July 17th, 2023 by admin
In our newest blog series, we will discuss Family Office Best Practices. Through our 20+ years of experience working in-house for family offices and our five years working with advisory clients, we have identified a number of issues that span most family offices – regardless of the size or overall purpose of the organization.
In the first two blog posts, we discuss Family Office Structure and Staffing. Issues in these areas are often what lead Family Offices to initially seek out our advisory services. We typically address structure and staffing together, as they are closely related and both critically important. Designing these components right can do more than any other single intervention to alleviate family involvement, reduce stress, and set the organization up for success. However, for the purpose of focus and brevity, we will tackle them individually in this blog series.
Designing the Right Family Office Structure
When creating your Family Office structure, we encourage clients to start high-level even if they already have existing employees, and then work their way down to more tactical and operational considerations. That means first outlining the Family Office Mission & Vision, and then deciding upon the Legal Structure & Entity Mapping and processes for Decision-Making & Controls. In the following sections, we provide recommendations for how to approach each of these steps thoughtfully and strategically.
Mission & Vision
Having a Mission & Vision can help provide purpose, direction, and a sense of pride and unity for your organization. This is especially important for Family Offices where the demands may shift frequently and the goals may not always be clear – sound familiar?
Defining a strong Mission & Vision can help to clarify expectations, simplify decision-making, and reduce conflict among staff and family members when there isn’t an easy solution. You’ll be more likely to hire like-minded individuals who will share your values and act with the best interests of the family in mind. You’ll also provide non-investment employees – or those employees whose compensation is not dependent on the performance of the family’s investments – with a clear yardstick for success.
Think of your Mission & Vision like those WWJD (What Would Jesus Do) bracelets that everyone used to wear back in the 90s. When faced with a challenge, your employees can pause, lift up their metaphorical wristbands, and ask “What Would [Family Office Organization] do?” How would they act? With a strong Mission & Vision, they’ll have a clear framework for how to proceed, even if it’s a problem they’ve never encountered before.
Your Family Office Mission & Vision should answer the question, “Why do we exist”? Or:
- What is the purpose of the organization?
- What will it manage and do?
- Which family members are involved?
- What are the core values?
- How will members act and treat each other?
We can’t emphasize enough the importance of defining your Mission & Vision. Many Family Offices skip this step, usually because they arise organically in response to an immediate need or crisis (as we discussed in our previous blog post on the Life Cycle of the Family Office) and dive straight into tactical operations. However, by taking the time to consider your “reason for being” right away, you can avoid a lot of problems and set your organization up for long-term success.
Legal Structure and Entity Mapping
Once you’ve agreed upon the purpose of your organization, it’s time to start thinking about the structure. Before getting into questions about employee roles and business functions, you’ll need to consider the basics of how your business(es) and assets are aligned for legal and tax purposes.
When starting out, most Family Offices are structured as a Limited Liability Corporation (LLC) or Trust, or both. As the Office matures, they may evolve to become a C-Corp for the investment arm. There are pros and cons to each that impact privacy, legal liability, and your overall tax burden. The most important thing is make sure that you are aware of these considerations and are making an intentional, well-advised decision when choosing your legal structure.
Ensure you are not only speaking with your attorneys but also with your tax professionals and investment team.
Accounting and administration
Once you’ve decided upon how your business entities are structured, you’ll want to put appropriate financial and administrative reporting in place. That means setting up clean records and budgets for each entity and ensuring you have professionals managing the process and looking at the big picture. You’ll need a team of day-to-day managers and expert advisors working collaboratively to be successful – we’ll talk more about these roles in the next section and in a future blog post about staffing.
Decision-making and Controls
Establishing the right decision-making and controls is critical for promoting efficiency in your organization, while ensuring a high level of security, accountability, and trust.
This means deciding who can “make the call” and spend the client’s money with the appropriate checks and balances in place. This is especially important in Family Office businesses, where it is common for employees to have a service mindset and strong desire to satisfy the client at all costs. This attitude has many benefits, but can also result in employees trying to engage the client in every little decision, which can add to their stress levels and make the overall functioning of the team less effective.
Mapping decisions and disbursement authority
Map out who has decision rights in which areas – ideally, only one person should have final say in any decision to avoid conflicts and bottlenecks. It’s also a good idea to create levels of disbursement authority that enable staff with higher degrees of seniority to spend more money – with the appropriate approvals from Finance, of course.
Engaging external advisors
Speaking of Finance, you’ll want to consider how to take advantage of any external paid advisors like Tax Professionals, Accountants, Investment Managers, and Lawyers in your decision and control processes. This will likely mean creating steps for review and approval that involve these experts.
The experts can usually advise on how best to engage them, such as by copying them on all relevant emails and including them in important meetings. Make sure that your team is familiar with these advisors and has positive working relationships so that they can easily get their attention when needed.
Finally, know that mistakes will happen in every organization – no one and no team is perfect! But by having the right processes, controls, documentation, and professional relationships in place, you can quickly fix errors while maintaining the trust and confidence of your client.
Creating an Advisory Board
Larger Family Offices may also want to create an Advisory Board to provide oversight of their Executive Team. This body should include experts representing a variety of key functional areas, such as tax accounting, non-profit / philanthropy, and legal services. You’ll also want to have experts from the family office industry, such as a Family Office Executive from another SFO and/or a family member of another SFO.
Next Up: Staffing
We hope this blog post has given you some food for thought for designing your Family Office structure. In the next post, we’ll discuss how to staff your Family Office to support the intentional structure that you just created.
Posted in: Best Practices