Not every family with substantial assets requires their own single family office. But for those with complex situations, there are circumstances where it does make sense.
Typically, wealthy families that span multiple generations often navigate intricate family dynamics and a diverse array of investments. These complexities often include everything from real estate holdings, HR and payroll and private businesses to multiple jurisdictions and, many times, private aircraft and yachts. In such cases, a single family office serves as a dedicated business for managing personal wealth, mitigating risk, and providing the necessary support and infrastructure for the family to thrive.
On the other hand, for families new to significant wealth, it often makes sense to initially prioritize simplicity. Gradually building their financial structures often proves more advantageous since a single family office may not be essential at the outset.
While many families prefer to keep things straightforward, complexities can sometimes be unavoidable. Therefore, it’s crucial for families to thoughtfully establish their planning and organizational structures, as what begins simply can evolve into something much more intricate over time.
In our extensive discussions with clients regarding the value and types of family offices, we frequently address an important question: Is the investment worthwhile, or does it introduce unnecessary complexity and costs? We also consider whether now is the right time to establish one and what structure would be most beneficial.
As you might expect, the answer varies based on each family’s unique situation. In this article, we will explore the different types of family offices, analyze their costs, weigh the pros and cons, and provide a framework to assist families in evaluating this decision.
What is a Family Office Structure?
There is a saying: “Once you’ve seen one family office, you’ve seen one family office.” This highlights the significant variation among types of family offices.
A “family office” (FO) is a broad term that refers to a private structure dedicated to managing the wealth and unique needs, directly or indirectly, of one or multiple families. They come in various forms, each providing a diverse array of personalized services that can be delivered in-house, fully outsourced, or through a hybrid model.
While some types of FOs employ a large staff, others may function with no employees at all. Below, we present an overview of the services offered by both single family and multi-family offices.
Embedded Family Office
An embedded family office operates within a family business to assist the family with personal finances while leveraging existing resources and expertise in the business. For example, some families that own businesses hire or utilize staff that is dedicated to managing family affairs such as bookkeeping, tax, and support staff. An embedded family office can be invaluable for managing large enterprises, though it is sometimes informally structured within family-owned business.
In our experience, embedded family offices are frequently not intentionally designed from the onset and instead develop incrementally to address the family’s complex needs over time. Depending on a family’s business strategy, such as a potential future sale or seeking capital from outside investors, an embedded family office may not serve as a long-term multigenerational solution. Many families will seek an alternative family office structure after business transactions.
Single Family Office
A single family office is dedicated to managing the wealth of one family. It centralizes financial and administrative functions while offering customized services designed to meet the unique needs of that one family.
A single family office can manage various services in-house, including:
- Investment strategy
- Family businesses
- Estate planning
- Concierge services
- Household management
The primary advantages of a single family office is the complete privacy, control, and customization that it offers. At the same time, establishing and maintaining this family office structure can be very expensive.
Some single family offices have dedicated divisions for investment management, legal, education, governance, accounting, and property management. Costs can range from 40 basis points to 2% of assets, depending on what the FO does. It’s our belief that about $ 500 million is the starting point for a family to even consider bringing everything in-house.
Modern examples of a notable single family office include household names such as the Gates, Walton, and Bezos families. But, one of the earliest single family offices was founded by John D. Rockefeller.
In the late 1800s, Rockefeller assembled a dedicated team to manage his wealth and business interests. This innovative approach was groundbreaking for the robber baron era at the time, although single family offices have existed in some form or fashion in Europe for quite some time.
Multi-Family Office
A multi-family office serves multiple families and it provides shared access to a comprehensive suite of services. This structure allows families to benefit from economies of scale to reduce costs while gaining access to various expertise and resources.
Families using a multi-family office can enjoy personalized services such as:
- Investment management
- Tax planning
- Estate planning
- Technology resources
- Philanthropic advisory
- Execution
They can leverage all of the above all while sharing the infrastructure and costs with other families. It is important to note that there are many different types of multi-family offices and each may have a different area of specialization.
A multi-family office is ideal for families seeking professional wealth management without the high costs of a single family office. Families utilizing these services typically start with assets of $20 million and can go into the billions.
Even many billionaire families use multi-family offices who do not desire to run their own single family office. Costs can range from 40 basis points to around 1%, depending on the family’s assets and the services provided by the multi-family office.
Virtual Family Office
A virtual family office offers a flexible and cost-effective alternative solution for families with assets between $20 million and $250 million. Typically, there is no physical office location or full-time staff.
Sometimes, a virtual family office involves just one team member who is a member of the family. Instead of maintaining a dedicated team, families can outsource to a multi-family office or other specialized service providers while still having a formalized legal and governance structure.
Think of a virtual family office as a hub for all things related to family wealth.
Many of our families have established professional investment structures, foundations, and family holding and operating companies, akin to the organization of a single family office. They can implement investment legal frameworks that generate economies of scale for pricing, reduce K-1 complexities, and enhance risk management.
The model of a virtual family office allows families to access specialized expertise as needed. They get to enjoy this benefit without the burden of maintaining a full-time staff.
When Does a Family Need a Family Office Structure?
Determining when and whether to establish a family office structure depends on several key factors, including the family’s assets, the complexity of their financial affairs, and family priorities. When guiding our Keystone clients, it’s crucial they understand:
- Specific challenges they wish to address
- Values
- Reasons for setting up the FO
- Who it is designed to serve
- Its objectives
Common Family Office Goals
Many families grapple with the decision of whether to create a single family office, or collaborate with a multi-family office. While the outcomes can vary significantly based on unique needs, several common motivations drive this choice:
- Formalized and organized governance structure
- Confidentiality
- Advocacy for family values, legacy, and vision
- Family risk management
- Consolidated and coordinated services for family members
- Economies of scale for service providers and investments
Ultimately, each family is unique, and the services provided should be fully customized to meet their specific requirements.
