Every family business reaches a point where the business has become so all-consuming that the leaders have little time to spend on their own family finances.
That’s where a “Family Office” comes in. It’s a relatively new term and one that describes setting up a company — complete with a CEO, chief financial officer and other key players — to do a variety of items, including:
- Pay bills;
- Manage investments;
- Manage household staff and properties;
- Educate all family members on the family business.
So, does your family need such a setup?
EisnerAmper, during its virtual business summit, “Breaking the Rules: Innovation in Action,” discussed the idea with Ken Drummond, the CFO of the Johnson Co., and Laura Macca, the director of the firm’s Business Transformation practice. Macca recently worked as the chief of staff for a family office.
The conversation was moderated by Marie Arrigo, tax partner and co-leader of Eisner’s Family Office Services. Here’s a look at conversation, condensed for space and clarity.
Q: What is a family office?
Ken Drummond: There’s a saying in the industry that, when you’ve seen one family office, you’ve seen one family office. They come in all shapes and sizes. A lot of them just start off with bill paying, some of them just start off with investments, asset management, household management, and some of them are basically everything for the family.
Laura Macca: A lot of family offices start off with either wealth management or bill-paying services. And, as the number of assets and the complexity of the assets and investments grow, there’s a need for a more formal structure to help manage all these activities. And, now, with multiple-generational family offices, help with communicating and with family cohesion, and bringing the family together.
Q: What circumstances lead a family to decide whether a family office makes sense?
KD: Most of the time, it’s either that the company’s growing so large that the person’s responsibilities with business precludes them from taking on a lot of their own personal investments and their personal bill-paying duties. Some family offices are formed after a liquidation event and the deciding factor is how much time do you want to give to organizing your own finances, doing your own taxes, paying your own bills, investing your own money? Do you want to hire somebody to manage the cash that you built up from a successful business?
LM: I think the big factor is the need for privacy and immediate access (to personal information). It’s nice to have a group of people who you can immediately walk into their office or, now, call and get those answers, there’s a continuity to the people. And, also, the staff now has access to different pieces of the family puzzle. They understand the financial position, the goals, the preferences and the values of the family. So, they can really be a thought partner in those strategic initiatives.
Q: Here’s the biggest question: At what net worth do families generally think about a family office?
LM: The most often quoted number is at least $100 million in liquid assets. However, the answer can vary, depending on the services the family requires. This will determine the cost of staff and other costs, such as technology and other operating expenses. On average, family office costs can run approximately 1-2% of liquid assets.
Q: Talk about the difference of joining a multifamily office or a single-family office?
KD: If you’re just starting out and you want to save expenses, you would probably go with the multifamily office route. Because, this way, you’re using the resources that have already been set up and are being used by other families.
Q: Give us some idea how the family office can be structured?
LM: With larger family offices, there’s the typical CEO, CFO and (chief operating officer), and also property managers. What I see more are project management teams to help implement all these initiatives. And, also, educational units to help educate and mentor future generations.
There’s always a discussion of what services you outsource and what services you keep in-house. A lot of family offices decide that they really don’t have the resources to keep up with the latest tax law planning, so they like to outsource that. They might have their own legal staff in house. But, when it comes to a specific area or transaction, they work with outside resources to complement their inside expertise.
Q: Talk about cybersecurity concerns?
LM: I think it’s an area that a lot of family offices haven’t invested in before. But, for obvious reasons, they are a prime target; there’s significant wealth. I think a lot of family offices haven’t invested in IT professionals, policies and procedures or educating their staff on best practices.
Q: Give us one takeaway?
KD: You want to think about how much you want to spend, how much access you want to have for these people, how much privacy you want and what tasks do you want them to do for you?
LM: I think just the importance of technology having a seat at the table, literally and figuratively, when you form a family office, and as it continues to grow. It’s important, as you implement those strategic objectives, to keep technology in the forefront and to have a plan and phases. It doesn’t have to be a lot of cost upfront.