Essential Questions to Ask Before Starting A Single Family Office

Opening a single family office (SFO) seemed like the logical next step for one family after they had sold their family business. Peer families and trusted advisors suggested they open an SFO. They visited several SFOs and set about building their own team. Rushing into that decision didn’t turn out well, however. It wasn’t until later that they realized they weren’t clear on why they truly needed the SFO, and family members had different expectations about its capabilities. After several family members stopped using the SFO because it wasn’t meeting their needs, the expense of the SFO for the remaining family members outweighed the benefits delivered. The family ultimately decided to wind down the SFO just a few years after it opened.

For many families, the allure of starting an SFO after a major liquidity event is powerful. They’ve seen other successful families take that path and assume they should do the same. Or maybe they want to start an SFO because the family’s needs have grown beyond what their operating business can handle. But in our experience, too often, families decide to start an SFO without adequately thinking through important questions that may determine its success in the long run.

That doesn’t mean an SFO is doomed to fail for all families. We’ve seen extraordinary SFOs that help families immensely. The key lies in ensuring that the family does the right upfront work to lay the foundation for success. As advisors, you can help your clients avoid an SFO failure by helping them be thoughtful about why they’re starting an SFO and aligning their individual and group expectations upfront. Through our experience helping families design SFOs, we’ve created a framework for ensuring that the family makes the right decision for them. Here’s what we’ve learned about setting up an SFO for long-term success.

Readiness

Too often, families planning for an SFO charge right into questions of staffing and logistics. We’ve found an effective way to ensure that the family isn’t skipping essential foundational questions is by starting a healthy conversation using the guided conversation prompts in “Single Family Office Readiness Scorecard,” Ask family members to run through these questions to see if they’re on the same page.

If you see lots of green and yellow in the answers, they’re probably in a good place to proceed to next steps. They may need more time to align if there’s an abundance of red or gray (or a wide variety of responses). The scorecard is just the starting point, however. You can use their answers to guide an honest and constructive conversation about the decision before making any significant moves.

Evaluation of Answers

Here’s how to use some of the answers to the key questions below to help the family think through their decisions:

Why do you want an SFO? What’s motivating you individually and collectively? This is the first and, arguably, most important question to answer. Each family member must do some soul-searching and be as honest as possible with the answers. Before talking about the great new services that an SFO could offer, dive deep into what problem the family is trying to solve or the opportunity they’re trying to seize. What’s the driving force behind “why” they think the family would benefit from an SFO now? Be as clear as possible about how much connectivity (or not) they expect an SFO to have with any existing shared ventures, whether it’s an operating company, private investments or shared property. Once each family member has articulated why they believe the family would benefit from an SFO, they’ll need to see how well the reasons match up. There doesn’t have to be a perfect overlap, but there must be enough in common to see the merit of establishing something together. (You can advise that they think of starting up an SFO just as they would consider starting up any new business—are they ready to invest and partner in a new venture together?) This open-ended conversation aims to determine whether the participants share the same vision for an SFO.

Individual family members may assume they’re all broadly aligned on the benefits of an SFO, but in our experience, such assumptions are often wrong. You can advance the conversation by asking individual family members to rank their three motivators. Valid answers could encompass any of the following:

1. Steward our family’s wealth by diversifying our assets and holdings
2. Coordinate our legal and financial services through a trusted, central office
3. Proactively prepare for the evolving needs of our family as it grows
4. Provide a shared platform to support next-generation members (for example, with new ventures)
5. Increase the financial/investing acumen among family members
6. Serve as a major entity within our enterprise for a family member to lead
7. Provide career opportunities for family members
8. Save costs by bringing services in-house and taking advantage of economies of scale
9. Serve as a vehicle to improve our community (for example, through impact investing)
10. Take care of the varied needs of our family (for example, travel and security)
11. Emulate another prominent family who’s benefited from an SFO

To help compare apples to apples, ranking their top three motivators will provide a shared language in their joint discussions. Why did you choose X and not Y? It may even elicit surprises, “Oh, I didn’t imagine the SFO would do Z.”

The end goal is to align on a collective purpose for an SFO. Given the scope of possibilities for an SFO, helping them align on why they’re taking this step to pool resources and invest together is essential for success. It has to be about more than return on investment, which can be found through other highly rated investment service providers. When designing SFOs with our clients, we always start with purpose and principles (the hard “why” questions) instead of what people naturally want to start with (the easier “what” questions—like what kind of services the SFO will offer).

