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How to Future-Proof Your Family Dynasty: Part 2.

Do You Need a Family Office? Part 1.

Circular image of manor in background with caption Family Office" Introduction

“Do you need a family office?” may be a pertinent question to ask if you don’t already have one but perhaps have heard/read about the possible benefit of a family office for your family, then please read on.

A family office is not for everyone. However, if the level of your family wealth puts you in the category of an HNWI/F* or an UHNWI/F**, then a suitable family office structure becomes a highly desirable vehicle for managing your wealth. In fact, the sustainable development of your Family Dynasty will likely depend on how well you manage your family office.

Back to the key question then – the need for a family office. A family office is a one-stop financial shop for the extremely wealthy. They serve as wealth management and financial advisors for high-net-worth clients typically focused only on the category known as “ultra-high-net-worth.” This is generally defined as anyone with $30 million or more to invest. The costs associated with running a family office are likely to make it not viable for those with a seven-figure net worth.

However, an UHNWI doesn’t just come to their level of wealth through chance (unless they have a huge lottery win, for instance). No – what normally transpires is that they pass through the HNWI phase (say – $1-million-plus investable assets) prior to achieving their UHNWI status.

Therefore, it’s our view that, if you are an individual or family achieving solid wealth management results whilst in the HNWI “phase”, you may well benefit from having a family office. Initially, instead of having a ‘traditional family office’ from the outset, you may be well-suited to a ‘multi-family’ or ‘outsourced’ family office type.

* high-net-worth-individual/family   ** ultra-high-net-worth-individual/family

How to Future-Proof Your Family Dynasty: Part 2.

How do you start up and build a family office?

First up – a business plan is a “must do”.

However, before creating a family office business plan, the family must determine their expectations, priorities and scope to decide what services they need. These can include financial planning (investments, philanthropy and life management), strategy (business and financial advice and estate planning), governance (reporting and record-keeping and succession planning) and advisory (tax and legal advice, compliance and risk management).

Diagram depicting Family Office Services

A business plan should include:

  • The vision and mission
  • The relationship to the family business
  • The structure of the office, including legal structure and ownership and intended regulatory and tax impact
  • Jurisdiction
  • Governance
  • Services
  • Staffing
  • Operations, including what key technology is needed
  • Financials including funding and budgeting
  • Work plan – how will the office be implemented?

As well as a business plan, 5 and 10-year strategic plans are key as they bridge the gap between the family governance documents (sometimes up to a 500-year plan) and an annual business plan. The latter is important to ensure that changes can be made in a timely fashion should they be required. In the “Training and Education” space, please note than an essential component should be that of ensuring that all family members, young and old, have received relevant financial literacy training.

It is more important than ever that families have a long-term outlook. The strategic plans consider “stress testing” assumptions on asset growth and income against the projected number of future family members and their consumption of the wealth accumulated as well as of the services provided by the office.

Families often find it helpful to bring in an independent adviser to lead and facilitate the process, ask inconvenient but essential questions and help to bring new perspectives as well as develop holistic solutions.

Establishing a family office is a major undertaking that may not live up to the family’s expectations. It is important therefore to factor in potential
doubts and shared areas of concern. In particular:

>> COST

The cost of running a family office and carrying out regulatory and compliance reporting is high. Before a family office can viably offset its fixed costs, a higher level of assets under management will be required.

>> TRUST IN EXTERNAL MANAGERS

To set up a family office, a family must have a certain level of trust in working with non-family asset managers and advisers. As trust is typically built through long-standing relationships, the next generation of family members may need time to develop the same level of trust. If new advisers are introduced, trust will need to be established with old and new organisational members as well as non-family employees.

>> EXPECTATIONS AROUND RETURNS

Ultimately, family offices rely on their longevity to ensure wealth preservation. There may be doubt about the family office’s ability to manage wealth “better” than other providers in the wealth and asset management industry.

>> MARKET, LEGAL AND TAX INFRASTRUCTURE

Family offices tend to function better when they operate in liquid and sophisticated markets within stable legal and tax systems. The absence of such systems in many emerging markets may have undermined the development of family offices and led to the growth of family offices in nearby markets. This could explain why an immense level of wealth in some emerging markets does not always correspond to the number of family offices present in the market.

After weighing the potential benefits and drawbacks of setting up a family office, the family can begin preparing the family office’s strategic plan to avoid operating on a deficit basis in the long term, that is, purely as a cost centre. A strategic plan requires diligence and a vision for implementation that will serve the family office’s objectives well into the future.

In Part 3., we shall be discussing the ‘nitty gritty’ of Family Office setup factors and procedures. In particular, we shall be addressing the topic of The Legal Setup and Structure and Associated Jurisdiction Criteria

How FBA Can Help You With Your Family Office Setup

At Family Business Advisory (FBA), our purpose is to help family businesses succeed on a sustainable basis. As such, we provide you with access to specialist family, business and technical services with a goal being to generate opportunities for families in business.

In order to complement our own particular specialised skills, over the past several decades, we have developed a network of trusted, professional advisers in such areas as:

Image of Services spectrum

Moreover, we work at all times to give you peace of mind and proactive support to help navigate any changes in the market brought about by legislative changes, geopolitical events and general market conditions – all to maximise your personal wealth and security.

These services are provided by FBA, in association with the Wealth IQ Group.

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