How to build a family office that lasts

Bailey McCann

Creating a lasting legacy requires not just forward thinking but ongoing education.

Family offices are known for their high levels of customization, and their structure is designed to support that. Because each one is unique, it can often be hard to say definitively what it takes to build a family office that will stand the test of time.

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Data from the Global Family Office Report, written by UBS and Campden Wealth, shows that looking at existing family offices for indicators may also be tricky, as many are still relatively new. Sixty-eight percent of family offices in the report were founded in 2000 or later, and 35% started in 2010 or later.

Still, family-office practitioners agree that families can do several things to set themselves up for multigenerational wealth. But it means treating the family office like a business, which could require a culture shift within the family — at least initially.

THE HIGHLIGHTS

Tips for creating a family office that lasts:

• Identify a mission for the family office so that it has a purpose for existing.

• Treat the family office like a business and become its client. Family offices that aren’t well-maintained rarely last.

• Build flexibility into the structure of the family office to account for life changes along the way.

• Invest in ongoing education for all family members so that everyone understands how to manage personal wealth over time and with a long-term view.

SINGLE-LEADER SHORTCOMINGS

With a little planning, families can avoid a few common pitfalls, said Joseph Reilly, CEO and founder of the Circulus Group, a Greenwich, Connecticut-based advisory firm for family offices. “Often what we see is that the wealth creator is a single person,” he said. “Maybe they did it through an operating company or through their investments, but they create a structure where they are the leader, and they have the most control.”

Sometimes the single-leader model can also embed instability into the family office because the office is managed as an afterthought and not as a standalone business. Eric Becker, co-founder and chairman of the $30 billion Cresset Capital multifamily office, said this was his experience. It made him realize the need to become a client of his family office.

“We’ve worked with families that have lost assets or worse because of incompetence or not fully resourcing the family office,” Becker said. “It’s way too common, and it makes it less likely the family office will last through the next generation.”

Reilly said that sometimes with the single-leader model, that person will ask people affiliated with the operating company or investment company to manage business for the family — an approach that isn’t sustainable.

“I call it an embedded family office,” he said. “You’re asking the CFO or the corporate counsel to do other things, and what ends up happening is the family office is created on an ad-hoc basis.”

Families can ask for this kind of help initially, Reilly said. But if it doesn’t lead to hiring a family-office staff in the future, families can run into trouble.

Families often want to rely on people they know and trust, Reilly said, but a corporate counsel or corporate CFO may not have the time or skills to manage a family office as well.

Agreeing with that assessment is Thomas Thiegs, a Minneapolis-based family wealth coach with Ascent Private Capital Management. If families bring everyone to the table early on to discuss the goals of the family, Thiegs said, then the experts required to set up the family office can do what they need to do to create a solid foundation.

“It’s very hard to build a lasting organization if you don’t take the time to think through what that looks like and what your needs are,” he said.

The planning stage shouldn’t just look at setting aside wealth for future generations, Thiegs said. Many families are surprised to learn what is actually involved in setting up and maintaining a single-family office, including hiring staff and guiding the organization over several years. Best-in-class professionals don’t come cheap and may be hard to find as they are usually already in high demand.

“When I am working with families,” Thiegs said, “I often start by asking whether it is important to them to be a single-family office at all. In many cases, it may make more sense to join a multifamily office that already has the advisers and experts in place.”

This can be especially true if an operating company isn’t at the center of the family office, he said. A multifamily office has the advantage of providing an established platform “with investment expertise already in-house,” Thiegs said.

Cresset’s Becker said identifying the right structure and experts should involve more than just attorneys and accountants. Many multifamily offices have investment staff built in, but that will need to be acquired under the single-family model. Philanthropic work will also usually need additional staff who understand nonprofits.

NEED ADVICE? CREATE A BOARD

Finally, Becker said, setting up an advisory board might help.

“We often talk to families about putting a board in place formally or semiformally,” he said. This is still somewhat rare within the family-office world, Becker said, but having outside advice can help families identify issues before they become problems and increase knowledge-sharing.

“Often people think their issues are unique to them,” he said, “but they are actually quite common, and there are ways to work around them if you have the knowledge.”

Christopher Norwine, who leads business development at Two Ocean Trust, said that regardless of whether a family sets itself up as a single-family office or joins a multifamily-office platform, when families work with trust and estate professionals, they need to consider what they think the family will look like 10 or 20 years from now, not just today. Many trust and estate structures are flexible and can be adjusted as families change over time, Norwine said, but it is easier to make those changes if some preliminary discussions have occurred early on.

This is especially true for succession planning. If the office was formed around a single leader or if the next generation is very young, the succession plan might not be immediately clear. However, thinking through what that might look like with an estate planner can help identify procedures and asset preservation plans ahead of time. Without it, spouses or other family members are often left to figure out accounts and systems on their own with limited information, and that can lead to failure.

“You almost want to bring an endowment-style mindset into the discussion,” Norwine said. “We’re looking at investments, assets and estate strategies with an intergenerational mindset. That could look like pairing near-term tax optimization strategies with longer-term trusts or other structures that are going to preserve and protect assets for the future.”

Once the basics are in place, families should invest in a chief learning officer, Thiegs said. Within the world of family offices, the learning officer provides information about managing wealth at all stages of their lives.

“This is a really crucial piece, especially when it comes to working with younger generations,” Thiegs said. Research indicates that families tend to allocate between 1% and 4% of their wealth to learning opportunities, he said, but experts say it should be much higher if the goal is to create and preserve multigenerational wealth.

“The rate of change is accelerating,” Thiegs said, “and this is where families experience the most conflict. Having an expert in this role could be the difference between success or failure.”

AUTHOR

Bailey McCann is a contributor to The Wall Street Journal Funds Report and is the senior U.S. editor for the Opalesque Alternative Market Briefing, a daily newsletter covering alternative investments, and Opalesque New Managers, a monthly publication focused on emerging hedge fund managers. Her work has also appeared in Barron’s, CIO Magazine, Institutional Investor, Middle Market Growth and other financial publications. She is also the author of Tactical Portfolios: Strategies & Tactics for Investing in Hedge Funds & Liquid Alternatives.