Ready, Set, Whoa: Starting a Family Office
By Ross Nager, CPA and FBA Contributor
If you're considering starting a family office, the odds are that you already have one, an informal one, any way. A family office typically evolves from humble beginnings. You probably use some of your business employees for personal matters. Perhaps your assistant books personal travel. Your in-house bookkeeper maintains some personal records and works with your outside CPA to get your tax returns prepared.
As you become more successful, the family grows and the kids get older, the needs become more complex. Outside advisors are expensive, so you hire some additional people and, before you know it, they coalesce into a family office.
What is a family office? The definition clearly is in the eye of the beholder. Family offices run the spectrum from the humble beginnings I just described to those having dozens of people capable of highly sophisticated investing, reporting and other functions.
Wherever you might be on this spectrum, you should take some time to reflect on where your family office might head and, more importantly, what you want it to look like in the future.
Of course, there is the obvious approach. Determine what services you and your family need and/or want now and over the next 5 - 10 years. Then, go hire people to fulfill those needs. More on this later, but first, there is a more important...
It's not an easy one, so I'll state it bluntly. Will a family office deprive family members of potentially important life experiences? What??!! you exclaim. That question sure came out of left field! Ross, are you playing shrink again?
Not really. I m just concerned about your family's well being. So, let me explain.
It's fine for an experienced family member like you to hire people to handle your non-business affairs. You've already learned how to manage people and make tough financial and personal decisions. YOU want someone to take care of YOUR problems because YOU'RE busy and YOU'VE earned the privilege. More power to you!
But, by indulging your needs, do you potentially create problems for your descendents or other family members? The family office's mission typically becomes one of relieving family members of many of life's responsibilities and burdens. Competent family office personnel will treat family members as clients and will seek ways to care for family members needs.
The family office becomes the easy place for a family member to turn if some need arises. Need a new house? Call the family office and have them arrange financing and deal with that messy paperwork. Need a will? Let the family office interact with the family lawyer to handle that complicated stuff. Need to fire the maid? The family office can handle that distasteful task. Don't want to plan your own budget or try to understand investment principles? Give me a call.
Just like raising little kids, if the office does everything for them, family members may never learn to do things for themselves or to supervise those they might hire to do things for them. If you provide a way for your kids to avoid life's difficult and unpleasant experiences, they will.
Certainly, wealth and success bring privilege. How much privilege is appropriate? Assuming the answer is something less than unlimited, you will need to impose constraints. Both family office personnel and family members must understand those constraints.
Perhaps some services should be offered only to senior generation family members. However, there is a risk. As some younger generation members move up in the business and family hierarchy, they may feel entitled to step into the perks previously offered only to their elders. That can breed resentment among the have-nots - those members not in positions of authority or esteem.
Ask and Tell
Assuming a less-than-unlimited budget, should the family office be expected to satisfy all family member service requests? Family members typically have little awareness, much less understanding of the cost involved in the services they receive from their family offices. That can't be healthy in the long-term. But the client-service-oriented family office can't bear to say no to a request for help.
With senior generation belt-tightening over the past several years of economic downturn, many family offices are seeking additional revenue sources to support themselves. Some are thinking about billing family members for certain services, but they fear the family will be appalled at the cost. Some have gone full circle and are trying to cut back on services that the office considers unprofitable. Unfortunately, those often are the high-touch services most desired by family members who have grown accustomed to the pampering.
It is indeed interesting to watch longstanding family offices start to apply basic business principles to their operations. This subtle change foreshadows many important lessons that your budding family office might learn from the mature ones.
I recommend a reverse-Clinton policy: Ask and Tell. Family members must be trained to ask the cost of a service before they approve it and office personnel must be trained not to be shy about telling family members about the resources (cost) required to fulfill a request.
Unless someone is willing to provide unlimited resources to the office, there must be some accountability. Perhaps the best approach is to require family members to pay for the services they use.
There are some additional unseemly and unpleasant considerations to address before you launch a family office. The next decision is whether to relieve your needs via an in-house or outhouse experience. Stay tuned next month for this geographic, not anatomic, discussion.
Ross Nager is Senior Managing Director of Sentinel Trust Company, in Houston, Texas.