Best practices for starting a single family office

Family office trendsBest practices for starting a single family office

March 23, 2021

Key things to know

  • Establishing a single family office may help your family better manage the complexity of their business and personal finances.

  • Assessing the implications of creating a family office can help determine the structure and mission for the organization.

  • Following best practices which include active involvement and participation of multiple generations of family members may help ensure your family office success.

Forming a single family office may be a natural progression for many families experiencing increasing complexity in their ownership of business and personal assets.

Although unique in design to each family, a single family office provides an organized approach to handling investment and wealth management needs for one family, with the goal to effectively grow and transfer wealth across generations. With careful planning and management, you and your family can experience more personalized attention, control and efficiencies over your holdings.

More importantly establishing a family office may improve trust and communication among family members, create a focus on leadership development, and an establish a shared mission and vision for the family’s wealth and legacy. These “soft” considerations are often significant to the long-term success of the family finances but may not come naturally to wealth managers trained in the legal, tax and investment disciplines.

If you’re contemplating opening a single family office, here are considerations and best practices to help inform your decision.

Considerations

Consideration #1: Control. A family office offers a family significant control over the management of its wealth. However, with control comes responsibility. The family office is a business, and while employees will manage it, the family will make, at a minimum, all director-level decisions. Concerns and responsibilities such as, business strategy, budgets, office rents and hiring/firing will fall on family members rather than a wealth management firm.

Consideration #2: Coordination. Pooling assets offers a comprehensive view of the family wealth. It allows a single family vision and mission to be applied to decisions across family branches and generations. It may also provide greater access to special investment opportunities.

This level of coordination requires that family members be willing to share some information with each other. When it comes to pooled assets, family members will have some knowledge of each other’s individual wealth and, potentially, of special needs and situations, such as requests for extraordinary distributions.

Not all family members may be comfortable with even a modest window into their affairs, or open to having their personal interests subordinate to “what’s best for the family.”

Consideration #3: Exit strategy. At some point, it’s likely that some family members will seek to go it alone and formally separate from the management of the family wealth. Creating an exit strategy, may help to ease tension and disruption in the future.

Consideration #4: Partner selection. Creating a single family office allows the family to select the individuals they work with, not just a firm. A single family office employee should not only have the requisite skill set to perform their function, they must also comfortable working in closer, more personal way with family members in an environment where there is often limited upward mobility.

With careful planning and management, you and your family can experience more personalized attention, control and efficiencies over your holdings.

Best practices

Best practice #1: Governance. Establishing rules of governance, management and decision-making for the family office provides clarity and may help reduce conflict.

Create a board of directors and determine how directors are selected, whether at large or from specific branches, how many will serve for how long and how many non-family members should be included.

If your family is large enough, consider a Family Council as a separate unit to communicate directly between the family and the board. Again, determine how the Council is selected and serves. Develop clear roles, expectations and responsibilities for the board, trustees and management.

Best practice #2: Vision and mission. Spend time as a family to determine the purpose of the family wealth and the role of the family office in facilitating that purpose. The following questions can help identify areas of affinity:

  • Why are we working together?
  • What are our common interests and values?
  • Will we use our wealth to increase individual prosperity, create a better society, ensure wealth continuity for generations or serve some other purpose?
  • Will we use our family office to provide services around administration, reporting, investments, banking, planning, philanthropy or all the above?

Gaining consensus on those questions will help the family office make both strategic and day-to-day decisions.

Best practice #3: Development and education. Each generation must eventually take its place in the leadership and oversight of the family office. A well-designed development and education program can provide a pathway, bridge the gaps and improve the likelihood that the next generation will be effective stewards.

Programs that successful family offices offer to their family members include mentorships, financial literacy education, board apprenticeships and leadership coaching.

Best practice #4: Communication and engagement. An interested, informed and involved family can help management better understand the family’s goals, follow the family’s vision and mission and recognize and pursue new opportunities. This becomes especially important in the second generation, which tends to be a bridge for the family legacy in the transition from wealth creation to wealth management from generation to generation.

Regular communication is imperative across the family and between the family and management. Consider developing roles and positions for family members and rotating individuals through them to allow broad experience to help family members feel connected to the family office.

Launching and managing a successful family office requires forethought and resources. Initially weighing the considerations and applying best practices throughout the life cycle can provide great benefits. Such attention may allow the single family office to serve the family and its legacy for many generations.

Learn how Ascent Private Capital Management® of U.S. Bank works with family office executives.

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