As the size of your family and its net worth grow over time, managing your family’s wealth can become complex. That’s especially true for families that own a family business and have numerous generations with competing financial priorities. Also, as wealth is volatile, it needs to be sustained with care and strong values. Having a family office becomes necessary.
Thus, the major decision families need to make about their wealth is whether they will invest together or not. Deciding to invest together gives the benefits of wider investment opportunities, at the same time, it also opens the possibility of risk, so it’s a decision that needs to be carefully made.
Once a choice to invest together is made, the family can select the vehicle that will best enable them to manage their wealth (an office, a single-family office, or a multifamily office). The option is based on the amount of wealth, the cost of running each type, and the level of control the family wants to maintain.
Here are the overarching questions families must ask when deciding on how to manage their wealth.
What type of office is right for your family?
What is a Family Office?
A family office can be interpreted as an entity created or engaged by a single family or a group of families to manage their fortune. The priority of the family office is on governing, building, and maintaining wealth for present and future generations.
- Single Family Office (SFO): This model enables the family to totally separate its personal transactions from the business, and can make it easier to ultimately sell or go public with their legacy operating entity. An SFO can also provide a high level of privacy and seclusion and can handle more custom tasks and requests, but is often the least cost-effective option. The office offers duties beyond financial, legal, and tax management, and may become active in handling holidays, education programs, and some other family matters.
- Multi-Family Office (MFO). A multi-family office is perfect for families that are low on the range of intricacy and can be a cost-effective model. With this structure, the family loses the special touch of having full-time personnel to support their wealth and private needs. MFOs also generally rely on overseeing investments for the family and deriving management expenses to subsidize the extra services which some families may be interested in. Multifamily offices can take various forms, they can be organizations of professionals, run by financial institutions, or even be family-owned establishments.
How should a family office be structured?
It is important that family members play a role at the governance level of the family office but don’t need to be involved in its management. The family must set the fundamental strategic objectives, determine an investment risk profile, analyze the performance of the office and ensure it is compliant with the rules and regulations. Although they can authorize some of these duties to the family office board and management, the family members need to guide essential decisions.
The family office is predominately led by families, regardless of whether their boards and management are available to outsiders. In these structures, families are generally involved in all decisions, in contrast to when their financial wealth is invested in a multifamily office.
The family office is generally governed by a board that has the subsequent tasks:
- lay out the monetary needs of the family and its anticipated growth in order to calculate the return needed on investments to cover those needs and increase the financial capital
- define family significances, standards, and desired investment risk profile
- build a long-term family wealth strategy
- create proper controls to meet compliance standards and to prevent extortion
- provides a framework for making conclusions and the main factors to consider when making financial decisions
- appoint key managers
- enhance investment performance if there is a predictable strategy based on the family’s culture and values taken forward, compared with a random ad hoc investment strategy
- screen investments and benchmark outcomes
What is a family office charter and what should it cover?
A Family Charter is a report that is a fundamental element in setting out the connection between the business and the family. In other words, it defines the rules of the game. An extra task of the board is to guarantee that the role, attributes, and tasks of the family office are plainly clarified in the family office charter.
How is a family office managed?
The CEO of the family office handles the wealth management planning, monitors the functioning of the office, and is responsible for regulatory compliance.
Family offices manage the monetary assets of a family and operate in a similar manner to standard investment funds but with extra flexibility towards the needs of their sole principal.
The primary tasks of the family office can include the following:
- investments and portfolio management
- tax, legal, and estate planning
- real estate management and administration.
- giving legal, insurance, estate, business, lifestyle, and even philanthropy related advice to clients.
The structure, size, and functions of family offices differ broadly from one country to another and from one family to another. Single-family offices frequently place a stronger priority on the financial and educational needs of family members.
How can a family best prepare the next generation?
The purpose of many family offices is to guarantee that the family’s wealth remains undamaged through numerous future generations. In light of that, you’ll need to think about the promising ways to introduce newer generations to the family’s wealth and the duties that come with it. Each family member may have varied understandings of and reactions to wealth. As we know, the generation who created the wealth is naturally proud of their achievements while the ones who inherit it can take it for granted or may feel undeserving of it.
When inheritors realize that they can accomplish something beneficial with their wealth, they often feel more worthy as well as develop a sense of responsibility. They can make this change by realizing how this wealth can help them make their business endeavors succeed, create new business opportunities, become philanthropists, and assist their communities. By being involved in these various activities they usually become proud of their wealth and in return want to impart it to their own children. Educational projects can also stimulate the process of helping family members from new generations formulate a shared sense of family purpose and mutual goals.
To give yourself an opportunity to preserve your family’s wealth, it is important to answer and clarify the questions above.
If you are considering creating a family office and looking for the right firm to help with this, let’s go ahead together and contact your Damalion expert now, and we’d be happy to assist.
