Most businesses worldwide are family businesses, and several features, such as succession and governance, make family business management unique. In addition, these ultra-rich families have Single Family Office or SFOs that strives to beat the performance of private banks and other investment firms. Therefore, it is interesting to delve deeper into how family wealth is managed.

The history of SFOs dates back to Major Domus (head of the house) and Major Domo (chief steward) employed by ancient and medieval Roman empires, respectively. Today’s SFO emerged in the mid-19th century by creating private banks and trust companies for families that made fortunes in the Industrial Revolution. Today, SFOs are also operated for entrepreneurial families.

A typical SFO requires an operating cost of around ₹20 crores a year. So, other wealthy individuals and families often create entities known as Multifamily Offices (MFOs) to carry out profitable yet affordable wealth management.

The Objectives of Family Offices

The primary objective of a Family Office is trans-generational wealth management. Second, they are created to consolidate accounting, tax, and estate planning services. Other goals of a Family Office include freedom of career choice for family members; cost-effective money management; stable yet scalable asset management; trustworthy and loyal employees; and cheaper document administration.

An independent investment advisor may have other interests. Similarly, an investment firm might be a business that runs on a fee or a large financial institution that is more focused on selling its products. Today, more Family Offices seem to be moving toward portfolio management. Yet they can protect against conflicts of interest and prioritize the family interests.

The Partnership with Banks

Single Family Offices do not manage family funds directly. Instead, they work alongside banks, investment managers, and asset management companies to set the strategy and protect and grow the family portfolio. As a result, SFOs complement banks. Most of their work is outsourced to the banks, and the banks turn into partners rather than competitors.

In the family office business, partnering with banks is a positive trend. The most crucial benefit for Family Office is better access to Information Technology (IT) to generate timely yet comprehensive reports related to investment management. Standalone family offices need help to continuously invest in expensive IT infrastructure that helps to make optimal investment decisions.

An efficient IT infrastructure also helps many Family Offices to offer ‘door keeping’ services, such as managing homes, vehicles, and payments, hiring staff, and guiding philanthropy. The SFO also helps to keep family unity and achieve common objectives.

Governance Practices to Ensure Accountability

Governance is essential in Family Office setup. The governance structure of family offices reflects the families that fund them. Efficient family offices have explicit governance practices that hold the professionals accountable. It has been done by implementing pre-determined benchmarks, regular evaluations based on solid criteria, and transparent reporting. The combination of accountability and objectivity contributes to building trust, a key reason to have a family office.

The family members participate in family office governance. They may do it either informally or through established committees. On top of that, there are mission statements and operating agreements in administration. These elements guide family members to make genuine governance commitments based on a shared vision of the family office. The visions may include a family’s expected results from its family office, the financial and time commitments, and its ability to ensure efficient operation.

Most wealthy families appoint a family member to run their SFO; the rest hire financial professionals from outside. More affluent families are more likely to hire outsiders to manage their money. Some families hire investment managers from the family business to head their SFO as they have experience in running a family business and the family. On the flip side, other families avoid hiring professionals from the family business because they want to separate the family wealth from the company.

The Significance of Discretion

Discretion is crucial for SFO employees who manage the fortunes of families whose endless wealth might put them in the public eye. Therefore, most SFOs have no website and never advertise their services. On the other hand, some high-profile wealthy families don’t care much about discretion. So it depends more on the nature of the business and the family.

Discretion in family office business is a straightforward concept. Still, it becomes challenging at times, mainly when certain assets, such as a privately held business or property, are owned jointly by separate family members.

A Few Suggestions for SFOs

To conclude this article, it would be apt to give three significant suggestions for SFOs.

First, having a purpose matters more in the family office business. It enhances the performance of a family office. An efficient Family Office would mostly connect to families with a strong sense of purpose when dealing with their fortune. These families invest not only their money or assets but also their enthusiasm in pursuing something beyond mere wealth preservation and appreciation. This sense of purpose may include a wide range of objectives. Some include involvement in entrepreneurial activities, worthy causes, and philanthropic pursuits.

Second, the families must strive for excellence in every area of their family office. In other words, nepotism has no place in the family office, and family politics never compromise the professionalism of their SFO.

Third, segmenting tasks can improve performance. A highly paid fund manager should not be distracted by dealing with the car fleet or collecting the laundry. Some SFOs deal with dormant companies of the family. This creates problems for family members in properly supervising their SFO’s decision-making. Spending time, interest, or expertise on unnecessary and unprofitable tasks cost

Justin Raj

Alpha Research Team