Are the personal relationships among the family leaders healthy enough now (before starting an SFO)? Too often, an SFO is glamorized and viewed as a white knight who will save the family enterprise. If there’s already conflict or politicking in the current system, that won’t miraculously disappear once the SFO is up and running. Instead, some existing dynamics will likely transfer to the SFO. For example, if a brother and sister both insist on staying on their family business board because they have fundamental trust issues with one another, governance of the SFO is likely to become another front in their ongoing battle.

The good news is that an SFO will have a dedicated team of professionals with high intelligence and emotional quotients to help resolve such issues (rather than the Good Samaritan work of an employee in an operating business). While the SFO team will likely experience growing pains before hitting its stride in managing family dynamics, part of a successful SFO team’s scope will be to navigate a variety of perspectives and try to find alignment across the group.

Are you comfortable sharing your private information with the SFO? Ask family members to rate their answers on a scale of one to five, with one defined as “I’m fine being fully transparent,” three defined as “I’d like to approve what’s shared or not,” and five defined as “My personal information is for my eyes only.”

Consider how the SFO will fit into the pre-existing culture of the family and family enterprise.

One way to help them answer this question is to ask what they wouldn’t want others in the family to know. For example, how would they feel about sharing their personal finances or estate plans? What about legal situations, such as if they ever need bail or are involved in a lawsuit? Defining expectations about information sharing and boundaries upfront helps. Families should be aware there’s always a potential risk for spillover consequences whenever they consolidate such sensitive information.

Another way to test the response is by asking them to consider how they’d feel if, over time, there were widely different levels of wealth among family members. Immediately after a liquidity event, they’re more likely to have relatively similar levels of wealth. But after that, some family members may engage in new, risky ventures while others are more conservative. Are they comfortable with others knowing that eventual disparity in wealth? How might emotions like envy affect the family or the SFO if they find themselves with different economic means? How/would this impact how they view and pay for the SFO’s services? While you don’t need to scenario test every possible outcome, it’s important to consider how the family will navigate questions of perceived changes in fairness or equity.

Are you clear on how the SFO would be structured for joint ownership? Will the SFO structure be “opt-in,” “opt-out” or “all in”? Consider how the SFO will fit into the pre-existing culture of the family and family enterprise. Do they have a history of “all in” regarding other businesses or assets, or do they fiercely value independence? How much flexibility for choice do they want to build into the SFO?

Look deeply at the family’s history and what other experiences have taught them. Do shared assets or ventures tend to bring them together or apart? Are they interested in connecting more of their net worth, some of which may be in illiquid assets? All options have benefits and tradeoffs. You can help them figure out what best fits their family.

For example:

• All in (everyone has to be part of the SFO for it to work). This model results in a shared enterprise that creates connectivity. It can be helpful if the family has an operating business and wants to share joint tax resources. The drawback is that it indefinitely binds the family, which works well until someone wants out.
• Opt-in (100% voluntary choice to join the SFO). This model provides a degree of independence and results in explicit support for the SFO, knowing that each member actively chose to participate. However, if some family members initially join and then exit, it may result in an unsustainable (and unexpected) financial burden to those who remain.
• Opt-out (all presumed in unless specified). This is a hybrid model that allows some degree of choice while still keeping the majority together.

In all circumstances, it’s important to acknowledge that it will be up to the SFO to prove its value to the family as its clients. People will vote with their feet if they see the value the SFO provides (or the pain in the absence of one).

Are you aligned on what types of services the SFO must provide? An integral part of the design process will be determining what services the SFO will provide. First, the family needs to align at a high level what types of services they want to provide: investment management, financial/tax/estate administration, risk management, governance, education and development and concierge support. Second, they should prioritize specific services in each category based on what’s essential to provide right away, what can be added once the SFO is more settled, what are longer term “nice to haves” and what they don’t want to include.

The type and level of services will impact the cost of the SFO.

Expect this part of the design period to be a significant lift as the family articulates what services they need versus want. Finally, once they’ve settled on the full scope of services, the third step is to critically examine it. Consider: Can one SFO realistically meet all the needs and expectations across the family? Is there any editing or expectation resetting to be done to set the SFO up for success?

