Emerging Topics in Family Offices

Emerging topics confronting family offices include direct investing versus investing through funds; compensation arrangements for family office employees; preserving the family-office exemption under the Advisers Act; succession planning; and taking precaution against cybersecurity threats. While interest in direct investing over fund investing is growing among family offices, direct investing is typically higher risk and requires heightened knowledge and hence in-house diligence and other resources. To attract and retain talent, family offices face pressure to increase salaries and bonuses, as well as offer more attractive longer term incentive arrangements such as deferred cash, or other profit-sharing arrangements, such as carried interest and incentive fees, that vest over time as well as offering internal talent the right to co-invest in harder to access illiquid investment opportunities in which the family office participates. While family offices can take advantage of the exemption from Advisers Act disclosure obligations and attendant operating costs, the family office needs to be vigilant to properly structure compensation and investment sharing opportunities so as not cause the family office to lose its exemption. In the long term, family offices need to develop a succession plan where the younger generation is educated and trained both in the disciplines of investing but in leadership and communication so that the family and staff outside the family can work seamlessly in a complementary fashion. Family offices may be particularly vulnerable to cyber threats because the individuals who use family offices may be in the public eye, and it is therefore imperative that family offices put in place best practices to reduce the chance of a successful cyber-attack. While there is no “one size fits all” model, family offices are well advised to consider how best to address these five emerging family office topics to insure their long term success.