Wealthy families can manage their shared wealth and assets separately. However, this will sometimes result in one part of the family’s interests working against another. Equally, families can overinvest in certain areas if they do not coordinate in a structured manner across multiple asset classes. This is why family office investment portfolios exist – to assist with wealth management issues that protect an entire, sometimes extended, family’s interests.
Since Tallard Management provides expert services in the field of family office design and build, the many complex strategic issues associated with them can be handled by professionals. Before going into detail about how that might work, however, it will be beneficial to examine more closely exactly what is meant by a family office and its associated fund.
What is a family office?
The family office definition that is most often used is that of a private wealth management advisory firm running the investment management of a family; generally speaking, one with in excess of $100 million, or £76 million, in investable assets. Although family offices have been around for centuries for managing large estates across more than one generation of a family, these days, they tend to use technology and the latest investment strategies to ensure wealth can be passed from one generation to the next in the most efficient way possible.
What is a family office fund?
A family office fund is an investment vehicle which can take various forms. They are commonly used by ultra-high-net-worth individuals to pass on their wealth in a way that continues to accrue value but which will not necessarily be subject to inheritance tax and other forms of financial penalties. For example, investment trusts are sometimes used to alter the legal ownership of an investment fund from a sole individual to their offspring and siblings. The idea is that the financial interests of the family as a whole are looked after rather than one or two individuals who might be at the ‘head of the family’. Family office funds might include venture capital investments, land portfolios, hedge funds and private equity funds, among other investments.
Which family office structure is best?
The answer to which family office structure is most suitable will depend on two primary factors. The first of these is the size and nature of the family in question. For example, some structures may need to suit the interests of just two generations made up of multiple siblings. There again, it might be that other families have a more linear structure without so many siblings and cousins to take into account but more children, grandchildren and great-grandchildren instead. The second factor is the family’s collective attitude to risk. Some investment funds will have a higher proportion of their investments placed into higher-risk opportunities, whereas other families may choose to place all of their wealth investments into longer-term but lower-risk ventures.
Understanding investment banking and management services in the context of a family office
On the face of it, wealth management through a family office is much like the sort of investment management service that a professional advisor might offer any high-net-worth individual. There are common themes, it is true. However, investment banking and financial management services in the context of a family office arrangement are different. This is because there needs to be a strong alignment of interests between asset owners and a family office which can be reviewed by the entire family. In some cases, family offices will alter strategy based on the overall consensus among the interested parties rather than it being decided upon by one or two individuals.
In addition, the family office structure will need to take into account matters of governance. When professional financial advisors are offering services to individuals, it is always clear who is in ultimate charge of the decision making. As such, governance has to be taken seriously at the outset so that matters of conflict and disagreements can be resolved fairly and properly within the rules governing the management of the family’s investment fund. So, too, must the design of reward structures be thought about and implemented properly. Given the multi-generational nature of most families, some planning and forethought will inevitably need to be applied to what happens when individuals within the family pass on and how the family office will adapt to such changes down the line. In these contexts, therefore, family offices are very different from other, similar finance jobs.
Designing a family office strategy for the future
As should be clear from the particular requirements families have, as opposed to individuals of high wealth, the family office community is different from others in the financial advice sector. As such, family office staffing by professionals tends to reflect these differences. However, the same expertise in tax-efficient wealth management still remains very much at the core of any sound family office investment set up. The key difference with such management services is that they will need to be designed to support a much larger group of individuals.
Sometimes, of course, family office structures will be set up for a small and, perhaps, closely-knit group of siblings and their parents. In other families, the design of the family office structure will need to take into account the spouses and in-law relatives of the wider family, perhaps including adopted children and so on. Consequently, there is no standard family office design that will suit, and they must be put together from scratch each time. If not, then they are likely to fail in their intended purpose which, in the final analysis, is to safeguard the interests of a particular family group.