Which Family Office Structure May Be Right for You?

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 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 take a closer look at different types of family office structures to help you determine which structure may best suit your needs.

Before starting the selection process, families and lead advisors must gain clarity on your family’s vision, values, goals and risk tolerance. To kickstart the conversation among family members, let’s delve into the advantages and disadvantages of four common structures.

1. Embedded family office (EFO)

This structure is the default for many business owners, though it has risks. An EFO is an informal/ad hoc entity that uses the existing resources of the family business to manage the family’s administrative, accounting and wealth management functions. The family office structure is embedded in the core business, and their employees are asked to serve both the company and the family.

Advantages

Integrated services. Embedded within a larger business entity, these offices can help provide seamless financial and personal services.

Cost efficiency. EFOs can leverage the existing infrastructure of the business, potentially reducing overhead costs.

Familiarity with assets. Since the relationship with the family is already closeknit, this structure offers intimate knowledge of the family’s business operations and assets.

Disadvantages

Lack of focus. Your employees can’t serve both business and family effectively over the long term. When employees have a dual focus like this, performance could suffer.

Poor privacy controls. Employees may be tempted to tell their co-workers about your purchases, or forced into the awkward position of keeping an eye on one family member at the request of another.

Risk management. Your family may need services beyond an EFO’s capabilities, such as property or casualty insurance, technology and cybersecurity support, and adequate legal protection.

Poor family governance. What oversight mechanisms are in place to manage spending? Does the EFO align with regulatory, tax and legal requirements? As accounting and compliance complexities increase over time, essential tasks may end up in limbo.

2. Single-family office (SFO)

The SFO is a private entity managing a single family’s wealth, affairs and tax planning requirements. Typically, it’s created by the founding family and offers considerable customization, but it can also grow into a multi-family office structure. Oftentimes, the family has a complex multi-generational structure and focuses on several long-term goals, such as preserving and growing familial wealth; providing a blueprint/investment direction for the family unit; and effectively transferring wealth from one generation to another while maintaining privacy.

Advantages

Control and privacy. SFOs can offer the greatest amount of control and privacy. Investment and proprietary knowledge stay in the family.

Highest degree of customization. Technology and services can be tailored to your family’s exact needs. Additionally, staff can wear multiple (relevant) hats and develop skills tailored to the family’s needs.

Disadvantages

Talent challenges. Finding, acquiring and retaining qualified personnel and technical infrastructure can be challenging and expensive. If talent is limited, it may lead some SFOs to be operated by individuals unqualified to handle all requisite duties.

Shifting regulatory landscape. Formal requirements can alter quickly with changing taxes, investment conditions and family circumstances, and you’ll need to stay abreast of these changes. Further, SFOs focusing on large-scale public or private investments could face the greatest level of responsibility and regulatory burden (such as state and local securities regulations).

High costs. Expenses include the need for various professional services (in-house and external), compliance with state and federal regulators, and administrative and operational overhead expenses (e.g., IT, security). Family members must acquire and customize all components needed to run the family office: staff, location, technology, software and systems.

3. Multi-family office (MFO)

While there are two primary MFO structures (i.e., a multi-family office entity serving the needs of several families; and a family-owned multi-family office serving the needs of a select few founding families), the advantages and disadvantages are similar:

Advantages

Abundance of talent. One of the benefits of working with MFOs is access to many highly skilled and talented professionals, and a potential reduction in key-person risk.

More flexibility. Having access to a suite of services and experts, the MFO structure allows you to add or remove services as your strategy dictates. You can also select or change professionals according to your needs and their performance.

Higher degree of safety and security. MFO’s typically implement technology and security infrastructures that encompass layers of checks and balances.

Increased access to investment opportunities. You can expect to benefit from access to a wide variety of pre-vetted investment opportunities appropriate for your requirements and circumstances.

Lower costs. MFOs can be a cost-effective alternative to SFOs. Their structure and service options afford them the ability to deliver economies of scale.

