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Building your wealth

Do I need a family office?

15 Minute Read

Most wealthy families eventually face the question of whether or not to start a family office, often as the result of peer pressure. Like va­cation homes and private air travel, forming a family office seems to be something that friends and neighbors are doing. If your business and career have brought you significant net worth, someone in your circle may eventually suggest forming a family office.

Whether such an organization is right for you is the starting point for families asking them­selves the question. The execution of the idea, however, is a longer topic best discussed with experienced advisers.

What Is a Family Office?

According to Ernst & Young, there are more than 10,000 family offices globally, and some estimates put the figure in the U.S. at 6,000. The largest family offices are well known: Bill and Melinda Gates’ Cascade Investment, Sergey Brin’s Bayshore and David Rubenstein’s Declaration Partners Capital are just a few examples. With large office spaces, dozens of employees and seemingly un­ending resources, these family offices are easy to spot. Thousands of family offices are much smaller, with most employing as few as one or two people to help the principal manage their wealth.

There are three categories of family office:

  • The traditional family office. The concept is straightforward. A wealthy principal forms a legal entity, and then hires a staff whose job it is to invest and protect the family’s wealth, manage the family’s assets and assist with their lifestyle.
  • The multifamily office. The rapid growth of family offices has been accompanied by new, creative variations. One of the most common is the multifamily office. These outside firms are set up to perform most of the functions of a fully staffed family office: They help set investment strategy, perform due diligence on private investments, assist with tax and estate planning, interface with investment managers and advise on family governance. They charge a fee, typically a percentage of total net worth, and have dozens of client families. These models are more affordable than a traditional family office, but because you share resourc­es with other families, they lack the same level of control as a traditional family office.
  • The outsourced family office. Finally, an outsourced family office isn’t an office at all, or a single organization, but a collaborative effort across several supporting players. A financial adviser handles the investment portfolio, an attorney handles the estate plan and a CPA handles tax strategy and pays bills. Concierge services, next-generation education and family governance advice are types of services often included in the fees at large wealth advisory firms. Creating an outsourced family office lacks the total control and coordination of a traditional family office, but it is the least expensive approach.

How is an outsourced family office different than your current financial adviser/CPA/attorney trio? The principal will need to give authorization for the parties to communicate at any time, and then he/she chooses a “quarterback” to coordinate most family financial matters. This is often the financial adviser, who will now guide the family on much more than asset allocation and portfolio management. Topics such as family meeting coordination, next-generation financial education and philanthropic planning become routine conversations.

Who Needs a Family Office: 3 Factors to Consider

Do you need a family office? If so, which model should you use? It is unfortunate that most financial advisers answer this question with a simple range of personal net worth. Your balance sheet is an important factor, but there are many other questions that should be answered about income, diversification, staffing, overhead, geographic disparity, family dynam­ics, philanthropic interests and time commitments. This longer, more thoughtful discussion can be grouped into three categories: the size of your wealth, the complexity of your life, and the priorities of your family.

No. 1: The Size of Your Wealth

One client was a serial entrepreneur who was successful across multiple industries. Al­ready wealthy by any standard, his largest business was on the verge of selling. The transaction would multiply his personal liquidity, and nearly end his day-to-day business responsibilities. Large-scale liquidity events are usually the catalyst for someone to start considering a family office.

How much wealth justifies a family office? Most advisers will offer a balance sheet measure. However, the most important measure is income, not assets or net worth. Either from private investments or from a large liquid portfolio, a family’s sus­tainable income — after paying all lifestyle needs — has to be enough to pay the overhead of the staff they want to hire. When a principal burns into their liquidity to pay for the office, they have transformed the family office concept into a business venture that requires excess market returns to fund itself. This is called a private equity firm — not a family office.

Even small offices can be very expensive. A small family office with two professionals and four support personnel can cost $1.5 million to $1.8 million per year. In 2019, a survey found that the average small family office in Chicago can expect to pay a chief investment officer over $300,000, and a general counsel over $200,000. These figures are base salaries and do not include benefits, bonuses or carried interest compensation.

Many clients still think in terms of total net worth; convention wisdom dictates that you should only consider a traditional family office if your total net worth is above $100 million minimum, and most will need more than $250 million.

