When To Establish A Family Office

You Are Anticipating A Liquidity Event

Perhaps you have sold your business. Perhaps your company is going public. Perhaps you’ve won the lottery or perhaps you’re selling your collection of Dutch masters paintings. In theses types of scenario where you receive a large amount of money that dramatically changes your net worth, it would be beneficial to understand what new options become available to you. Money, at scale, enables you to operate at scale. There are financial benefits to treating your finances like a business in their own right, wealthy or otherwise. Establishing a formal wealth management structure will give you more time to do the things that you enjoy doing. Without that structure, your wealth might have the surprising and unwanted effect of taking your time away from you; which is as ironic given that most people start out in business to secure their independence and freedom.

You Have A Large Family Spread Across Different Countries

If you operate a business with family there are many moving parts. Compliance, tax, human resources, legal, accounting, cultural norms and expectations. Underlying these areas will be complex relationships between family members and staff.  If you operate a family business in two different countries you have doubled the considerations. Arguably, in some cases you have not doubled, but squared your considerations. After all, how much commonality would there there be between the Tokyo branch and the Dubai branches of your company when considering the above factors. A family office provides structure and commonality to sometimes disparate and uncomplimentary individual parts that don’t get along. This could be the Tokyo and the Dubai office. It could just as easily be Uncle David and Auntie Esther who dislike each other. Having a hub to unify business interests and people can help from a logistical and structural standpoint for businesses, but also on a human level for family members when planning for the longevity of a family enterprise.

You Have Many Service Providers

You have one Windows computer and one Apple computer. They both do important tasks for you. It is up to you to parse the individual outputs of these two computers and combine their work, as the two systems do not express themselves in the same way, and operate using different formats. This is commonly how unstructured HNWI’s work. They have a good accountant, a good financial adviser, a good insurance agent and so on. Everybody is competent but they all speak if not a different language, a different dialect. In consolidating your service provides using a family office structure you can ensure that everybody speaks the same language. And even when the best person for the particular job  in question does not, the family office will be able to parse and standardize their outputs to ensure that you only ever need one computer- not eight.

You Are Unaware How Much You’re Spending

As you, your business, your family and your finances get bigger it becomes an increasingly large challenge to keep track of expenses. There often comes a point where, exhausted, clients give up on expense tracking and take the position that ‘as long as more money comes in than goes out’, the everything is good. Expense tracking gives you the ability to put a stop to unnecessary expenses, notice trends and increases in cost, and save money by negotiating better deals. If you’re unsure of how much your current set-up is costing you in aggregate we can guarantee that you’re spending too much. That money over-spent on fees could be better applied to having a team of experts working for you to optimize your business, your investments, and your lifestyle. Get more. Spend the same.

Your Current Financial Plan Fails To Consolidate Your Interests

In continuation from the topic of having too many service providers, this is the net result. Even though each professional silo of your finances (your financial adviser, your lawyer, your estate planner etc.) are working well, unless there is a project manager of sorts, it is impossible to get optimal results. A skilled architect, plumber, electrician and interior designer cannot build your dream house without a project manager to preside over its construction, and coordinate and apply their skills. The same is true of your finances. Having good people is not enough. At the very least you will need another good person to coordinate the good people, that speaks all of their languages and understands what they do. That is the primary role of a private wealth manager.

You’re Spending A Lot On Professional Fees

So, you are actually fully aware of what you’re spending annually on professional services, so everything is good, right? Not necessarily. Economy of scale dictates that you pay more for x10 services at x10 different places than you would for buying x10 services from one single place. The problem being that there is no x1 single place that can accommodate all of your personal, professional and business needs because you are unique. That is, unless you build that place yourself. Clients are often surprised that consolidating all of these external services and bringing them ‘in house’ costs about the same as they were paying previously or less, but with the addition of absolute control, loyalty, transparency and privacy.

You Lose Track Of What You Have And Where You Have It

This is particularly true for people that have various investments and numerous business interests. A good investment left unmanaged can produce poor results. Similarly to relaxed or overly forgiving attitudes that regard fees as the unavoidable cost of doing business, it can be easy to fall into the trap of believing that as long as your investments have produced a positive return and not a negative one, that they’re doing great. Absolute performance only tells you if the return has been positive or negative. Relative performance tells you how your investment has performed relative to what it should have done- i.e should it have done better than it actually did. Old employee benefit plans from past jobs, retirement accounts, brokerage accounts and annuities left by Auntie Jean. Many clients have multiple dormant accounts that they either haven’t checked in years or have forgotten about entirely. If you are losing track of things, then things are not on track.

Moving on to establish family office infrastructure is a natural progression for wealthy individuals and families. Over time they outgrow and over-capacitate their previous systems, service providers and methods. With the dramatic decreases in cost, and the emergence of virtual family office service providers that offer an a la carte menu of services, it has become significantly quicker to set up and easier to scale world-class wealth infrastructure. Consider upgrading to benefit from the following.

• Enhanced privacy and control. When you decrease the number of service providers you decrease the number of locations that your private information exists. You also decrease the number of times that it is at risk during transmission. If you bring professionals in-house then you have absolute control over your information and personal data. Right now how many companies have private information about you, and how many people within each organization could potentially access that information about you if they wanted to? As you grow, this risk does too.
• Simplification. Instead of dealing with 6, if not more different people, you deal with one. Your wealth manager may ultimately be in constant contact with a significantly larger number of experts than 6 if that is what best serves your interests and needs, but an increase in complexity or headcount will never increase your own time commitment or administrative burden. As your wealth and interests grow and require more attention, they are meticulously catered for.
• Scale. Readily adapt to changes in your situation and needs. This might mean getting better access or fee discounts by virtue of existing under an umbrella of significant wealth across multiple families. This could also mean having instant access to professional experts on-demand without having to go into the marketplace and start searching from the ground up.
• Focus. With a family office you have the undivided attention of your service providers. They are not working with a database of 300 other families. They are not spread thinly, struggling to remember the details of your last conversation and what your partner’s name is. Their loyalty and focus is on you. Not only does this continuity result in a higher quality of work being done as there is more shared understanding, but it dramatically improves client satisfaction as you are supported by people who ‘get’ you and your family.
• Succession. Only 10% of family wealth survives to the third generation. The odds are very much against you if you wish for your good fortune to extend to future generations of your family or community. Without a formal structure in place to manage, protect and cultivate your wealth you are statistically likely to fail as over time your estate is depleted by taxes, predators and creditors. For many people a family office is looked upon as an operational improvement. For others it is looked upon as an absolute necessity to secure the future of the family.