Families often consider a family office after their advisors have not worked together or taken a holistic view of the family's interests. A family office can add dedicated coordination without necessarily replacing an existing wealth advisor or private bank. In this first part, I explain why families start one and when they might begin.
When advice is not coordinated
Managing substantial wealth can involve operating businesses, real estate, employees, travel, and other commitments. Yet a family's CPA, insurance agent, and wealth advisor may speak only once a year or once a quarter. The family can end up remembering the details and carrying information between advisors.
That arrangement leaves little room for missed steps. You should not have to remember when to sell an asset, close a deal, or start a new LLC while also managing everything else. A family office can provide a more holistic layer of support, while allowing you to keep existing advisor relationships.
The cost of a mistake
A mistake has a different dollar impact at different levels of wealth. A 5% mistake on $1 million is $50,000. A 5% taxation mistake on a $100 million estate is $5 million. The chapter points out that this amount could have paid for a full-time team for several years.
The case for a family office is not limited to avoiding one costly mistake. The team may help avoid other mistakes, find better-quality investments, and free up your time. If set up right, it should help protect against known and future risks, support faster adaptation to opportunities, and give you more time for your unique ability, such as negotiating deals, acquiring competitors, or developing real estate.
Direct investing and family control
Families may want to diversify their assets to preserve wealth over time. Some invest directly in apartment buildings, develop real estate, or buy operating businesses. These investments do not always go through a private equity fund, an exchange-traded product, or a sponsor charging a promotion or share of profits.
Some families prefer to build teams and manage assets themselves. Those are the skills that built their wealth in the first place. A family office can help attract and execute more direct investment deals.
What a single family office means
A single family office is "a holistic, full-balance-sheet wealth management solution for an affluent individual or family."
The chapter also describes a virtual family office: one or two, and no more than three, full-time professionals running the office, with other services outsourced. This lean structure can work for families who would find a full staff of 10 to 15 professionals too expensive for their comfort or wealth level.
The chapter notes that some families at $50 million may choose a lean virtual office. At $100 million, it says families almost always need some type of single or virtual family office. The term "centimillionaire" is used throughout the book, but the ideas apply to anyone considering an office, from $50 million to $10 billion in wealth.
When to start
The best time to start may be before a liquidity event, or as net worth is rising at a pace that makes reaching $50 million or $100 million likely. Starting before a liquidity event can help get structures in place to manage capital and taxation from the beginning.
Some families begin with a holding company and later formalize their holdings and philanthropy work into a family office. The chapter describes a growing trend of turning holding companies into virtual or single family offices. Families that built wealth through real estate or operating businesses may want to stay in the driver's seat as they manage it.
Action checklist
- Consider whether your advisors coordinate and take a holistic view of your family's interests.
- List the businesses, real estate, employees, and other commitments requiring your attention.
- Identify recurring details you are responsible for carrying between advisors.
- Consider what a 5% mistake could mean at your level of wealth.
- Decide whether direct investment and in-house asset management fit your approach.
- Compare a lean virtual family office with a larger full-time team.
- If a liquidity event is approaching, consider when to begin setting up structures.
From the book
"At the same time, your CPA, insurance agent, and wealth advisor probably only speak with each other once a year or once a quarter at best. "
"With so much going on, you should not be the one required to remember when you need to sell an asset, close a deal, or start a new LLC. "
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