Article
What’s a family office and how should it work to protect you? One of the nation’s top lawyers shares his priorities.
Source: Worth
Article
08.07.10
The family office, or FO, is a private enterprise created to manage the affairs of wealthy people and families. Those affairs include: investments, business matters, family governance, philanthropic interests, taxes, estate planning, risk management, cash management, coordination of professionals, lifestyle and concierge services. There's a saying that if you've seen one family office, you have only seen one family office meaning that every FO is different because the needs of their clients are different. Still, FOs do share certain basic guiding principles and identical major concerns. They include:
Protecting a family's nest eggs should be one of the highest priorities of every FO-the highest, I believe. The FO must focus on minimizing risk exposure. Risks that must be mitigated include: employment practices, medical and health, income tax, estate tax, damage to reputation, divorce. Financial and nonfinancial risks should be given equal levels of focus. For example, how do you put a value on making sure that your children grow up to be honest, drug-free, hard-working members of society?
Of course, insurance coverage needs to be reviewed periodically, but this task is really an administrative function and even the best insurance can't protect against every type of risk. Each family has a unique risk-exposure profile that needs to be initially evaluated and periodically reviewed. If, for example, a family has a special-needs child, a hereditary propensity for certain diseases or a concern about intrafamily disputes causing disharmony and expense, then structures can be established to reduce these risks.
Other risks are more generic but also need to be anticipated. What if there's a terrorist attack – how will family members communicate with one another? How will they access financial assets?
To minimize risks associated with personnel departures, more than one person should be able to perform key functions within the FO; no one should be indispensable. Furthermore, redundancy reduces the possibility of fraud and unintentional errors.
FOs generally fall into three categories: Some are accounting firms that either run the offices directly or have created separate FO companies to do so. Other FOs specialize in financial planning and investment advisory services and outsource work such as tax and accounting-related services. Yet other firms specialize in lifestyle and concierge matters and outsource technical and professional services.
Which firm or combination of firms to use depends upon many factors, including the complexity of the issues facing the particular family office, the existence and competency level of current FO staff, the business sophistication of the clients and their interest in being involved in the activities of the FO.
No matter who the specific personnel are, the client needs to determine how the office will be managed and how much involvement he or she wishes to have.
Fees and costs vary depending upon clients' needs and staffing infrastructure. Accounting related FO firms and lifestyle/concierge type firms may charge fixed fees, hourly fees, or a combination. Financial-related firms generally charge a percentage of assets under management. The most efficient strategy is to determine the basic services to be performed and, to the extent possible, have these services performed either by full-time employees or outsourced on a negotiated fixed monthly or quarterly fee basis. The challenge is to know when a particular issue is not routine and needs to be outsourced.
There is always a balance between the need to have expertise within the FO and the cost of such expertise. I suggest a cost-benefit approach: Most tax questions, for example, can be answered by the FO's certified public accountant rather than a tax attorney.
These are broad strokes, and specific quandaries inevitably arise. In future columns, I'll be delving into some of those specifics.