Key Considerations When Creating a Family Office

Family offices are nothing new. The Rockefeller family office was founded in 1882 and is still going strong today. However, managing family wealth successfully is a complicated undertaking and starting a dedicated single family office may be one way to manage this complexity. 

Dart

Establishing a family office should be approached the same way as creating any other successful business – with a good strategic plan.

Why is the Family Office being created? 

An important preliminary step is to clarify the objectives for the family office, given that these objectives will determine its mission. There are many reasons why setting up a family office makes sense but at the root is the desire to ensure smooth intergenerational transfer of wealth and to keep the family working together toward a common purpose. Other factors include:

  • Maintain control of family assets and the decision making process;
  • Benefit from collective buying power of the family’s combined assets and access to investment, legal and tax information more effectively that any family member could do alone;  
  • Alignment of the direction, interests and goals of all family members with regards to education, communication, philanthropy;
  • Create openness and transparency to avoid misunderstandings and disputes within the family;
  • Have a dedicated team devoted to providing key services and help achieve long-term goals; 
  • Identify and manage an array of risks from investment risk to reputational risk; and
  • Preservation of privacy and security of financial and family information.

How much does a Family Office cost? 

The cost of each family office depends on a number of variables including the size of the family, the number of staff and the nature of the family’s investments. With increased regulatory and compliance reporting, set up and running costs can be high. The general rule of thumb is that a family office typically costs about 1% of the assets being administered. 

Family offices need to offer competitive remuneration packages in order to attract the top talent. Operating costs are another major factor and can include rent of the office property, trustee fees, external investment management fees and insurance premiums.

Throughout the creation and running of a family office, the most important consideration is value. The family should determine whether the benefits of the family office do justify the time and expense involved. Some small well-run offices produce an abundance of benefits relative to cost. The family needs to collectively define what is valuable and beneficial to them and ensure their family office fulfills all of their requirements whilst adhering to a pre-determined operating budget.

Who will the Family Office provide services to? 

Family offices are most often established by founders of successful businesses to serve them and their children. Over time, the children may have their own families and the family office’s client base grows. The family office may also serve extended family and must contend with the reality of managing expectations of spouses, in-laws, stepchildren and adopted family members. 

Defining the ‘client base’ is important to efficiently allocate resources and capital outlay. 

What services will the Family Office provide? 

Although management of the family finances and assets are perhaps considered at the heart of family office services, they also provide a range of other services from strategic planning, administrative support, compliance and regulatory advice, family governance, coordination of philanthropic initiatives and succession planning.   In addition, lifestyle or concierge services such as paying bills, arranging travel, management of household personnel may also be required.  

The range of services delivered may change over time as generations’ age, technology evolves and the investment landscape shifts. 

Who will be involved in the Family Office? 

For families with significant wealth, their assets may be sufficiently large and complex to justify a team with wide-ranging expertise and a board comprising of both family members and external parties.   For other families it may be more effective to hire a specialist to liaise between the family and multiple third party advisors, rather than recruiting for each specialism internally. 

A governance and succession process that clearly outlines the role of family members within the office is vital to ensure the involvement of younger family members, particularly whilst there is an opportunity for them to learn from and work with the senior generation and their trusted advisors.  Management roles could allow future family leaders to serve on committees or become junior board members. 

It is not unheard of for family members to take issue with the degree of control wielded by the CEO of their family office. Having clear guidelines will help manage responsibilities and expectations. Every office should have a mission statement, a written code of conduct and perform regular performance reviews. Policies also need to be clear about whether family members can be employees of the office. 

One of biggest advantages of starting a family office is the ability to hire competent staff who truly understand the family’s needs and motivations. Given family office employees are empowered with tremendous authority and control over the family’s assets, retaining proficient and trustworthy staff is critical to success. 

What is the appropriate vehicle and location for the Family Office? 

As can be gleaned from the above, there is no typical family office structure.  The legal entity created is driven by a family’s unique jurisdictional, regulatory and tax considerations. In Cayman we are increasingly seeing the use of foundation companies over traditional private trust companies or STAR trusts.  

Previously, the natural tendency was to locate the family office where the family business was or where the patriarch/matriarch live. However, with new technologies, globalisation and a rising trend towards the remote workforce, family offices are moving to other jurisdictions.  Political stability, privacy regulations, access to quality staff and professional advisors are all-important considerations. 

In conclusion, it is apparent that the considerations for starting a family office are plentiful. Some of the attractive features include highly personalised service, control, exclusivity and confidentiality. However, they can also be a source or catalyst for family dysfunction and an execution failure can lead to the permanent destruction of the family’s wealth if not governed and operated properly. Therefore, it is crucial to consult with the right advisors before formalising a family office structure. 

Author: 

Lucy Comacchio, Associate Director 
Rawlinson & Hunter, Cayman Islands
Lucy.Comacchio@rawlinson.com.ky