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Family Office
August 18, 2021
5 mins

A guide to establishing a family office

August 18, 2021
5 mins
Stephen Campbell
Chairman, Citi Private Capital Group
SUMMARY

In this paper we explore the key factors, share best practices and pitfalls, and define a process so principals can structure their office around their family's specific needs and aspirations.


Introduction

Wealth creators and inheritors face numerous decisions when stewarding assets for future generations and serving the present day needs of extended family members. Increasingly, family heads or principals are creating family offices to manage their wealth and provide highly personalized services.

Over the past 20 years, growth in global wealth hasresulted in the creation of an estimated 12,000 – 15,000 family offices around the world. No longer simply the province of the world’s 1,500 billionaires, the family office concept now scales to those families with US$200 million or more in investible wealth.

How then might a family head decide if a family office is the right option, and if it is, what would be an appropriate size, structure, and cost?

We explore the key factors, share best practices and pitfalls, and define a process so principals can structure their office around their family’s specific needs and aspirations.

 

Growth in global wealth has resulted in the creation of an estimated 10,000 family offices around the world.

 
 
 

What is a family office?

A family office is any collection of staff, whether separate from a family business or not, which provides dedicated personal and/or professional services to a family. This often includes one or more individuals managing the operational aspects of family life – such as residences, travel, and asset collections – as well as professional staff managing accounting, tax, estate planning, legal, philanthropic, investment, and administrative matters. A family office can consist of as few as two people or as many as 350.

A wide range of family office models are in use today. There are a number of key differences between single family offices, which is our focus here, and multi-family offices that serve several unrelated families. Variants also include private family trust companies that are legally constituted in a form that maximizes tax and estate planning, along with long-term fiduciary oversight. The private trust company may work in concert with a family office, or operate as a standalone entity.

Another model is the family investment company. These entities often undertake investment activities on behalf of the family, but do not offer support services (residence management, legal and accounting services, etc.) that are often provided by the traditional family offices.

Regardless, the common denominator is that the office serves only one family, which may include multiple generations or even family branches.

 

No single family office model serves all families equally well.

 
 
 

How are family offices defined?

While it is often said that each family office is unique, they do share many common attributes in respect to operational practices and service delivery models. The ‘uniqueness’ of each family office is most often due to the values, interests, needs, and idiosyncrasies of the family it serves. In this regard, we often see great variety in governance, family engagement, communication practices, and the degree to which the office enables and enriches the lives of family members.

Structurally, family offices are often defined by three key factors:

1. Size - number of professionals
2. Complexity - legal entity structures, investment types,
number of generations, etc.
3. Autonomy of the office - the degree to which professional functions such as investment management, legal, or accounting has been outsourced to third parties or carried out internally by staff
 

Principals are advised to think beyond how a family offices may help day-to-day support functions, but also consider how the office may enrich their lives.

 
 
 

What is the best family office for a particular family?

With such a wide range of business models, operating costs, and approaches available, the important question becomes: what is best for a particular family?

No single family office model serves all families equally well. The specifics of an optimal family office architecture depend on the family's needs today, as well as upon how they might change over time. Indeed, many families are best served by not creating a family office but rather by engaging a private bank, multi-family office, or wealth management firm.

As we shall see, the costs, time commitment, ongoing decision-making, and engagement with the family office may be beyond the capacity or interests of a family principal.

In essence, creating a family office is in fact creating a new business, one that requires oversight, capital, and leadership.

With these factors in mind, a process-driven methodology best serves to guide a family’s understanding of what a family office does, and helps them determine whether it is right for them. The following guidelines draw upon effective process principles, sound management practices, and general industry benchmarks to help clients create a family office of the appropriate size and complexity, helping to produce their desired outcomes.

Five factors family offices should consider

A thorough planning and evaluation approach should examine the following five factors:

1. Qualitative factors, helping to determine the appropriateness of creating a family office.
2. Quantitative factors, involving the size, costs, and benefits of a family office.
3. Strategy, operational and governance factors, including understanding the responsibilities that will be carried by the family office, and how the office will be managed.
4. Personnel factors, such as determining which skills are needed and how personnel are recruited, trained, managed, motivated, and compensated.
5. Family leadership factors, pertaining to the leadership role family members will take, how family decisions will be made, and how training and succession planning will affect future generations.

In this paper, we will focus on the first four factors. Download to read more.

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