Managing your family’s finances is a full-time job. You need a team of qualified professionals to protect, monitor, and grow your wealth.
While a family office is an effective way to organize and centralize a family’s business and investment activities, if not operated properly, it can become a source and catalyst for family dysfunction and increase a family’s exposure to tax, legal, and financial risks.
The key to getting things right?
Treating your family office like a business.
Here, we’re sharing the practices high-net-worth individuals should follow to evaluate their family office’s organizational structure and maximize its operations for long-term success and wealth.
The Purpose of a Family Office
Family offices relieve families of the burden of managing their finances, so they can focus on what matters most and avoid getting tangled up in daily financial affairs.
Most families don’t think of their personal finances like they would a business…
But they should.
Just as a business produces valuable products and increases profits, your family finances should run the same way.
The “product” of your money is your lifestyle and legacy. And your “profits” are your overall wealth and happiness.
When you properly manage your finances, your wealth and happiness should increase as well.
Signs of a Well-Run Family Office
The most successful businesses are well-structured with clearly defined roles at every level of the organization and standard operating procedures that bring consistent results.
A family office needs this type of structure, too, to protect and increase a family’s wealth.
Here’s what a well-run family office looks like:
- Clearly defined functions
- Designated roles and responsibilities
- A checks and balances system with segregated duties
- High-functioning and accountable employees
- Excellent collaboration and communication
- Alignment on the family office’s goals and priorities — and exactly what needs to happen to achieve them
- Timely and accurate reporting
A well-managed family office consistently supplies the family with robust, detailed reports. If your office isn’t regularly generating reports, consider it a red flag risking your family wealth.
At Arootah, when we evaluate family offices via our Family Office Advisory, we assess nearly 100 functions that could (and should) be running smoothly for optimal performance.
During that assessment, we determine the effectiveness of the people, systems, and outputs to develop a better picture of how the family office operates and where issues might lie.
Risks of Not Running Your Family Office as a Business
The risks of not treating your family office like a business go beyond skipping a bill or neglecting a tax payment.
Many entrepreneurs who’ve spent years tirelessly professionalizing their businesses and generating wealth pay considerably less attention to protecting their personal wealth and family affairs.
But operating an unstructured family office can result in multiple risks, including poor oversight and, in turn, a misuse of funds.
Inefficiency can also drain your money and may be exacerbated by:
- High employee turnover
- A surplus of “busywork” rather than work that advances the family’s mission and goals
- Inefficient reporting
- Excessive use of employee sick time or leaves of absence
- A backlog of work
- Unnecessary tension between family members
- Legal and regulatory issues
If your family office is always “just getting by” or buried in busy work, it won’t have time to proactively find opportunities to cultivate your wealth, reduce risks, and establish advanced planning strategies that can save you millions of dollars and support your family in achieving your longer-term goals.
Benefits of Running Your Family Office as a Business
The most significant benefits to treating your family office as a business are financial. Essentially, the more control you have over your office’s operations, the more money you’ll reap and keep.
Here are some of the additional benefits:
For many families, this is the greatest benefit to operating their family office as a business — a well-managed family office can provide families the freedom to enjoy life with limited financial stress and fewer conflicts among family members. Imagine having the peace of mind to focus on your family and their future.
Now that’s the fun part of being wealthy!
Well-run family offices not only help you reduce stress but can also help you develop clarity and certainty with regard to where your money is and where it’s going.
Accurate, Timely Reports
An efficient family office produces accurate and timely reports that give your family the transparency and insights they need to make good and timely financial decisions. Consolidated reports can help the entire family and family advisory team handle potential issues across family entities and generations before they become disasters.
This equates to critical abilities, such as:
- Spotting tax or legal issues quickly
- Devising tax savings strategies
- Conducting efficient family meetings with legal, tax, accounting, and investment professionals without wasting time or money on irrelevant issues
Better Overall Success
For your professional team, this is their career. When they find your family office environment to be an enjoyable and rewarding place to work, both your team and your family win.
What Are Some of the Critical Steps in Running any Business?
Ironically, high-net-worth individuals who have successfully generated wealth through good business management don’t always apply these management standards to their most important business: their family wealth.
However, you must learn to replicate the same focus and structured approach you would take to run any of your business entities at your family office. These activities include:
- Defining clear objectives
- Organizing proper budgeting
- Devising strategies for continued growth and succession planning
- Holding regular meetings to keep stakeholders informed and engaged
- Obtaining advice from high-quality advisors
- Professionally monitoring performance
- Maintaining control over each of the functional areas that make up the business
- Implementing and monitoring policies and procedures to mitigate risk and vulnerabilities aspects of wealth management
- Fostering an environment of continuous improvement and best practices
Family Office: To In-House Hire or Outsource?
Whether you’re starting a family office from scratch or looking to restructure your existing family office, it‘s important to determine the services you expect your family office to provide in-house and the services you expect to outsource to third-party providers.
In today’s expanding global services economy, wealthy families with family offices have numerous options for purchasing personal and financial services. However, some family office functions are best kept in-house, if the family can identify capable office employees.
Skillful and organized employees can manage many of these services (e.g., recordkeeping and reporting, bookkeeping, budgeting, and cash flow analysis) to address daily financial activity at a more personalized level. By keeping these duties in-house, families have immediate and cost-efficient control over this information. You may also choose to use commercial software packages and business apps that facilitate these services.
Outsourced services encompass a wide range of activities.
Tax, legal, and insurance services often include some level of technical expertise best provided by certain licensed and independent outside providers. This level of specialization from outside experts, when supplemented with the strength of internal staff, can create the right balance. This synergy brings the best of both worlds: cost savings on lower-risk or less complicated work combined with cutting-edge planning and a degree of quality assurance for complicated or more extensive work.
One of the most significant decisions for a family office — particularly, one formed after a significant increase in liquidity — is whether to keep investment services in-house or to hire a competent outside investment advisor to oversee the portfolio. This decision may be in large part driven by the initial views of the family as properly managing the family’s investment portfolio requires a significant amount of insight, a careful allocation of resources, strong technical skills, and consistent administration (including managing legal and regulatory requirements), particularly when the investments under management represent portfolios of various family members. The family should consider hiring competent professionals to help plan for the investment of the family’s wealth and the costs and benefits of retaining this function in-house, outsourcing it to competent managers, or taking a hybrid approach. Very few families can build a successful in-house investment platform; many more have appropriately engaged outside professionals in some capacity.
However, this arrangement requires a high degree of coordination and communication between the family office and outside service providers in order to work efficiently and effectively. The relationship between the family office personnel and outside professionals must be one of mutual respect, trust, and collaboration. Family office personnel cannot feel threatened by the presence of outside providers and must be willing to share time, information, and insights to support them in their work. Likewise, the outside professionals should strive to incorporate the family office personnel as part of the team, keeping them engaged and informed of changes to policies and procedures.
The Bottom Line
A well-run family office is vital in the long-term preservation and generation of a family’s wealth. By treating your family office like a business, you can build a sustainable and successful office that serves the needs of the current and future generations of your family.
Arootah Family Office Advisory supports single and multi-family offices as well as wealthy families and their advisors with assessments, best practice reviews, and expert guidance on crucial family office services, such as insurance, charitable giving, and legacy planning. Book a free 30-minute strategy call today to see how we can support you in building a family office that runs at optimal performance.
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.