The influx of newfound riches and a rapidly evolving corporate landscape have led to the recent rise of single-family offices. While this setup may come at a cost, it offers an efficient and sophisticated means to professionally manage family wealth, as well as preserve it for future generations. Its primary focus is also on furthering long-term goals. But what is a single family office? What makes them important?
The Emergence of the Single Family Office
Single-family offices (SFOs) are independent business organizations that operate solely to take care of the financial and personal requirements of a wealthy family. A single family office is only responsible for overseeing the family’s own funds, while the concept itself dates back to the Industrial Revolution.
Over the last few decades, there has been a remarkable surge in SFO numbers – global family office assets under management have exceeded one trillion Dollars. Despite their lack of visibility when compared to huge companies or brands, single family offices are quickly becoming major economic powerhouses.
They provide essential contributions to major private equity deals, as well as having an impact on both community and society as a whole by focussing more on their lasting mark and social outreach.
For a primer on what family offices do, please see our article What Does a Family Office Do? A Deep Dive Update For 2023
Key Drivers: Growth of the Single Family Office
The dawn of the new millennium has brought about sharp growth in the single family office arena, with most having been set up after 2000. This development is in sync with a rise in wealth creation seen in both established and developing countries over the last couple of decades.
Quite a bit of this new wealth has been fueled by emerging technologies and digital transformations, but there are many other components that have played an instrumental role in pushing the family office trend forward. The main four of focus are privacy, purpose, risk, and complexity.
Our present-day world has become more digital than ever, allowing information to be effortlessly shared and disseminated faster than ever. As is expected, a breach of privacy can cause immense harm to wealthy families and their public image.
The demand for greater transparency and curiosity about the individuals behind huge brands and enterprises has blurred the boundary between private and professional life, thus making secrecy a higher priority for families.
In tune with the global movement towards environmental and social awareness, families are paying more attention to ensuring a long-term legacy based on a single and unique purpose. Achieving a precise, positive effect necessitates having the right know-how as well as an active investment approach that goes beyond regular investing products.
Securing generational wealth for the future has become more complex in today’s business world due to novel risks. Low-interest rates, unstable financial markets, and shifting geopolitical conditions have all necessitated the adoption of refined risk management tactics.
The emergence of technology has added an extra layer of difficulty, with fortunes now being created and lost at an unimaginable pace. Additionally, cybercrime has been given an avenue to thrive and social media can be a potential reputation time bomb in this digital age.
The corporate world has become more intricate, particularly in the areas of regulations, tax, and wealth management. Investment strategies must be able to keep up with all the changes and varying market trends. As families grow bigger and more complex over time, it means they are now faced with difficulties when it comes to transferring wealth between generations.
Is a Single Family Office a Good Choice?
Creating a single family office provides greater privacy, confidentiality, tailored services, and a unified investment perspective. However, this model is only feasible for families with more than $250 million in assets under management as it can be rather costly to maintain (unless you go the Multi-Family route, the Virtual Office route, or the Familoff route).
Other important things to consider are the complexity of the family structure and the number of generations involved, the complexity of the family’s investments, the types of services needed, the degree of control over investment decisions, the importance of family legacy and purpose, and level of harmony among members.
To establish if a single family office is right for your family circumstances, you should carry out a due diligence exercise and hire an expert advisor to help guide you through the process.
Single Family Offices vs Multi Family Offices
A multi-family office is an organization that gives financial advice and wealth management services to multiple affluent families. This is a suitable solution for families with simpler needs and who are hoping for a more economical alternative to having a single family office.
In this structure, the family loses control, autonomy, and the more specialized attention they’d have with the former option. However, there are still benefits that can be drawn from it, which you should take into consideration.
For more information about multi-family offices, please see our article What is a Multi-Family Office? A 2023 Comparison Guide.
Multi-family offices have their advantages such as increased access to talented personnel, cost savings due to economies of scale, more reliable continuity plans, and reduced costs in comparison to single family offices. Additionally, there is also the benefit of being able to leverage more advanced technology solutions.
Focused Single Family Office Services
Before the 1980s, single family offices only provided investment advisory. But since then, they have become much more comprehensive, bringing in-house highly specialized resources and providing a full suite of integrated services. Investment management is the primary purpose of such offices; however, fully developed ones also provide core services like tax planning, estate planning, philanthropy, and succession planning.
Strategic Wealth Management
Long-term strategic planning is essential for achieving lasting success and preserving family wealth across generations. Part of this process involves outlining objectives, building family governance structures such as boards and councils, creating mission statements, and constating a constitution. This all contributes to successful long-term wealth management.
