Choosing the family office structure that helps your family's goals
Consider costs, governance and privacy
Authored by RSM US LLP
An effective family office protects and maintains a family’s financial legacy while supporting various other multigenerational needs, objectives and priorities. Structuring the family office in alignment with those goals is a crucial step toward achieving them.
Generally, family offices are established in one of three forms: single family office, multifamily office or virtual family office. Choosing the best fit for your family requires defining the enterprise’s purpose and the corresponding services it provides. Those commonly include investment management; accounting and bill pay; concierge services; coordination of family meetings and communication; tax and legal services; technology management; real estate management; insurance procurement (property, casualty, liability, life); and maintaining and managing assets like art, aircraft, wine and other luxury collectibles.
Each structure type supports family preferences and service management in different ways.
A single family office (SFO) serves one family and tailors its services to the family’s approach. The family can choose whether to insource or outsource services, a determination that commonly depends on the size and complexity of the family. The family can range in size from a set of parents and one child to a multigenerational group of wealth creators, their children, grandchildren and extended relatives, including all related trusts and other entities.
A multifamily office (MFO) manages the wealth of multiple families through a common governance board or third-party provider. MFOs serve a relatively large base of families, typically supported by a robust team of professionals with varieties of expertise. When a family joins an existing MFO whose philosophy and structure match the family’s objectives, the family benefits from the existing infrastructure and avoids the challenges and costs of building a family office from scratch.
A virtual family office (VFO) provides services and resources to a family—usually a single family—by outsourcing providers. Typically, a family member manages or oversees and coordinates these services and the providers. VFOs generally do not hire their own chief investment officer (CIO); instead, they engage an outsourced CIO.
While it is paramount for a family to assess how the framework of each family office structure type aligns with its objectives, there are other significant considerations in determining the optimal structure: costs, control and privacy.
Who is paying for the family office services—and how?
Paying for family office services is an important factor, and for families that have just sold an operating business, it represents a new dynamic. These families are suddenly without the chief financial officer (CFO) and the accounting and tax teams that serviced the business they no longer own. Will funding for the family office depend on the services provided on an a la carte basis, level of assets under management, a percentage of profits earned, a combination of those variables or something else?
In a SFO, the family bears the burden of putting a comprehensive family office structure in place—in other words, creating and running a full-blown enterprise. That includes rent, overhead and salaries (often the highest of the annual costs). The SFO will also need to consider the compensation and benefits structures for third-party and family employees, as well as governance and succession planning.
VFOs might seem like the less expensive route because a family outsources services, but an a la carte approach to hiring experts and teams can get expensive. In addition, someone in the family needs to organize and oversee the family’s outsourced advisors.
MFOs spread out the service costs among members, and joining an existing one enables a family to escape the costs of building a family office from the ground up. The MFO’s approach, however, is not tailored to one family. There might be limitations on existing services or the ability to add services—in other words, not as much flexibility. A family that understands the style and philosophy of an MFO can determine whether they align with family objectives and whether that alignment outweighs any trade-offs involving services structured for multiple families.
Who holds the family office responsibilities?
A family might want the control that comes with an SFO, but that also means incurring all costs and shouldering management and oversight responsibilities—particularly during the office’s establishment. SFOs require that the family make all of the initial hiring decisions. While there might be an advisor guiding some of these early choices, a lot of time and energy are required for writing job descriptions, recruitment efforts, interviewing and onboarding. Overseeing the hiring process, however, does help to ensure that a family finds specialists that have similar priorities and align values to theirs.
An MFO might be the right choice for a family that prefers to share costs with other families. MFOs will do the legwork of interviewing and negotiating with service providers. Keep in mind, though, MFO team members are working for multiple families. This underscores the importance of joining an MFO in which the families’ objectives align with each other and the MFO’s approach.
While some coordination with a family representative is required when working in a VFO structure, a VFO does not offer the scope of services or level of flexibility as an SFO. VFOs are still capable of white-glove service, but, like in an MFO, the VFO professionals serving a particular family’s family office serve other clients at the same time.
How much do you value privacy?
Outside advisors contribute to all types of family offices, and families’ openness to working with them differs. Privacy is a top priority for some families, and they have their SFO serve as a gatekeeper. They are protective of their personal or professional business, and they are willing to pay a higher cost to maintain control and the ability to customize services.
Still, many SFOs do not hire a full team of qualified tax accountants or attorneys and need outside advisors fulfilling those roles. The largest SFOs, at least, may have such professionals on their staff.
Families that are more receptive to working with outside advisors might gravitate toward a MFO or VFO. While privacy is not necessarily sacrificed when a family uses either of those structure types, the personalization level will be different than working under an SFO.
With a VFO, privacy is still maintained but might not be as guarded because outside service providers are extensively involved. With an MFO, there is still a substantial level of privacy, but not to the extent of a SFO because the MFO employees are serving multiple families.
Starting or joining a family office is a milestone in a family’s legacy. Laying a strong foundation for the family office helps to cultivate that legacy. To that end, a comprehensive assessment to determine the family’s multigenerational objectives is paramount.
By defining the office’s purpose; prioritizing wants and needs in terms of cost, control, governance and privacy; and aligning those preferences with one of three main structural forms, a family office will position itself to succeed today and for many years to come.
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This article was written by RSM US LLP and originally appeared on 2021-07-26.
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