Single Family Offices - all you need to know

Author

Mr FamilyOffice
November 17, 2023

Single Family Offices - all you need to know

We’ve got to newsletter #7, it’s time to get back to basics and talk about single family offices (SFOs)

This newsletter covers the core roles of SFOs, their functions, the SFO archetypes and finally a little on my journey in recent years 

So what is an SFO? In short, it’s a private wealth management firm supporting a single affluent family

A perennial hot topic is how much do you need for an SFO. We could debate this all day (and feel free to do that on Twitter) but that’s a topic for another newsletter. For what it’s worth, The SFO Alliance (an organization for single family offices to network and share best practices) requires families to have a minimum AUM of $400 million to become a member

SFOs manage investments, tax planning, legal support and other financial matters

Its core roles are:

  1. Wealth preservation and growth

  2. Financial Planning

  3. Succession Planning

  4. Administration

But first, let’s look at the functions of a model SFO:

At its core, the family board orchestrates overarching strategies and oversees the CEO, and top executives, including the COO, CFO, CIO and Legal Counsel. The investment teams, spanning venture capital, private equity, alternative investments, financial securities, real estate and others, navigate wealth growth and preservation. Portfolio management and the back office support the investment teams and report to the executive team

Depending on the family, certain functions may be outsourced. In cases of high levels of outsourcing, the structure may resemble a Virtual Family Office 

The typical size of an in-house SFO team is usually related to the level of Assets Under Management:

Let’s take a closer look at the core functions

🛡 Wealth Protection and Growth:

Family offices balance the imperatives of wealth preservation and growth

There is growing evidence that SFOs are shifting toward a growth mindset, but wealth protection remains fundamental for family offices

One of my favorite quotes from a family office principal; “we don’t want to get rich, we want to stay rich”

Wealth management involves:

Deal Sourcing: Sourcing optimal deal flow, collaborating with other SFOs, Multi-Family Offices (MFOs), Private Equity, and Venture Capital entities

Due Diligence and Deal Evaluation: Rigorous examination and assessment of potential investments to make informed decisions

Risk Management: Continuous vigilance and monitoring of investments and market dynamics to identify and mitigate potential threats

Diversification Strategies: Implementing strategies to ensure a balanced and resilient portfolio

Estate Planning: Creating trusts and legal structures to perpetuate wealth within the family, shielding it from external threats such as errant family members, former spouses and tax authorities

Insurance Planning: Safeguarding assets through insurance planning

🗒 Financial Planning:

Family offices are responsible for coordinating a range of tasks:

Investment Management and Strategies: Devising and executing effective investment strategies to preserve or grow the family's wealth. This includes planning around diversification and risk assessment

Tax Planning: Optimizing tax for both individual transactions and the structural efficiency of the family office itself

Cash Flow Management: Cash is the lifeblood for any business and that includes family offices. Cash and debt must be managed to ensure that commitments can be met including; investments (often including a buffer for opportunistic deals), capital calls, distributions, operational expenses, taxes etc.

Estate Planning: Developing comprehensive plans to preserve wealth across generations

Financial Reporting: Both internal reporting to support management decisions and statutory reporting or other third-party reporting

Philanthropic Planning: Facilitating strategic philanthropy aligned with family values. This can include impact investing

👨‍👩‍👧‍👦 Succession Planning:

Easier said than done - only 63% of US FOs have a succession plan in place

That’s a shocking 37% of family offices without a succession plan

Every responsible FO should help plan the smooth transition of wealth from one generation to the next. They should collaborate with legal and tax professionals to minimize estate taxes and preserve wealth

Financial education is key. The next gen should be prepared to responsibly manage and handle inherited wealth and must learn to make smart financial decisions

Instilling a sense of financial stewardship is crucial to prevent wasteful spending and supports sustainable wealth growth

📋 Administration:

Wealthy families often appoint EAs and a chief of staff to run their household, covering both the mundane and the finer things in life. The family office often oversees these administration tasks:

Hiring and Firing Domestic Staff: Ensuring a reliable and efficient household team

Paying Bills: Managing financial obligations seamlessly

Scheduling Appointments: Coordinating the family's busy calendar

Booking Travel and Vacations: Supporting travel and experiences

Shopping and Tickets: Handling the luxuries and indulgences

Single Family Office Archetypes

The structure and functions of SFOs show common traits - however, the focus and objectives of an SFO can differ significantly. An SFO may be influenced by the family's lifecycle stage, as well as its complexity and size.

