What is a family office?

What is a “Family Office”, Why have one, what have others done, and what choices exist?

The “Family Office” is a relatively new label for a relatively old structure

Family offices have their origins in the sixth century, when a Kings steward was responsible for managing royal wealth. The modern concept of the family office developed in the 19th century. In 1838, the family of J.P. Morgan founded the house of Morgan to manage the family assets. In 1882 the Rockefellers founded their own family office which still exists and provides services to other families. The Rothchild family office has managed the family finances for over seven generations. Some of the largest, and most successful, Family Offices today are associated with the Royal Families in the Middle East and Europe.

Family offices are amongst the fastest growing investment vehicles in the World today, as families with substantial wealth are seeing the virtue of establishing a family office. There are at least 3000 single family offices in existence globally, and at least half were set up in the last 15 years.

Wealthy families have often created an office to run the family, and their investments. Typically these offices have either arisen as an adjunct to a business activity and the management of family matters has ended up being planted inside a commercial enterprise.

More recently these offices have arisen, first to deal with managing investment portfolios, and where the family’s interest is managed as part of the investment process. This in turn has evolved into a wide ranging function where an office manages directly held businesses, investments, philanthropic works, family development issues, and even sometimes basic household and other functions.

Think of a family office, if fully developed, as a combination of investment manager, hotel concierge, and butler that looks after the wider family.

The main types of Family office are:

  • Single Family Office (SFO) –in its purest sense, a private company that manages financial affairs of a single family. Typically engaging in all or part of the investments, fiduciary, trusts, and estate management of a family. Many will have a concierge function.
  • A Multi-Family Office (MFO) – Like an SFO, but most are commercial as they sell services to other families.
  • A Virtual Family Office (VFO) – A family may want the benefits of a family office, but don’t want to set up an actual company structure, can outsource some or all services to external providers.

These “offices” most often exist and are needed when there are large families, and significant investment portfolios combined. Examples in NZ include the Todd and Mackenzie families. Other examples that have morphed into exclusively charitable functions (albeit this has taken decades) include the Logan Campbell family and the Caughey’s. The younger or more recently wealthy examples include David Levene and Stephen Tindall.

With successful investment the dynamics and scale will change over time.
Locally, at least one of the major banks is looking at establishing a family office function within its private bank function. A number of the bigger accounting firms internationally offer Family Office services, but are often restricted in what they can do because of their own internal quality and risk management rules. In New Zealand, there is a small number of Multi-Family Office providers, some of which are connected to Overseas based Multi-Family Office organisations that are run from Australia, Asia or the UK.

The negative of such an arrangement with a bank, is that it will inevitably embed your wealth management with a bank which is not always the best outcome. Hidden conflicts of interest are imbedded in such a relationship. Most of the main banks have yet to take a truly product agnostic approach to wealth management and prefer to use such structures to increase the business of their bank.

This said, the wealth management industry is maturing, albeit slowly in New Zealand.
The Gilligan Sheppard approach to Family Office structures is to provide a hybrid solution that emphasises early design and planning stages to establish the Family Office infrastructure. As the structure and family develops more or less is done as is required.

From our experience, an asset base of at least $25m will benefit from some sort of Family Office support and engagement. International research shows that most single family offices manage a minimum of US$ 100m to justify the associated costs.

Rather than an out of the box approach, we offer a customised approach which affirms the family goals and objectives with a strong focus on outcomes – today and in the future. You can expect our hallmark honest and direct approach in our dealings with you and your family.

Issues to consider before you begin

  • Before you appoint anyone or create any structure you should consider each of the following questions:
  • How can family wealth best be preserved and increased?
  • How does a family identify and unlock further potential?
  • How can responsibilities best be divided up?
  • How can the family best monitor success?
  • What expertise should the family’s most important decision-makers have access to?
  • What is the risk profile you wish to adopt in respect of your investment portfolio?
  • Which strategy is the most effective for charitable activities? eg what focus do you want, education, poverty, medical, family, religious and so on.
  • What costs are to be expected?
  • Which internal and external risks should be avoided, and how?

In addition, it is important for every family to have a vision of its own future, as well as of its role in the future of the business. That means finding answers to these questions:

  • What is the family’s corporate philosophy? What is your attitude or guiding principle going to be in respect of the family, cradle to grave support, handout, hand up, what mentoring and support do you intend for subsequent generations. What values do you want to impart?
  • Is the ongoing existence of the business a declared goal?
  • Does the family intend to continue running the business?
  • Are there potential successors within the family?
  • Is it conceivable that someone from outside the family could run the business?
  • What are the needs and expectations of the next generation? How can these be met?

Conflict management – a cautionary note

It is sad but true that conflicts within families often tear family businesses apart. This is despite the fact that many families think that this could never happen in their case. To reduce this risk, it is important for the next generation to not simply rely on familial ties, but to start creating strong business relationships within the family at an early stage. It is also important for the next generation of family members to be given a clear idea about what roles they can expect to fulfil in the business.

One of the other conflicts that can arise within a Family Office is between the family (principals) that owns the wealth and any fund managers and external providers (agents). The length of investment horizon can also create tension between principals and agents. While Family Offices tend to have longer term focus, bonuses and other forms of compensation are typically determined more frequently. A recent US report suggests that over 60% of the costs of a Family Office are dedicated to compensation and benefits. Families should establish formal processes to make investment decisions as this can help family offices to set clearly defined boundaries and goals and to avoid ad-hoc decisions that are not in line with the broader mandate or longer term strategy.

What is the minimum you will need?

After the family determines their vision for the family office, the next step should be the design and construction of a business plan. It is important to identify if the family office will be run as a cost centre or profit centre, and what mix of in-source vs outsources functions will be required now and in the future.
It is also important to consider if some family members have the right skills to run the office, or will external management be hired (physically or virtually). The need for an investment committee or supervisory board with family representation will need to be part of the governance structure.

You may need at least one full time employee, the answer to the above questions and the weight you put on each will determine the characteristics and nature of the appointment. Think of this appointment as a CEO. In time this person will need others perhaps an investment or property manager, and administrative support. Initially all functions maybe combined into one person or completely or partially outsourced.
The operational office that you appoint will have to report to someone. This could be a board of Directors of a management company or it could be the trustees directly. There is merit in separating the roles of office and investment management from the role of trustee.

To discuss what our Virtual Family Office services can do for you, contact Debra at Gilligan Sheppard. We would be happy to sit down and discuss this in more detail, and to answer any questions that you will no doubt think up. We have experience working with a broad cross section of families including those migrating to New Zealand, in particular from Asia.

If you don’t know where to begin, want to talk through something, or have a specific question but are not sure who to address it to, fill in the form, and we’ll get back to you within two working days.

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