Mastering Family Office Management: How to Run it Like a Business for Lasting Success

When it comes to managing a family office, many families struggle to treat their office like a business. These families may believe they have no clients, products, profits, or business goals. But this is simply untrue. Seasoned family office professionals know that the “clients” are the family members, the “product” is their lifestyle and legacy, and the “profits” are their overall wealth and happiness. They know that, like any other business, offices need clearly-defined goals and employees that bring those goals to life to succeed. Operating a family office requires a delicate balance of financial expertise, estate planning acumen, and an unwavering commitment to meeting the unique needs of the family members it serves.

Below, we examine the best practices for growing a family office and offer essential tips and insights to optimize the efficiency, security, and success of these exclusive financial management entities. Whether you’re an established family office seeking to enhance your operations or a family considering establishing your own, these four steps will help you pave the way for a prosperous and enduring financial future.

1. Building a Corporate Structure

Typically, family offices serve multiple purposes. These purposes vary based on a family’s needs, which are based on factors including the size of their pool of capital, the complexity of their underlying investments, the number of generations in the family, and the degree of insourcing versus outsourcing responsibilities within the investment.

From a corporate structure framework, family offices can serve five purposes. They help families address (1) financial matters, (2) legal matters, (3) household matters, (4) foundations/charity opportunities, and (5) day-to-day operations.

Financial matters relate to personal financial management (such as bill pay, accounting, expense tracking, property taxes, and even the college tuition of younger family members), taxes, and investments that generate income and/or appreciate in value. Examples of these investments may include family-owned real estate properties, passive investments such as private equity funds, and marketable securities. Family offices must also work with tax advisors or accountants to ensure their family office is set up correctly.

Families must also determine their legal responsibilities. It’s important families discuss this with an attorney to determine whether their family office falls under corporate, real estate law, or trust and estate. In addition to working with expert attorneys, family offices can help families manage their households, including employing drivers, housekeeping staff, personal assistants, trainers, etc. Managing the household may also include protecting high value assets, such as private planes, homes, or even art collections.

Next, family offices can help families manage donations to foundations, charities, or philanthropic endeavors. Engaging in philanthropic pursuits allows families to align their wealth with meaningful causes. To maximize the impact of their charitable efforts, family offices should align their philanthropic goals with their core values and business objectives. This helps them not only achieve financial success but also create a legacy of positive change.

Last, family offices help families manage the day-to-day responsibilities of the office itself. These responsibilities include fund administration, employee salaries, rental payments, as well as all duties of a Chief Operating Officer or Office Manager.

2. Determining Insourcing vs. Outsourcing

Families can either insource or outsource the five responsibilities above. Families who insource these responsibilities use their team of employees who are dedicated to a specific purpose. Conversely, families who outsource these responsibilities use third party providers to fulfill specific duties and roles. For example, instead of owning planes, some families opt to outsource that service to Boeing Net Jets.

When choosing between insourcing and outsourcing responsibilities, it’s important to consider trade-offs as well as how decision-making can impact your family’s situation. Insourcing means you hire W2 staff who are only dedicated to you. If that is the case, you will have to provide HR support to your employees to manage pay raises, bonuses, promotions, hiring, retention, replacement, and overall career management. The benefit of this setup is that your family has the opportunity to work with employees dedicated to your vision while you support their career and leadership development.

When it comes to outsourcing, the biggest benefit is that the cost is more flexible, and you don’t have to use time and resources to manage personnel. The drawback, however, is that outsourced employees are not solely dedicated to you and may have other clients. This can be a good thing as these employees can leverage the learnings and experience, they’ve developed in working with other clients, especially in relation to legal and tax matters.

Many of the top family offices use a balance of insourced and outsourced providers to manage office operations. The key deciding factor you’ll want to consider is whether you want to build a knowledge base internally with the goal of institutionalizing it. Some of the family offices our team works with, for example, have spent years building out their own internal direct private equity team to buy controlling stakes in middle-market companies and have experienced tremendous success over time. Once they institutionalized the platform, they were then able to take outside capital. Effectively, they incubated their private equity firm and then expanded it.

3. Considering Corporate Governance

Top family offices use a strategic approach to manage their family’s interests, investments, wealth, and control over time. This is essential if a family wants to grow their wealth beyond one or two generations. There are two layers of governance that family officers must employ: the Board and the Investment Committee (IC). The Board consists of senior members of the family and lead members responsible for different aspects of office management, such as senior advisors, the chief investment officer, lawyers, etc. It’s essential that the Board have their ground rules set up and have an odd number of members for majority voting matters. Having regular meetings (preferably quarterly) to review performance and other matters is also important in protecting the office’s continuity and growth.

On the other hand, the Investment Committee is focused on managing the investments for the family including both active investments (where they are in control) and passive investments (where they are not). The Investment Committee should outline the overall goals, risks, and framework in an investment policy statement. The policy should clearly state the amount of risk they are willing to take, how they define risk (market exposure, illiquidity, exposure to foreign countries, etc.), and what investments they want to avoid (alcohol, gambling, etc.). The IC is also responsible for creating a similar policy statement for investment sub-strategies such as:

• Direct Private Equity
• Direct Real Estate
• Passive Investments
• Private Equity Funds
• Venture Capital Funds
• Hedge funds
• Private Credit Funds
• Real estate Funds
• Marketable Securities

The investment policy framework for each of the sub-strategies should be different for each strategy and align with the IC’s investment policy statement.

4. Building in Accountability

One of the best practices of top family offices is that they hold team members accountable for their performances. As mentioned above, each investment team has its objectives and goals, and they should be held accountable for attaining them.

Family offices must set clear objectives up front with predefined timelines and measurement periods. For example, a marketable securities team might set a goal to attain a 10% return each year or a 10% average return over three years. If the S&P 500 is up 12% during that time, they may then have to reevaluate whether they still consider a 10% return as a “strong performance”. These are important factors for families to consider. For the overall investment program, reporting systems should generate performance results on a monthly, if not quarterly, basis so offices can track and calculate their progress in comparison to their objectives.

The Bottom Line

All in all, there is a lot to consider to ensure the growth and success of your family office. By adopting a business-centric approach to managing this entity, you not only elevate its operational efficiency but also ensure the preservation and growth of your family’s wealth for generations to come. The key to success lies in maintaining clear communication channels, establishing well-defined roles and responsibilities, and regularly assessing performance through accountability and data-driven metrics. Remember, running your family office like a business is not solely about maximizing profits; it’s about safeguarding your family’s legacy and providing a solid foundation for the dreams and aspirations of future generations.

Interested in learning more and taking action? Find out how Arootah’s Family Office Advisory can support you.

Disclaimer: This article is for general informational purposes only and does not constitute legal, investment, financial, accounting, or tax advice, or establish an attorney-client relationship. Arootah does not warrant or guarantee the accuracy, reliability, completeness, or suitability of its content for a particular purpose. Please do not act or refrain from acting based on anything you read in our newsletter, blog, or anywhere else on our website.