1/ The Founder’s Family Office

The starting point for most family offices

  • Family office created after founder's financial success

  • Founder drives operations and retains control

  • Often embedded in a family business (not a good idea)

  • Major challenges: transitioning ownership to next-generation

2/ The Administrative/Compliance Family Office 

When professionalization and formalization kicks in

  • Coordinates and records assets and wealth planning needs

  • Oversees tax returns, banking, insurance, and service-provider relationships

  • Services include tax payments, estate planning, and document management

  • Often a lifestyle management angle: Concierge services such as property management, travel, jet acquisitions, private collections, gifting, insurance, staffing

3/ The Philanthropic Family Office

When the focus is less on wealth preservation and more on legacy

  • Focuses on charitable giving, impact investing, and engaging heirs for wealth transition

  • Prioritize education and planning in philanthropy, estate, finance, and family governance

  • Manages family foundations or philanthropic funds

  • Family members can use the philanthropic family office as a platform for education, involvement, and leadership development

4/ The Direct Investment and Investment Offices

When hands-on wealth creation is a priority

  • Focus is on growing the family wealth

  • Handles financial, accounting, and investment affairs of the family

  • Implementing robust reporting of investment results

  • Some investment offices focus exclusively on direct investments, acting as boutique private equity or venture capital firms

5/ The Family Business-Focused Family Office 

When the family business dominates

  • Manage owners' wealth and provide diversification to the business, addressing wealth transfer, tax, and ownership control

  • Services include advising on stock repurchase, buy/sell agreements, debt and credit management, generating liquidity

  • May support business restructuring or sale of the operating business

  • Provide financial planning, analysis, and legal, ownership, income tax, estate and gift tax planning, fiduciary planning, asset protection, and family governance

6/ The Multigenerational-Focused Family Office

The pinnacle of family offices, preserving and growing wealth over many generations

  • Services include lifestyle planning, investment and tax mgmt, estate and fiduciary mgmt, risk mgmt, financial education, and philanthropic services for a complex group of family owners from different branches

  • Some families outsource to a multi-family office for cost efficiency

  • Proactive in wealth transfer planning and has sophisticated governance systems, including family policies, committees, and decision-making processes

  • Family continuity, cohesion, and buy-in are important attributes

7/ The Fake Family Office 

(This one doesn't deserve a place on the chart)

  • Markets itself as a family office to gain proximity to real family offices and UHNW individuals

  • Trying to sell to or scam genuine family offices

  • Often fabricated track record, history and credentials

  • Found at conferences and LinkedIn hawking services or investments

(There’s a good example of a fake family office in the X highlights below)

My Journey

Over recent years I have been managing the transition of an embedded family office into a fully functioning multi-generational family office

We rely on outsourced support for various functions, but have a core investment team and functional leaders

The structure has been formalized and controls implemented. Looking back, the original structure now looks totally unfit for purpose. Embedded family offices come with all manner of risks such as litigation, control, privacy, tax, and co-mingling of investments

The original structure was not equipped to last beyond one generation, but the new structure could and should endure for several generations to come

𝕏 highlights

Canvassing opinion on how much is enough for a family office

Fake family offices deserve a whole newsletter

Not every family office experience gets a 5-star rating

📚 what to read

Never Split the Difference by former FBI hostage negotiator Chris Voss

“I realized that without a deep understanding of human psychology, without the acceptance that we are all crazy, irrational, impulsive, emotionally driven animals, all the raw intelligence and mathematical logic in the world is little help in the fraught, shifting interplay of two people negotiating.”

📻 what to listen to

I like to dip into the Business Wars podcast. The richest companies in the world fighting dirty. Netflix vs Blockbuster is a classic

📺 what to watch

My favorite movies often have a business edge. AIR is the Air Jordan origin story. All star cast, great story and reinforces the key message in business and life… equity will get you rich

📰 family offices news roundup

And finally…

After almost a year of being exclusive to X, I pulled the trigger on LinkedIn

You can find the Mr Family Office page here - come and say hello 👋

That’s all for this week, we’ll dive in again next week

If you are enjoying the newsletter, I would really appreciate it if you took a screenshot and shared on X or LinkedIn 🙏

Wishing you the best weekend possible, there will be more next week

Until then, see you on 𝕏

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