Darragh O'Sullivan is a London-based family office expert, helping entrepreneurs and new/young wealth to build and run their family offices.
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It's quite possible that you have never heard of a family office. Indeed, unless you are a private banker, private client lawyer or generally work in the investment world, there may be no reason for you to have even considered the question.
But the concept of a family office is almost as old as the concept of money itself. Even the first Roman emperor, Augustus, was said to have outsourced the management of his wealth to a team of trusted advisors while he ran his empire.
Today, the principles remain. Wealth not managed will diminish—the so-called leaky bucket theory. The family office exists to manage both the wealth and the trappings that come with it. This includes the lifestyles of the wealth-holders, their real estate, luxury assets and philanthropic activities.
By managing the risks through the provision of diligent legal services, adequate insurance and strategic asset management; ensuring sufficient liquidity for rainy days through planned investment allocations and activity; and handling all of the back-office administration like record-keeping, correspondence and filing for all of the wealth-holders' activities—the traditional family office exists to preserve and grow the family's wealth for future generations.
Effectively, it runs the wealth as if it were a business itself with income from investments/ongoing enterprise; costs of investments, opportunities, real estate and luxury assets; overheads in the form of maintenance, travel, operational expenses and staff costs; and, ideally, profit.
Why are family offices increasingly important?
There is a long-standing, generally untrue, adage surrounding family businesses that goes, "the first generation builds it, the second one grows it and the third one wastes it away." A formal family office is designed to smooth the bumps in this generational hand-over by offering consistency and continuity in the management of the family's affairs.
Never has financial affairs management been more needed. As post-war baby-boomers eye retirement, their heirs will be considering their future roles as custodians of the accrued business empires and personal wealth. An opinion piece by Jason Butler in the Financial Times refers to an estimate of an intergenerational wealth transfer of around £5.5 trillion (around $6 trillion) over the next 30 years (paywall).
Popular TV streaming services have picked up on this zeitgeist, supplying us with a constant flow of new series that capture the aspirations, struggles, feuds and setbacks encountered by strong principal wealth-holders as they plan for succession and leave behind their legacies.
The family office can also be extremely tax-efficient. While countless different legal structures exist—tailored to the exact requirements of the family, their geographic footprint and their lifestyles—the principle of transferring wealth from being individually held into a corporate or trust structure means that when the primary wealth-holder passes on, there isn't any inheritance tax event since the wealth continues to belong to the corporate/trust structure.
What are some considerations for business leaders?
As a business leader/entrepreneur, if you decide that you do need your own family office, the temptation can be to involve your business's external team (lawyers, bankers and investment managers) in those family office plans. You already know them, work with them and probably trust them, so it makes sense.
Generally, I'd counsel against this, however. Heading toward a liquidity event, your business's advisors will sell you the world; they get paid properly when your liquidity event happens, and your importance to them until that time cannot be overstated. But you may find that after the liquidity event, your importance in their world diminishes, in some cases, very quickly.
Family office management bears, in many cases, little resemblance to corporate life. Priorities for family wealth and operations don't tend to be as solely based on notions of profit, and I am increasingly seeing philanthropic, socially responsible and passion-project type considerations weighing in much higher.
If you go with a family office, make sure to choose your advisors for their experience in managing private affairs, networks, access and for their fit with your personal life.
Do I need a family office?
As important as financial affairs management is, for the most part, even if you are incredibly successful and wealthy, you may not need a family office. While family offices come in all shapes and sizes, increasingly, it is possible to avail yourself of all of the benefits of having your own dedicated family office without actually needing to set one up.
Popular criticisms of family offices as organizations include the burden of administration and the paperwork required. This includes the cost of salaries and office space; the challenges of hiring, training (and retaining) good staff; and, most importantly, the loss of privacy and risks associated with handing over the keys to the castle. Operating a single-family office necessarily involves placing all of your family's eggs in one basket.
There is a tipping point (which depends not on the volume of wealth but on the complexity of the family's affairs), after which having a dedicated family office will make sense, but before that point, we are seeing an increasing trend for wealth-holders to operate a virtual family office and choose best-in-class trusted advisors to assist with and manage discrete elements of their family wealth when required.
This way, the keys to the castle are retained, and there are fire breaks and airlocks, ensuring that no one has access to all of the information. You can utilize modern-day family office professionals who are accustomed to working as part of wider virtual teams to deliver value to their wealth-holder clients. Keep in mind that these are significant appointments of your most trusted advisors—it's worth spending the time to meet as many as you can before you make a final decision.
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