Scale / Assets
Families with substantial assets, typically over $100 million, often find that some iteration of a family office structure can provide the infrastructure to manage wealth effectively. The threshold may vary, but significant assets generally warrant specialized management and structure to ensure optimal growth and preservation.
Typically, in the sub-$500-million dollar range, a multi-family office, virtual family office, or hybrid approach makes the most sense. This is primarily due to costs associated with bringing staff and specific services in-house. For instance, consider the staffing costs associated with bringing a professional wealth manager team or in-house legal.
Complexity
The complexity of financial affairs is another crucial factor in choosing from the types of family offices available. Families with diverse investments, multiple businesses, philanthropic interests, and multiple family units may benefit from the coordinated approach a family office structure can offer.
We have found that the longer a family has had wealth, the more complex they are. In cases like this, a family office structure can make more sense. For example, a multi-generational family with multiple family units will typically be more complex than a newly minted founder who has just sold their company.
To delve deeper into this concept, multigenerational FOs often prioritize the following:
- Family governance
- Next-generation education
- Wealth stewardship
- Risk management
- Family cohesion
- Generational transition
Priorities
Family priorities, including legacy planning, wealth transfer, and charitable endeavors, often underscore the need for a family office structure. Families dedicated to preserving their legacy and ensuring a smooth wealth transition across generations will discover that a family office offers invaluable support and expertise.
When addressing these priorities, we frequently assist our clients in defining a vision for the FO and determining its budget. This foundational exercise is instrumental in designing the various components of the family office, such as technology, legacy management, staffing, and oversight.
Costs of a Family Office Structure
Establishing and maintaining a FO – whether it’s an embedded family office, virtual, or single family office – can be costly. The expenses vary depending on the scope of services, the size of the family office, and the family’s specific needs. Here’s an overview of potential costs:
Setup Costs
Setup costs include expenses related to recruiting staff, acquiring office space, purchasing technology, legal fees, and establishing processes and procedures. These initial investments can be substantial, especially for a full-service, single family office.
Operational Costs
Operational costs encompass ongoing expenses such as staff comp and benefits, operations overhead, technology, development, and compliance costs. For a typical single family office, annual costs can range from $800,000 to millions yearly.
The more in-house services a family has (investment management, in-house legal, lifestyle services for example), the more expensive an FO costs to operate. For this reason, many families prefer to outsource specific components instead of handling them in-house.
External Advisors
Single, multi, embedded, and virtual family offices rely on external advisors for specialized expertise. These advisors may include multi-family offices, investment managers, tax consultants, legal advisors, and philanthropic consultants.The fees for these services vary but are an essential consideration in the overall cost structure.
Total Costs
A straightforward approach to assessing costs is to sum all desired services along with their associated expenses. Notably, staffing costs often represent the largest expense for all types of family offices.
For example, total costs can range from 50 basis points to 2% of a family’s total assets. Our general guideline is to keep total expenses around 1% or less.
However, the ideal way to budget is to view total family office costs as a percentage of expected long-term asset growth. For instance, a family targeting a 6% after-tax return should have a lower FO budget than a family aiming for a 10% after-tax return.
In-House vs. Outsourced Services
One of the most important decisions in establishing a single, virtual, embedded, or multi-family office is determining which services to manage in-house and which to outsource. The concept of “buy, build, or rent” is relevant even for some of the wealthiest families, as they often choose to outsource certain functions.
Achieving the right balance is crucial, especially when evaluating cost efficiencies. Here are the key considerations to keep in mind:
- Complexity
- Number of family members/generations
- Family alignment
- Priorities
- Risk management
- Prioritization of family legacy and succession
- Cost and FO budget
- Technology and infrastructure
- Asset types and FO focus
- Family operating businesses
Many families outsource specific functions, including investment management, legal, and tax, to external consultants or multi-family offices. This choice often depends on the quality of available talent and the costs associated with bringing that expertise in-house.
For example, investment management can represent one of the largest expenses incurred. Therefore, the costs of attracting and retaining top investment management talent might be larger than a FO’s budget.
Conclusion
The decision whether to establish a single, multi, virtual, or embedded family office is influenced by your unique needs and priorities. While cost is a factor, it shouldn’t be the only consideration.
Families should assess their complexity, priorities, and desired level of control before making a choice. A family office can be particularly beneficial for those with significant assets and complex financial affairs since they provide personalized services that support long-term goals and protect wealth across generations.
Whether managing functions in-house or outsourcing to external advisors, the goal is to ensure comprehensive support for the family’s well-being and legacy. As you consider your options for types of family offices, reflect on these factors and seek advice from experts who comprehend the needs of this particular segment of clientele.
We are here to help if you would like to discuss this in more detail.
FAQs
What are family offices?
Family offices are private organizations that cater specifically to the financial needs and priorities of high net worth families. They offer personalized services and support for managing complex assets, preserving family legacy, and facilitating intergenerational wealth transfer. These office structures can either be in-house or outsourced to external advisors depending on the family’s unique needs and preferences.
What is a multi-family office?
A multi-family office is a wealth management firm that caters to multiple high-net-worth families. These offices offer a range of services, including investment management, tax planning, and legacy preservation. Multi-family offices are often more cost-effective for families who do not desire to set up and run their own single family office.
What is a single family office?
A single family office is a private organization established to manage the financial affairs of an individual family. It typically offers a diverse range of services tailored to meet the unique needs, goals, and priorities of that family.
Designed for families with significant assets and intricate financial situations, single family offices provide enhanced privacy, customization, and control. However, they can be quite costly to maintain.
