have started to appear in the business press, as more of them have begun to invest directly in businesses (often those owned by other families).

Briefly, a family office is a private vehicle to help high-net-worth families manage their money and other family affairs by bundling some functions, such as legal, accounting and financial advisory services, under one umbrella. Some families, however, have family offices that focus only on functions such as family education, charitable donations and shareholder communications but not on investing and tax services (see sidebar).

Family office services can help families navigate diverse holdings and advice from an array of professionals.

“Most of the people that come to us as potential clients already have an investment manager, an attorney and an accountant. They have the basis of a family office there. What they don’t have is connectivity, coordination and communication,” Lau says. “A lot of people, when they come in as potential clients, say: ‘My attorney’s telling me one thing. My accountant’s telling me another thing. What am I supposed to do?’ ”

The concept of a family office dates back to the 18th century, when “merchants would hire a trusted adviser to manage their wealth,” according to a study by the World Economic Forum and J.P. Morgan. The House of Morgan, created by J.P. Morgan in 1838, and John D. Rockefeller’s family office, formed in 1882, are two examples from the Industrial Revolution. The family office sector today appears to have grown out of the accounting world, as firms expanded services, says Lucinda Peterson, CFO of Lau Associates.

For families with an operating company, a family office removes the responsibilities of managing the family’s assets and other needs from the family business staff, enabling them to concentrate on the needs of the business. For families who have sold their companies, a family office can help the extended family maintain shared assets and family governance.

Family office pros and cons

Pros
•  A family office can provide governance and management structures to address the complexities of the family’s assets, promoting family cohesion and preventing family conflicts.

•  Advisers’ interests are better aligned with the family’s interests in a family office setting than they are when multiple advisers work with multiple households.

•  Centralization and professionalization of wealth management services generally leads to higher returns or lower risk and enables family members to aggregate and leverage their wealth for investing and delivery of services such as insurance and technology.

•  A family office can help separate the family business from the family’s other assets.

•  A family that uses a family office controls how services are delivered.

•  A family office ensures discretion and confidentiality regarding the family’s wealth.

•  Families with a family office can make direct investments without going through private equity funds or hedge funds.

Cons
•  Family members or family branches must sacrifice autonomy and independence to invest and work together.

•  Structuring and operating a family office can be complicated, time-consuming and expensive.

•  Family members’ expectations for increasing returns and more services may grow over time, resulting in “scope creep.”

•  The greater the number of family members whose affairs are managed by the family office, the higher the potential for conflict.

Sources: PwC / Family Business Magazine webinar, “Is a Family Office Right for You?,” April 25, 2018; Ernst & Young, “EY Family Office Guide.”

Most family offices today are classified as either single-family offices, which handle the affairs of one family, or multi-family offices, which provide services to a number of unrelated families.

Ernst & Young’s “Family Office Guide” notes that most multi-family offices are commercial, meaning they sell their services to client families. Others operate as private multi-family offices, open exclusively to a few families. Most multi-family offices started out as single-family offices that grew to include other families to achieve greater economies of scale.

Among the advantages of a family office are protecting the family’s privacy, reducing administrative burdens stemming from the holdings of multiple family branches, and providing financial advantages (cost savings and investment opportunities) due to the aggregation of wealth from multiple households.

Services handled by a family office can include wealth management, estate planning, tax preparation, insurance, philanthropy, family governance, NextGen education, risk management, bill paying and record keeping. A family office might also handle lifestyle (or “concierge”) services, such as managing family travel arrangements and supervising household services.

Single-family offices can be embedded within the family operating company or organized as a separate entity.
Many families develop their family offices over time, beginning with one employee administering the family’s affairs, says Raphael Amit, the Marie and Joseph Melone Professor and a professor of management at the University of Pennsylvania’s Wharton School.

“Some start in a small room in the company owned by the family,” Amit says.

These small operations can draw from the family business staff for assistance. Eventually, a small family office might grow into a private company — often an LLC — that manages the family’s affairs. Some single-family offices have 20 or more employees, according to Charlie Carr, U.S. family enterprise advisory leader at PwC.

Another option is a virtual family office, which outsources many family office services. At the opposite end of the complexity spectrum is a private trust company, which acts as a permanent trustee for family trusts.
Like family-owned operating companies, family offices vary in management and structure from family to family.

“It’s not one-size-fits all,” says Amit.

How to begin
Generally, the process of creating a family office starts when the family leaders recognize their lives have gotten very complex, says Todd Ganos of Reno, Nev., who started an office for his own family and then developed it into a multi-family office. Ganos’ entrepreneur grandfather owned a hotel, restaurant and supermarket in California.
“You realize you have a lot of things going on and you’re starting to outgrow your CPA,” says Ganos, principal adviser with IWC Family Offices. “You realize your business accountant is not going to have the skill set to do the personal planning.”

Sam Fratoni of Portland, Maine, joined Lau Associates to help build a portfolio about 20 years ago. Over time, he began using more of Lau’s services.

A family office alternative: Clemens’ shareholder services office

John C. Clemens surely would be proud to see how his descendants have carried on the family business he started in 1895. The company, based in Hatfield, Pa., with operations in Pennsylvania and Coldwater, Mich., today has four business units: Hatfield Quality Meats, Clemens Development, Country View Family Farms and PV Transport. The enterprise now generates annual revenues of more than $1 billion.

