As the number of affluent American households continues to rise, so does interest in professional family offices designed to address their many and often complex needs—both financial and otherwise. 

It’s not entirely clear just how many family offices exist in the U.S. One study by Capgemini estimates there are around 3,000 single-family offices—each one catering to a single family—and roughly 150 multifamily offices that serve more than one family. Another report estimates there are more than 7,000 single-family offices around the globe. 

And of course, the rise of virtual family offices in recent years means that some wealth management firms that aren’t technically classified as family offices have a real family office look and feel. 

But family offices aren’t a panacea for every wealthy family. Key questions must be asked and important considerations must be assessed when families start thinking about possibly getting involved with a family office of some kind. 

That’s true even if you’re not part of the Super Rich (net worth of $500 million or more) community to whom family offices tend to cater. Today, even many “merely affluent” families can work with their wealth managers to create virtual family offices that feature many of the capabilities of the more traditional options.

Single-family office considerations

Some things to think about if you’re exploring the idea of a family office include the following:

1. Single-family offices provide a menu of deliverables to a wealthy family, either directly or by engaging with external experts.

• Are there areas of expertise you feel would benefit you and your family that you do not have access to today, at the performance levels you expect? If so, what are those areas?
• Are these areas of expertise best addressed by establishing your own single-family office, by becoming a client of a multifamily office or by dealing with these matters in some other manner?

2. Single-family offices are in a position to oversee and work with an array of external experts in a coordinated, synchronized manner.

• Are the professionals you currently work with providing an integrated set of solutions to address the various necessities and desires of your family? 
• How might you and your family benefit if you were able to ensure there was greater harmonization and synergistic coordination among these professionals? 

3. Working with professionals who are leading authorities in their respective fields requires a belief in their integrity and abilities. 

• How comfortable are you in delegating financial and personal matters—particularly the critical ones—to properly vetted specialists? 
• How comfortable are you and your family in following the advice of such experts?

4. The role of family members in a single-family office can prove very beneficial, very problematic or (usually) something in between. 

• Are there members of your family who have the skills and knowledge to be involved operationally in your single-family office? 
• Are there family members who should play an oversight role in your single-family office?

Reasons to avoid the SFO route

Despite the advantages that single-family offices can bring, there are a wide variety of reasons wealthy families should not establish single-family offices. The following are some of the questions that (depending on the answers) might indicate that a single-family office is a poor choice.

• Are the expectations of what a single-family office can accomplish impracticable and unfeasible? The expectations of the wealthy family and the capabilities of the single-family office need to be aligned, with every effort being made to ensure this alignment is maintained perpetually.

• Are there deeply ingrained, grave and truly irreparable conflicts within the family? If a family is riddled with domestic battles, it’s very unlikely that the single-family office will operate effectively—unless, for example, it is completely controlled by one person. 

• Is the single-family office explicitly and purposefully understood to be a boutique business? A single-family office works best for a wealthy family if it’s run like a for-profit business—even if it doesn’t make a profit—rather than as a hobby that lacks goals, objectives and accountability. 

• Are the lines of communication open and working well? We see that operational failures at single-family offices are many times a function of a lack of clarity brought on by miscommunications between family members, and between family members and the senior office staff. 

So, where does that leave wealthy families?

Based on our experiences working with wealthy families that either want an SFO or already have one, it has become apparent that for a meaningful number of affluent families, this business model is not appropriate. In addition to these broad issues, there are others that can easily erode the value of a single-family office—or worse, make it a costly disaster. 

In a survey of 114 single-family offices, only about one in five family members involved in strategic oversight said their family office is performing well (see Exhibit 1). These single-family offices were exceeding the expectations of their families. 

The majority reported that their single-family offices were performing adequately—in other words, generally in line with what was expected of them. 

Meanwhile, about a quarter of the single-family offices were seen as underperforming expectations.

Five foundational considerations

Despite good intentions, some wealthy families create Frankenstein family offices—patchwork networks of unaligned service providers loosely sewn together. Single-family office formation is not a science project but an exercise in engineering and social management. 

A single-family office needs to be geared for precision and customized with premium components for responsiveness. Choosing the right structure allows the family to put all the pieces in place more quickly, efficiently and cost-effectively. Customizable, turnkey approaches are also gaining traction among established SFO operations that are looking to enhance client service capabilities.

Whatever the choice of operational structure for a new single-family office, there are five interconnected, related characteristics that are foundational.

1. Family direction. A newly established single-family office should involve family participation. This can include family members in operational positions. However, at a minimum there should be extensive family oversight.

2. Goal-achievement orientation. Goals need to be specified, and the operational structure needs to match up with those goals. Moreover, by being attentive to the goals on an ongoing basis, the single-family office is better positioned to accommodate the family’s needs, wants and preferences.

3. High adaptability. Due to a plethora of factors—from family dynamics to economic conditions—the single-family office needs to be as flexible as possible in its agenda. There is little doubt that the single-family office will need to adapt to changing circumstances over time, especially when multiple generations become involved.

4. Cost-effectiveness. The aim should be to get the best results from whatever operational structure is chosen, while mitigating the cost. This will usually involve certain trade-offs. Some of the most important deal with what services are provided internally and what services are outsourced to leading experts.

5. Ongoing monitoring with metrics. Continuous critical evaluations are required for a single-family office in order to achieve the goals of the wealthy family, to adapt when necessary and to ensure it is providing high-caliber deliverables cost-effectively. Comparisons between expectations and actual results help ensure the single-family office is operating as desired. 

When a multi- or virtual family office makes the most sense

There are many times when the superior approach would be to engage a multifamily office or to build a virtual family office with a team of outside experts. However, it makes sense to apply the same foundational considerations that are used when setting up a single-family office. For example:

1. Family direction. It is often a mistake to be hands-off and blindly take the advice of the professionals at the multifamily office (or of any legal or financial professionals you work with). Coordination between key family members is essential, and “speaking with one voice” to the multifamily office will usually lead to better outcomes.

2. Goal-achievement orientation. It is very important that a multifamily office understand a family’s goals, financial and otherwise. A key advantage of family offices over most other types of financial or legal providers is their holistic, client-centered orientation. High-quality multifamily offices develop synergistic solutions for their clients.

3. High adaptability. The world is constantly changing—and changing rapidly. A multifamily office must be able to gauge the changes and be able to bring state-of-the-art solutions. This is only possible when the multifamily office is committed to staying at the cutting edge across the entire spectrum of services and expertise. 

4. Cost-effectiveness. Some multifamily offices can end up overcharging by bundling inappropriate services and products with those that the family requires. A family should pay only for services and products that are meaningful to it. The issue is ultimately about value more than cost. 

5. Ongoing monitoring with metrics. The family has to be able to compare projected results with realized results. Regular review of the deliverables against the requirements of the family is useful in keeping everything on track.

Ultimately, it doesn’t matter if you’re exploring a single-family office, a multifamily office or a virtual family office facilitated through a wealth manager. If you arm yourself with these questions and considerations going into the process, you can conduct more effective and more insightful due diligence on the option that may be appropriate for you and your family.

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This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.

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