An insiders perspective on traditional family offices

In our last post, we described the basics of what a “Family Office” is. In this post, we’ll go over in more detail the traditional family offices: what they are, how they serve families, and their unique pros and cons.

To review traditional family offices, an embedded family office (“EFO”) is the term used for a family that uses their operating business staff to assist in managing their personal affairs. A single family office (“SFO”) is a dedicated team of professionals, separate from the operating business, that work exclusively for a single family.

Turning first to an EFO – a family owned business that engages staff to perform certain personal tasks that are generally outside of the business’ standard operations. At first, this option may appear cost effective, but the “staff cost” may be significant. A prime example of this appears at tax time. The company’s highly qualified and trained staff that prepare the company’s books, deal with auditors, bankers, etc. are now responsible for the family’s personal tax returns, holding companies, trusts, and/or foundations. The already busy CFO now has the family’s tax returns on the corner of their desk. Or the bookkeeper who is responsible for the company’s payables and receivables is now paying the family’s personal bills. While appearing cost effective, the true cost of an EFO must include the distraction by non-essential tasks, knowledge of personal family details and the burden of additional responsibilities.

Another EFO consideration: once the business is in successive generations (siblings and cousins working together), how do you balance the use of company staff for personal tasks? How do you ensure the privacy of their personal details, expenditures, etc? The intangible costs are likely to negate the dollar cost savings – if not now, certainly in the future.

Moving on to a SFO – staffed by professionals with unique skills who assist families in not only managing their finances, but who are partly responsible for the personal well being and growth of multiple generations. The lives of the wealthiest become unimaginably complicated in ways that many would not understand. Ensuring that the multi-generational beneficiaries of wealth lead healthy and productive lives, and can properly steward the wealth for years to come is paramount.

A traditional SFO is a team of professionals that quarterback the family, not only in administering their day-to-day lives, but also in providing the family with insight and guidance. Managing a hundred-million-dollar business is very different from managing liquid wealth of that scale. As the matriarch of a SFO once stated, “managing our family and our wealth is our business”. Although a SFO uses dedicated staff – lawyers, accountants, investment professionals, administrators, etc., technical skills are often not enough. A successful SFO needs people with emotional intelligence, patience and unique interpersonal skills. While SFO staff get to know very personal family information and often build close and trusted family relationships, they fully understand that “this is the business” they are in. However, few families can afford the SFO cost in terms of the right professionals, facilities, infrastructure, privacy, security, etc.

Of course, this isn’t how all wealthy families manage their lives and money. In our next and final post in this series, we will outline the up and coming non-traditional family office – the multi-family office.

Our estate planning posts consider estate planning issues at a high level. Before you commence any form of estate planning, please consult with tax and legal advisors