How a family office can support family needs

Byline:

Robert (Bobby) Stover Jr, Americas Family Enterprise and Family Office Leader, Ernst & Young LLP

Catherine Fankhauser, Partner, Family Office Advisory Services, Ernst & Young LLP

As family businesses grow and the number of family members involved increase, the complications of managing investments, taxes and other financial tasks escalate. In such a situation, family offices can provide a single point of coordination for enhancing wealth management strategies and providing comprehensive support for a family’s varying needs.

A family office can take several forms. An embedded office sits within an operating company, and a single family office is set up outside the company. A multifamily office is established by a third party and works for multiple unrelated families. However, the responsibilities a family office assumes make it crucial to weigh benefits against the cost and complexity of establishing and maintaining one. Here we take a look at embedded family offices and stand-alone single family offices, along with some tips for establishing one. You can learn more about how EY can support your family office, here.

Embedded family offices offer efficient operations

Embedded family offices are a good starting point for many family businesses because they are set up inside the operating company. They can be easily customized to the family’s needs, from a small office that focuses on a single need to a full-service office that provides administrative, tax, legal, accounting and investment services.

An embedded office offers cost efficiencies as it leverages the existing infrastructure of the family enterprise, including personnel and IT support. This structure also minimizes staffing redundancies on behalf of the family and heightens the sense of trust due to the long-standing relationships between the family and employees.

Challenges with this model can include a strain on operations and blurred lines of decision-making, as employees are tasked with the work of both the business and the family office. Embedded offices that start small, focused on tax, for example, can experience the addition of incremental responsibility that compounds over time, diluting the original operational intent. There’s even a chance of distractions arising from the family office hindering the core focus of growing the business itself.

If the family and its enterprise grow significantly in complexity and size, the embedded approach might not be ideal. As more employees gain access to sensitive family information, privacy could become a concern. Moreover, family members who are less involved in the business may lack equal access to the services. So while an embedded office can be advantageous, it demands a clear structure and processes focused on outcomes.

Single family offices can handle greater complexity

Families may find themselves outgrowing an embedded office because of an increased number of family members, multiple generations, and privacy and risk concerns. A stand-alone single-family office is designed to handle the greater complexity that can overwhelm an office within the operating company, while still offering a range of personalized services tailored to the family’s needs.

Single family offices provide a high level of privacy and confidentiality, as information is shared on a need-to-know basis within the office and with third-party vendors subject to risk management policies. This controlled access also helps to coordinate the work of advisors and avoid potential conflicts of interest, while establishing a long-lasting institution that caters to wealth and estate planning across generations.

However, these benefits may come at significant expense. The costs of setting up and maintaining a stand-alone family office can be high, including hiring skilled professionals, investing in the necessary technology and managing operational costs. To manage the operational costs of a single family office, the expenses are often charged back to the family clients and can range from a bank-style assets under management charge, a time-and-materials model, or a hybrid model for different entities and complexity levels. Starting and managing a single family office also involves navigating governance, compliance and reporting concerns. Learn more by accessing the ?EY Americas Family Office Guide, our handbook for ?those planning to set up a family office and also for those looking to set benchmarks of leading practices within their family office. ?

Tips for standing up a family office

If a family office sounds like a good idea, you will need to determine what services it should provide and who can use them. Consider the following:

• Take inventory of your family’s life. Think about what your business and outside advisors currently do for family members — income tax returns, investment planning, property taxes, home and auto insurance. Each of these could go into the family office, prioritized by importance versus risk.
• Evaluate your family’s complexity. Consider the number of family members, generational reach, number of legal entities, type of assets and any interfamily transactions. Determine if the management of your wealth requires the more organized structure of a family office.
• Assess long-term goals. As your life and business become more complex, so too will the services you need from a family office. Develop a future-state inventory of your family’s life and design the family office around these goals.
• Review your advisor coordination and costs. If you have numerous advisors for different aspects of wealth management, a family office could streamline the process. In addition, calculate the current costs paid for financial advice, legal counsel, tax planning, estate planning and asset management. Then compare it with the potential costs of setting up and operating a family office.
• Consider privacy needs. If confidentiality is paramount, a single family office may be a more attractive option. You will need to understand what you want to keep in-house and control.
• Determine your preferred level of control. If you want to personally direct how certain tasks are conducted, you will need oversight of an individual’s activities. In other situations, your desires will influence how a third-party vendor provides services but not control their execution.

Learn more on how EY’s Family Office Advisory Services can support you and your family office.?

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Catherine Fankhauser, CPA Desmond Teo Lauri Oinaala Steve Shultz Gio M. Paul McKibbin David Bowen Tina Di Vito CPA, CA, FEA, TEP, CFP Suzanne Lauritzen Ned Draydon AIF? MAICD Lee Henderson Ryan Burke Jim Givens