Operating a family office

The purpose of a family office is to organize and centralize the management of a family’s personal and business financial affairs, and to maintain the financial house in as good an order as that of a well-run public company. The origin of the family office concept came from extremely wealthy families, with net worths in today’s dollars well in excess of $100 million. The family office was frequently a separate entity, with employees ranging from a CEO or CFO along with a staff of bookkeepers and personal assistants that could do everything from monthly financial statements to booking travel and personal care appointments. Many even employ their own chief investment officer.

In a traditional family office, no service or calling is beyond the scope of the office’s services. Employees may be called upon to pick up the car from the auto dealership or bail a troubled family member out of jail. At times, the CEO of the family office acts as the CEO of the family, sans the parenting. Although, if you speak to those at the helm of some family offices, you’ll hear stories of the pseudo-parenting and mentoring that is frequently part of the job as the relationships build.

Many of these wealthy families have made their money from success in business. Typically, the family office staff will not be involved in the operations or even the accounting for the business. They will, however, be extremely familiar with the business as it relates to the family. The family office will stay on top of loan guarantees; make timely reporting to shareholders and the family office; deal with tax planning or other benefit planning as it relates to family members; obtain current valuations of the company; and make sure that the value of the business is enhanced by smart family and succession planning for that business. The family office may provide reports from source data regarding investment rates of return on family-owned businesses, real estate and other privately run businesses or deals. The family office will also assist with acquisitions and sales of various business entities through the lens of the family investment objectives and best use of talent and resources.

In some cases, it is the family lawyer or accountant who sits in the chair of the executive of the family office. Clearly, it is a role for an educated, well-versed financial executive, and not a salesperson. This person should be knowledgeable in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes, investments and risk management. In addition to their own personal experience and knowledge, this person should be able to build a team of subject-matter experts in any area to support the family’s needs. For example, some family offices own property, businesses or investment accounts overseas. Unless this represents a majority of the family’s interests, the CEO of the family office would not necessarily need to be an international expert, but should positively have experts on the family office team who are heavily experienced in such matters.

 
Form and function

The traditional family office may or may not actually manage the financial assets. It’s worth noting that asset oversight is different than asset management. Oversight typically involves setting an allocation through coordination and working with investment specialists and money managers, and not actually selecting the individual investments. The family office may perform due diligence on investment managers and consultants, but not oversee the actual day-to-day management of the assets. Those that do get involved with day-to-day asset management are typically those whose fortunes were built by skillfully managing investments and also those that are so large that they built or acquired their own investment management staff.

The common tasks that a family office may oversee include:

• Comprehensive oversight of family assets;
• Contemporaneous recordkeeping of all financial assets;
• Overseeing the management of property and other real asset holdings;
• Preparing monthly financial reports to show cash flow, income, gains and losses, and a statement of assets and liabilities;
• Coordinating the advice and services received from all of the clients’ other professionals;
• Being responsible for implementation and ongoing management for each matter under oversight;
• Personal concierge services to the family members for personal or business matters;
• Family and entity governance and carrying out the wishes of the family matriarch or patriarch;
• Responsibility for the design and maintenance of the entity structures used to own assets;
• Responsibility to see that the family estate plan is well designed and governed accordingly; and,
• Oversight of philanthropic activities, foundations or gift trust accounts established.

Each family has its own set of unique issues, and each family wants to delegate some or all of these matters. But in this traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interests or other profit-making activities. The entity’s sole purpose is service to the family.

Also common — and the likely form for your accounting firm — is what is known as the multifamily office. The MFO is basically a professional services firm that delivers family office services for more than one family. The origin of the multifamily office comes from traditional family offices where the family decided to use their team to help others for a fee. But beyond a traditional family office that decides to serve others, many for-profit enterprises have flourished in the multifamily office model, including progressive law and CPA firms.

The multifamily office frequently serves families that are less wealthy than the single-family office, but essentially performs many of the same critical functions with respect to the financial side of the family life. For the accounting firm with clients whose net worth exceeds $25-50 million or so, this model offers lots of potential to elevate your clients’ experience. The firm is probably deeply involved in many family financial matters and often has a strong personal relationship with the founding or senior members of the family who may have created the wealth.

Like most firms with intergenerational client relationships, the accounting firms that serve these types of clients are frequently larger firms with some old-school partners who want nothing to do with matters beyond accounting and tax. This is another matter that really falls into the category of practice management. But fortunately, as aging partners retire, the younger generation may see the benefit of delivering elevated levels of service to the firm’s better clients.

 
Capabilities and credentials

A multifamily office is usually a for-profit entity. And as such, before you as an individual or as a firm decide to offer these services, you must document your services, compensation methods, and the required licenses.

Many CPA firms will often want to track their time and simply send bills each month based on the time spent. While this can work, it’s not the most common method of compensation. More common than hourly would be flat fees for a list of covered services. Some firms will also add fees for assets under management or overseeing and helping to select the actual asset manager. If your firm intends to offer asset management also, a separate entity may make sense.

Whether your family office fees are based on hours or flat-fee billing, the issue of licensing will still apply. CPAs can avoid registration as an investment advisor if their investment advice or financial planning advice is merely incidental to the practice of public accounting, and not really advisory in nature. Naturally, this is a very subjective standard, and many CPAs decide not to register for family office services. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel as to whether registration as an investment advisor would make sense.

Don’t let the name “registered investment advisor” fool you. The registered investment advisor license and registration is the same license that covers all financial planners. You may be deemed by regulators to be practicing investment advice and financial planning to the extent that you get involved in matters such as shaping goals and objectives and providing advice that is more than incidental to the practice of accounting for the family wealth. Registration as an investment advisor will also subject you to the same rules about compensation, marketing and audit as other financial services firms registered as RIAs, requiring a compliance professional or consultant.

Some multifamily offices do oversee or manage assets for their family office clients. Offering these services is easier if you’re already a larger investment advisory firm with experienced asset managers on staff. This isn’t the typical profile of many smaller CPA financial planning shops, and these are not the types of clients where you should be cutting your teeth in the investment advisory business. For larger firms with more sophisticated investment capabilities, this may be an ideal client.

I am not a fan of affiliating with a firm that already serves the types of clients that you are seeking to serve — especially if it involves any sort of fee sharing. In my opinion, you and your client would be better served by pursuing subject-matter professionals in the areas you need help. This will shorten your learning curve, cause fewer mistakes, and allow you to take advantage of a seasoned staff already in place. Your fees can be for the oversight, manager selection, manager evaluations and consolidated reporting of investment allocations and results.

Whether your CPA firm has a vibrant wealth management division or not is irrelevant when it comes to offering family office services. The family office role for a CPA firm is just like outsourced CFO work, except for a family rather than a business entity. As that outsourced CFO, you will rely on other outside subject-matter experts, and coordinate their efforts so that nothing falls through the cracks.

Should you choose to work with another firm that calls themselves a multifamily office, be careful. I’ve seen many financial advisors who want to move up market simply call themselves a family office without the experience, desire or services to warrant that title.