The Clemens family, now in its sixth generation, has grown to include an eye-popping 740 members. About 337 of these are shareholders in The Clemens Family Corporation. With that many business owners, things can get complicated.

As the shareholder group expanded into the fifth and sixth generations and households began to move outside the family’s Pennsylvania home base, managing their affairs “became more complex than it had in the past,” says Tara Bahn, a fifth-generation Clemens family member and director of shareholder services.

To coordinate professional services and facilitate an understanding of these services, two years ago the company began exploring the creation of a shareholder services function. Bahn, who previously was the family company’s corporate counsel, worked as a corporate lawyer at the Kirkland & Ellis law firm in Washington, D.C., and a trial attorney in the U.S. Department of Justice before joining the family business.

The purpose of Clemens’ shareholder services office is to act as a liaison between the company and the shareholders. The primary goals of the office are the sustainability of the business and having an informed ownership, Bahn says.

“It serves as a clearinghouse” of information and advice from the company to the shareholders as well as information from the shareholders to the company, explains Bahn.

Unlike a family office, Clemens’ shareholder services office doesn’t handle investments or tax preparation. Bahn says this stems from the company’s status as a C corporation, which means the enterprise is a distinct legal organization and tax-paying entity that is separate from the owners.

The shareholder services office works with shareholders’ professional service providers. For example, the office might coordinate with an attorney representing a family member who wants to create a trust for her grandchildren.

Bahn says the office combines and centralizes services and functions so they are performed by one person, thus improving the delivery of these services and facilitating communication. “Our purpose is not to have any surprises,” she says.

The office also handles day-to-day stock ledger functions, which include transfers from one generation to the next, dividends, payments and redemptions.

The shareholder services office currently does not handle education for NextGen members or other shareholders, but that function is “something we’re looking to start,” Bahn says.

Bahn says the transition to a shareholder services office was “very easy.”

One reason is that a third-party accountant who used to handle the day-to-day stock ledger still serves as a trustee on a number of trusts.

“It made the transition easier for shareholders,” Bahn says.

Before setting up the office, Bahn — along with John Reininger, who serves as Clemens’ chief relationship officer, plus the former CFO — interviewed several different family businesses to see how they handled the function.
Bahn notes there’s no one model that’s right for every business.

“We wished we could have found something and said ‘Oh, that’s exactly what we need,’” she says. “But with family business, they’re all different.”

She recalls a conversation with a member of another business family who cautioned against handling a particular function in a certain way. “We would absolutely recommend you never do that,” the person advised.

“I said, ‘Oh, we do that. It’s something that works for our family,’ ” Bahn says.

Bahn points out that Clemens’ shareholder services office is still evolving.

“Everything could change,” she says.

Bahn suggests that business families looking to create a shareholder liaison function talk to other families to learn what they do. The intelligence you gather will help you develop a model that works best for your family, she says.

“And we would always welcome any feedback from others,” she adds.

— Maureen Milford

Fratoni, an angel investor who was an executive in a high-growth biotech company, says it was important to have the family affairs in order “if something should happen to me.”

Advisers suggest that families considering a family office first sit down and develop a mission statement. “I ask people to flash forward 40 years and [envision that] Forbes is doing a story on your family. What do you want the headline to be?” says Ken Ude, director of the Marshall Family Business Program at the University of Southern California.

Amit says what stands out in mission statements he’s seen is the desire to manage assets in a way that fosters family unity, harmony, happiness and health. It’s vital that families decide the best way to manage their investments to accomplish those goals.

Single-family or multi-family?
Families with liquid assets of about $10 million or more might find a multi-family office more practical than the use of investment managers or wealth managers because of the additional services that fall under the multi-family office umbrella (tax compliance services, philanthropic advisory, family governance, etc.). Each multi-family office has its own unique menu of services and pricing, and each client family selects the services they want. The decision boils down to a cost-benefit analysis.

There is varying advice on how great a family’s net worth should be to make a single-family office worthwhile. Some advisers say a family should have at least $200 million to start a single-family office. But there are no hard and fast rules, says Carr.

An advantage of a single-family office is that it can be tailored to your family’s needs. It also offers control, privacy and confidentiality. The downside is that it’s expensive. The annual cost to operate a single-family office has been estimated at $1.5 million or more, depending on the scope of the operation. Advisers also warn that those handling the affairs of a single family may lack the insights that come with working with many families. Another problem could be the loyalty by the office staff to one generation, says Lau Associates’ Peterson.

Other criteria besides wealth should be considered to determine if a single-family office is right for you.

“There’s a big difference between wealth creation and wealth management. Are you interested — and skilled — in managing money, and is that something you want to do?” asks George Isaac, who runs a virtual family office for his family, which owned an industrial-grade metals recycling operation.

Typically, a multi-family office costs half of what it would cost to run your own single-family office, Carr says. Pricing structures vary but can include fees based on assets and additional hourly or fixed charges for other services. The downside, Carr notes, is that your family is just one of many multi-family office clients, so the services offered might be less personal.

Fratoni says families should determine in advance what services they want a family office to handle. “There should be clarity around what you want them to do and not do,” he says.

Whether you choose the single-family or multi-family office option, you must trust the professionals you work with.

“Trust is as valued as talent,” the J.P. Morgan study notes. 

Maureen Milford is a business writer based in Wilmington, Del.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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September/October 2018

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