Is Your Family Office Built for the Future?
Executive Summary: Family offices can provide a number of benefits, including privacy, customization, and having your own team to handle a wide range of services, such as guiding family philanthropy, managing shared properties, or even managing household help. Successful principals in hedge funds, private equity, real estate, and tech entrepreneurs, and even family businesses owners selling their firms, have recently created an explosion in the number of family offices. While most single-family offices are set up with good intentions of continuing to keep the family (and its wealth) close, they face some unique built-in tensions that family businesses don’t have that leave them vulnerable in the long-term. This article addresses five key decisions that family offices need to make if they want to set themselves up for long-term success.
Two years after their father died, Paul and Hank knew the time had come when they should break-up their family office. At their father’s insistence, the family’s substantial financial assets had been invested together. As their father’s business was the source of the family wealth, the brothers felt an obligation to build a single-family office together. But investing decisions soon became a source of conflict. Decision-making authority was murky; each brother lacked transparency into what the other brother was investing in and why. How aggressive to be on tax strategies became a matter of great disharmony.
Seeing the discord, the brothers’ siblings, spouses, and children tried to steer clear of the family office completely. Their father’s well-intentioned goal of keeping the family close after his death ended up backfiring. The family office was disbanded, and the brothers and the entire extended family drifted apart.
Family offices can provide a number of benefits, including privacy, customization, and having your own team to handle a wide range of services, such as guiding family philanthropy, managing shared properties or even managing household help. Successful principals in hedge funds, private equity, real estate, and tech entrepreneurs, and even family businesses owners selling their firms, have created an explosion in the number of family offices. A 2019 study by Campden Research put the number of family offices at 7,300 (up 38% from two years prior), managing a total of almost six trillion dollars. What was once the province of a select few, like the Rockefellers and Vanderbilts, has become central to the investment world. Both Single-Family Offices (SFOs) and Multi-Family Offices (MFOs) have been created to meet the investment and support needs of an ever-growing number of families.
Most of these family offices are in their relative infancy. A global survey by UBS and Campden Wealth showed that 68% were founded in 2000 or later, with 35% starting since 2010. That means most family offices are navigating or approaching a critical generational transition for the first time.
Without further attention to the challenges these transitions will bring, we are skeptical of how long many single-family offices will endure. As we’ve advised leading family enterprises over the past 15 years on how to create long-term success, we’ve seen that family offices are even harder to sustain than family businesses. The forces that hold a family business together are not always present in family offices. But that doesn’t mean they’re doomed to failure. Here’s what you need to know to build and sustain your family office so it will last.
The Built-In Tensions of Family Offices
Family offices are often established in a wave of enthusiasm. An individual or family has been successful enough to generate an excess of $100 million in wealth (a rough guideline for assets under management that justify the expenses of a single family office) and the family chooses to invest that together through a family office. But family offices face some unique built-in tensions that family businesses don’t that leave them vulnerable in the long-term:
Lack of an emotional connection.
Protection versus agency
The Key Decisions Family Offices Need to Make
As we’ve advised leading family enterprises, we’ve seen that the power that comes with ownership can make or break a family enterprise. The owners of an enterprise have the right to make decisions in five key areas (we refer to them as the 5 Rights of Owners) that no one else can without their permission. How the owners of a family office make these choices will shape long-term success of both the office and the family. Here are the key questions to consider:
Design: How will you own your assets together?
Design: How will you own your assets together?
Decide: How will you structure governance?
Value: How will you define success for your family office?
Inform: What will — and won’t — you communicate with your family?
Transfer: How will you handle the transition to the next generation?
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Originally published on HBR.org, 26 September 2022.