Disadvantages

Less autonomy. SFOs allow the family to fully dictate the office structure. While less autonomy through MFOs means less control, the MFO structure often results in more consistent and repeatable results over time.

Less control over staff hires. MFOs offer an abundance of talent, but this access comes at a price. Families may influence—but lack full control over—staffing decisions. The good news? MFOs may attract top talent, something SFOs struggle to do.

Shared resources. While SFOs afford you an entire staff dedicated to you and your family, MFO advisors are typically shared across client families. Additionally, depending on the firm and structure of the services and pricing model, you may wind up paying for unneeded services. Be sure to gain clarity about what’s included and how that compares to other family offices.

4. Virtual family office (VFO)

Think of this as an MFO constructed by a family leader, lead advisor or set of family members who outsource their needs to an investment advisor, legal counsel and tax compliance specialists, rather than receive a full set of amenities “in-house.” These independent professionals are active in their own firms, but coordinate with each other on the client’s behalf, typically through a small group (or single representative family member) functioning as the lead communicator.

Advantages

Greater control over hires/advisors, and direct control and flexibility. Since the VFO is a collaboration of multiple service providers like investment managers, legal advisors, tax advisors and personal CFO services who are typically organized through one lead advisor, you have the flexibility to voice specific requirements and make changes to underperforming service providers.

Lower costs and overhead. Like MFOs, VFOs can offer your family lower overall cost and overhead. Without the need for household security and technology infrastructure, the costs relative to SFOs could be reduced. Also, selecting the precise services you require from specific providers helps ensure you’re not paying for services you won’t use.

A large pool of data and investment perspectives. Given the flexibility to employ a number of advisors and firms to work in concert, you expand your access to relevant data and investment perspectives.

Disadvantages

Considerable time and coordination required. Because several advisors are involved and there isn’t a holistic, intermediary set of checks and balances among disparate providers, a VFO may require significant investment of time. A benefit of working with MFOs is the synchronicity between teams and functions. It can be laborious to direct, meet with, coordinate between, and receive reporting from several distinct providers on an ongoing basis.

Choosing the wrong professionals. It’s easy to choose a bad service provider, which may frustrate other members of your service team. These service areas are inherently opaque, as there’s no marketplace to easily compare hourly rates, historical performance, and quality of potential legal or tax advisors. To ensure proper alignment, it’s important to dictate your family’s vision, values, goals and risk tolerance before the selection process begins.

Speed and inefficiency. You’d think speed wouldn’t be an issue since the VFO is digital/remote, but it is. It can be frustrating to wait for a response from your team or individual advisors when an important life/liquidity event or opportunity needs immediate attention. When working with a VFO, seek advisors who are on the same page. If you need someone dedicated to you (e.g., available nights, weekends, holidays), state that upfront.

Confidentiality issues. Since the VFO is a collaboration of multiple service providers across different firms, others may view your investment portfolio or sensitive tax details, which means this information could possibly be used to benefit clients in their firm.

Making the best decision for your situation

As families face the ongoing complexities of managing and preserving wealth, the decision between traditional and more contemporary family office structures warrants careful consideration. The MFO structure provides a collaborative platform that can yield cost efficiencies and access to a broader range of expertise and investment opportunities, facilitated by the collective resources of multiple families. This model is conducive to families seeking a blend of personalized service with shared insights and economies of scale.

Conversely, the VFO approach caters to families prioritizing flexibility, direct oversight and cost management. By outsourcing services to a network of independent professionals, VFOs allow for a highly customized wealth management approach, offering families the agility to adapt services as their needs evolve, without the overhead associated with more traditional office structures.

While MFOs and VFOs present modern solutions to wealth management—emphasizing efficiency, adaptability and access to expertise—remember that no one structure universally fits all. The choice between family office models should be informed by a thorough assessment of a family’s unique circumstances, goals, values and legacy aspirations.

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?

Should You Build or Outsource Your Family Office?

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