Should You Build or Outsource Your Family Office?

Most familial wealth is short-lived as it tends to decrease from one generation to the next. Can your family buck the trend?

A “family office” may be utilized to help preserve and grow wealth in the present and for future generations. Additionally, if managed well, a family office can provide future generations with the infrastructure for successful wealth management.

In our three-part series, we discuss: what a family office is and whether you may need one; if you do need a family office, should you build or outsource it; and what family office structure might be best suited for your specific circumstances. In this article, we ponder the important question of whether you should build or outsource your family office, as each option has advantages and disadvantages.

If you’re a high-net-worth family that has identified the need for expert support and guidance regarding your wealth management and wealth transfer strategies, then it’s likely that a family office could meet your complex requirements. Now it’s time to decide whether it’s more feasible to build your own family office or outsource these duties to external professionals. Let’s consider it in more detail:

Advantages of building a single-family office

• The founding family receives more privacy, control and oversight
• The technology stack and services can be tailored to family’s exact requirements
• Can keep core services in-house while outsourcing others
• Greater privacy means investment knowledge stays in the family
• Staff can wear multiple hats and serve on an ad-hoc basis

Disadvantages of building your single-family office

• Setup and maintenance costs are high
• Finding, acquiring and maintaining qualified personnel can be a challenge
• The greatest level of responsibility—and regulatory burden (at the state and local level)
• Must exclusively serve family clients and not hold itself out to the public as an investment adviser to avoid SEC registration requirements

Advantages of outsourcing your family office to a multi-family or virtual family office

• Lower costs and overhead
• Helps to deliver economies of scale, reducing service pricing
• Access to a large pool of qualified personnel and professionals
• Add or remove services as your strategy dictates
• Access to advanced technology and security
• Reduces key-person risk

Disadvantages of outsourcing your family office

• Less privacy, control and oversight
• Must coordinate personnel and services to maintain performance
• Matching systems to what you already have in place may be onerous and often comes with transitional challenges
• It takes ongoing time and effort to perform due diligence or monitor providers

Choosing between building a single-family office versus outsourcing to a multi-family office requires careful evaluation of your circumstances. The more clarity and insight you have into your unique circumstances, the easier your decision should be.

Customizing sophisticated investment management strategies is typically an important aspect of the responsibilities for a family office. Assuming that a family has completed their due diligence and they’ve decided a multi-family office is right for them, then how does the family office invest their wealth?

How multi-family offices invest

Family offices often begin with enthusiasm and the best of intentions—namely, protecting and expanding the family’s wealth for future generations. However, diverging interests, shifting values, complicated tax structures and evolving cultural norms can make the task of maintaining and protecting wealth a challenge.

In the past, investment performance was the primary driver in determining how family offices spent their money. Today, individuals and clients look at both performance and social responsibility, as they seek to determine the lasting mark they will leave on this world. The focus is no longer on just wealth preservation. It’s about shared purpose and orienting the family legacy around values that matter. A frank discussion with your firm is a great place to start.

We suggest individuals and families ask potential family office firms the following 12 questions:

1. How does the firm customize their investing strategy to the client’s intent?
2. How does the firm select money managers, and do they manage money in-house?
3. What is the firm’s process for sourcing new investments and investment opportunities?
4. What services does the firm’s investment team provide in-house?
5. What are the firm’s capabilities for non-traditional assets?
6. Does the firm offer access to proprietary investment vehicles?
7. How does the firm monitor that asset class allocations align with a client’s investment policy?
8. What happens when a client’s portfolio is not in line with the investment policy?
9. What universe of money managers will the firm select from? Will they manage money in-house?
10. What are the firm’s capabilities on non-traditional (alternative) assets (e.g., what performance analysis and benchmarking will take place)?
11. What is the firm’s succession plan for leadership and key employees?
12. Does the firm offer investment clients other services at a discount?

Look for firms with an advisory approach that is careful and thoughtful. The planning process should be collaborative as it’s critical to investment success. As well, search for a portfolio composition that’s tailored to your family’s specific risk profiles, investment strategy, social values and liquidity requirements. Also keep in mind that simply chasing today’s best-available investment returns may not always lead to the most desirable long-term outcome; managers may occasionally outperform their peers for short-to-medium timeframes, but they eventually revert to the mean. When it comes to building and preserving generational wealth, your family office needs a sound, longer-term investment management approach.

If you’re considering a family office to help execute on your wealth management and wealth transfer strategies, please consult with your Corient Wealth Advisor, who can provide insights based on your (and your family’s) unique circumstances and objectives. Also read the other two articles in this series:

What Is a Family Office – And Do I Need One?

Which Family Office Structure May Be Right for You?

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