No. 2: The Complexity of Your Life

A single, large portfolio of stocks and bonds, regardless of the enormity, is not complicated nor is it time consuming. Finan­cial advisers who specialize in the ultra-wealthy can easily manage this portfolio according to your goals and risk tolerance. In addition, if your entire wealth is held in a single, family-owned business, you don’t need a family office staff to help grow your wealth. Your management team at the business is already helping you drive value.

Depending on age and personal preference, some clients sell their primary business and “go to the farm,” leaving their financial advisers with a portfolio to manage. This straightforward approach rarely requires full-time employees, HR over­sight and a long-term office lease. Other clients, however, build more businesses on the foundation of their early financial success. One client parlayed his early victories as a real estate developer into a diverse portfolio of closely held businesses across a dozen industries. Choosing to manage a myriad active, private investments takes a staff, and not just management teams at each business. In these cases, family offices will look like single-investor private equity firms, with staff members sourcing deals and performing due diligence.

An overweight of personal assets can also create complexity. One client, who did not have a family office structure, owned four vacation homes in addition to his primary residence. He, his wife and their grown children would use private aviation to spend as much time at each vacation property as they could. After a few years, he admitted that the properties were “just too much,” and he sold all but one. He chose to simplify his life rather than make the long-term investment of a family office.

It’s worth noting one of the most controversial subjects in the family office conversation: paying household bills. I’ve known many clients who achieved tremendous financial success and wonder, justifiably, why they’re still the person to write their lawn crew a check every Thursday. One of the advantages of a traditional or multi-family office is the outsourcing of the bill pay function. If your personal receipts and expenditures look more like a small business than a small household, you should consider a multi-family or traditional family office.

Another factor to consider is the complexity of your estate plan. The plan itself and its various legal entities should never, on their own, factor into the choice to form a family office. The best estate plans, however, reflect the principal’s desires on how best to leave a legacy for the next generation. Simple wills and remainder trusts describe an approach that requires very little interpretation when you’re gone. If, instead, you find yourself with multiple family limited partnerships, family foundations and an array of trust structures, you might require a professional staff to help implement your strategy. Many of the nation’s largest family offices have existed for multiple generations and continue to carry out their founders’ wishes.

No. 3: The Priorities of Your Family

It is hard to discuss the formation of a “family office” without discussing the family. It is entirely possible for a single individ­ual with no heirs to have the resources and requirements to create a family office. But most family offices are built around a family, or at least the legacy that the family wants to leave the world.

One of the advantages of the formal structure of a family office is the flexibility it gives the parents when it comes to their grown children. If the wealthy individual wants his or her children involved in the daily business of managing the family’s wealth, the office has built-in roles for their children.

This same flexibility can also go the other direction. One of my early family office clients was five generations removed from the founders. Decades ago, the descendants who controlled the business made the decision that no family members were allowed to work in the family office; instead, each was expected to blaze their own way. This approach is sometimes easier than having to decide which child or grandchild is qualified enough to earn a paycheck. It also allows the office staff to focus on growing and protecting the wealth without the drama of family politics.

You should also understand and acknowledge the issues of trust and confidentiality when considering the formation of a family office. Every wealthy family takes risks of confidentiality when they hire any outside firm. Using a CPA, attorney or financial adviser means sharing details that you hope will remain confidential. On one hand, building a traditional family office gives the principal a higher level of oversight and control over the flow of information. On the other hand, principals need to know that their new employees will become extremely close to the family, exposing them to personal information that the principal might otherwise want to keep private.

Finally, you and your family should weigh the benefits of the office against the time and emotion spent managing this new enterprise. Regardless of your staff size, hiring people means interviews, job offers, benefit plans, security protocols, per­formance evaluations, office politics, vacation time, raise discussions and much more. You will become the chief executive of the new enterprise, and ultimately will be responsible for all the people you employ.

My Final Words of Advice

The decision to form a family office requires plenty of thought and consideration over topics that some principals haven’t considered before. The framework above is just one tool to help you discover whether this endeavor is a fit for you and your family. Never forget that this wealth is yours, and the family office should be a help, not a hindrance.


This article was written by Matthew Smith from Kiplinger and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to


The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.

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