Are you ready for the financial and non-financial commitment of an SFO? How do the services desired align with the financial commitment you’re willing to make? The type and level of services will impact the cost of the SFO. Will there be investment services that can generate profit and fund the SFO? Or will the SFO intentionally be a cost center? How will the family collectively provide the seed money for the SFO? And once the start-up expenses are covered, how will they fund the SFO on an ongoing basis? Many families set an annual “membership fee” for services for their shared benefit. Additional expenses may be covered individually, akin to a country club model, so if anyone desires special concierge services, they’ll want to factor this into their planning.

When considering the financial commitment, we recommend a 5-year runway to allow the SFO time to properly launch, work through inevitable twists, iterate based on feedback received and build a rhythm. Some families opt for a 3-year test drive; others commit to five years from the start. Somewhere in this range is reasonable; we would caution against much less. Similarly, consider the non-financial commitment to the team employed at the SFO, as they’ll need the family owners’ time and guidance, not just their money.

How will decisions be made in the SFO? Will there be a leader, and if so, who will that individual be? What happens if two or more individuals disagree? Most SFOs that serve more than one nuclear family have a non-family executive who leads the SFO and multiple family owners who own a share of the SFO. The executive generally reports to an SFO board, usually comprised of at least a majority (if not exclusively) of family members and will need insights from the family to truly meet the needs of its owners. Along the way, expect a delicate situation or two to arise in which the SFO executive may need wise counsel from someone within the family to navigate it. How will decisions be made? What if two owners have a major conflict? Is the executive expected to step in or stay out of it? Should the SFO executive bring the matter to the whole board (potentially airing dirty laundry) or report up to a “first among equals” family member (for example, the chair of the SFO board)? The clearer the family can be from the onset to set the executive up for success, the better.

Under what circumstances would you mutually agree to fold the SFO? Before a family commits funding to the SFO, they should align on what criteria would make them agree to fold the SFO. What happens if the SFO doesn’t generate profit in a year or longer? What if it doesn’t break even or is a cost center? What if a substantial family conflict arises? Are they committed to the employees and their compensation? (After all, top talent must be well incentivized and compensated to stay.) Clarify the potential scenarios that would make the family consider folding an SFO. Be as specific as possible (include timelines and performance considerations) so you can compare notes with other family members before everyone commits to starting an SFO.

Avoid the Yacht Effect

We’ve seen many good reasons to open an SFO. But advise your clients not to fall victim to what we call the “yacht effect.” That’s when you see your peers have beautiful yachts, so that must mean you need a yacht, too. You even go aboard a couple of yachts for inspiration. But after you’ve built your brand-new yacht, hired a crew and set sail, you realize you get seasick and don’t actually enjoy being on the water. But now, it’s an expensive asset that’s depreciated significantly as soon as you took ownership (like a new car). And what do you do with the crew you hired and assured employment for? Instead of being an enjoyable value add that improves family members’ lives, it’s now a source of regret. The lesson is to make sure your clients need a yacht beforehand. An SFO can provide valuable services to a family, but only if they’ve done the work to make the right decisions during the process to set it up. They need to look out for signs that they’re not ready to start an SFO. See “Red Flags,” this page. We’ve seen SFOs be the MVP of a family enterprise or the bottom of the barrel. As advisors, you can help your clients answer the questions that will set them up for success.

Red Flags

Look out for signs that the family may not be ready to start a single family office (SFO):

• Privacy. Are family members uncomfortable sharing their wants and needs because they’re concerned about judgment? That sense of judgment and scrutiny will only increase, not decrease, once they’re jointly committed to an SFO.
• Willingness to put the work in upfront. Are they unwilling to invest the time it takes to wrestle with questions about the design of their SFO? If they’re unwilling to invest time in design, they won’t want to invest the time they need to govern a family office and make it successful.
• Time commitment. Are they only willing to commit to funding the SFO for one to two years? If they’re going to do it, the SFO needs a long runway to achieve proof of concept. The staff will also need the family’s commitment to articulate what the family wants in the SFO, how it can provide valuable services to them and what their likes and dislikes are. To be effective, there’s a significant upfront investment, both financial and time/energy (just as there would be to start any new business).

Originally published in Trusts & Estates Magazine, July/August 2024.