Investment and Financial Planning
Single family offices offer a range of investment management services like formulating policy statements, selecting managers, allocating assets, constructing and managing portfolios, conducting due diligence, and creating reports.
Financial planning services include budgeting and cash flow management as well as real estate and art management, bill pay, and other concierge services.
Philanthropy and Giving
Single-family offices often use philanthropy to engage the current and next generations while simultaneously conveying core values. They do this by creating and managing family foundations, and charitable funds and formulating donation strategies.
Get more information about Philanthropy and Giving here.
Estate and Legacy Planning
Family offices are typically the owners of the legal documents involved in successful wealth transfers and often manage their administration. They may also be responsible for overseeing the structure and execution of these documents, and for working with any fiduciaries that may be appointed.
Get more information about Estate and Legacy Planning here.
A single family office is responsible for developing policies, procedures, and decision-making processes, as well as dispute-resolution methods. They outline the structures, roles, and responsibilities for all involved, facilitate necessary meetings and create a communication plan to ensure everything runs smoothly.
Furthermore, family offices must also be diligent about succession planning – working to share knowledge, create training programs, and more in order to set up future generations for success.
Tax Services and Management
A single family office provides services to ensure tax compliance, create a comprehensive tax plan and devise investment strategies that consider all relevant tax implications.
To ensure they are consistently adhering to regulations surrounding investments, assets, and business operations, a general counsel will often be part of the team.
Get more information about Tax Services and Management here.
Insurance Services and Risk Management
Risk management is becoming an increasingly important service, requiring robust analysis and reporting. This includes creating scenario plans and response plans, as well as hedging strategies for concentrated investments. Data security, the physical security of family members, and the acquisition of necessary insurance policies should all be part of this important process.
To keep costs and access to expertise low, single-family offices often outsource certain services. This can include portfolio management, tax, and legal advice, succession and wealth transfer, as well as technology planning.
Get more information about Lifestyle Management here.
The Steps to Build a Single Family Office
The five facets associated with starting a family office are determining feasibility, defining processes and structures, building, testing, and a pre-launch review.
Determining family office feasibility
Before launching a family office, it is important to make an informed and well-justified business decision. Creating a business case with the help of an expert advisor can be beneficial, and it’s essential to consider the long-term vision, purpose, wealth, and future plans of the family.
This helps guide decisions like staffing, governance, technology, advisory services, operations costs, and other complexities that come with setting up a family office. For some families, having a family office is hugely beneficial; however, not all may find it suitable so careful consideration must be taken.
Defining processes and structures
A comprehensive business plan based on the feasibility study is essential in providing a roadmap to single family office implementation. This includes deciding which roles should be outsourced or insourced, and defining the requirements of these roles.
The right legal, tax, and governance frameworks should also be established, as well as operational and reporting process flows. Further considerations include determining necessary facilities, outlining technology and system requirements, and producing an operational and capital expenditure budget.
Building out the single family office
With a sound business plan in place, it’s time to refine the operational models and processes, and secure the necessary resources. This entails finalizing frameworks and the operating model; finalizing job descriptions and recruiting staff; outsourcing services as needed; securing premises; selecting and securing a technology partner for the single family office; and ensuring that data security measures are in place.
Testing the single family office
Before launching a family office, it is imperative to examine whether all designs implemented on paper are operational in reality. This includes testing the IT infrastructure, systems, and processes for reliability and against cyber threats. Furthermore, ensure that the facility meets expectations and has contingency plans prepared for any major disruptions.
Performing a pre-launch review and launching
Once testing is completed, a single family office can begin operating. If the right preparation has been done, a phased approach to service delivery may not be necessary. The investment into a family office should be regularly monitored to ensure it meets the expectations of the family.
Performance tracking is essential and periodic reviews on people, processes, vendors, and technology should take place against family objectives and best practices. Continual refinement and enhancement will need to be carried out as communication effectiveness, digital abilities, and cyber-security protocols must often be upgraded in order for the family office to remain competitive and sustainable.
For a deeper dive into this, please see our article How to Start a Family Office: The 2023 Familoff Breakdown.
Final Thoughts on a Single Family Office
Managing and preserving large family wealth is growing increasingly intricate and requires the right leadership and experience in place.
With a well-defined long-term aim and a clear understanding of what services are needed now and down the line, families can make an educated decision on whether to create a solitary family office and how best to establish it.