Questions to Ponder before Embarking on the Path of Creating a Family Office
In the world of high-net-worth individuals and families, the combined wealth is nearly on par with the gross domestic product of every country except the United States. Yet, the question of whether to establish a family office is not as straightforward as it may seem.
Instead, families should focus on understanding their need, purpose, sophistication, and preparedness for a family office. The key is to consider what families hope to accomplish with a family office, whether it's more focused on meeting family needs or adding strategy and sophistication to resource management.
A family office, in its various forms such as embedded, virtual, single-family, multifamily, private investment offices, and wealth-management firms, can require an annual operation cost of $1 million to $10 million. The alignment of a family around the questions regarding the purpose, structure, and cost of a family office is crucial for its success.
Next-generation family-enterprise members should ask strategic and forward-looking questions about their wealth management and family office structures. Questions like:
- What are our family’s long-term wealth management goals and values, and how can our structure best support them?
- How can we optimize investment strategies, including exposure to alternative assets and direct investments, to align with the younger generation’s preferences and risk appetite?
- What governance and operational frameworks can ensure intergenerational collaboration, adaptability, and continuity in managing family wealth?
- How can technology and wealth management innovations be integrated to provide efficient and transparent portfolio management?
- How can we leverage our family office or alternative structures to achieve financial diversification, access to unique opportunities, and portfolio resilience amid market volatility?
These questions reflect a shift from the binary decision of establishing a family office to a nuanced deliberation about designing a tailored wealth management ecosystem that balances legacy, growth, and innovation.
The principal work performed by family offices includes managing family resources and supporting family members on multiple dimensions. A recent study by Deloitte Private estimates that the total number of family offices worldwide will grow by 75% between 2020 and 2030.
However, families are better served asking themselves questions about the need, purpose, sophistication, and preparedness related to a family office. The common question "Do we need a family office?" is not the right question, as families often already have some structure in place to manage family resources. Education is necessary to ensure a common understanding among the family regarding the overall purpose of the family office as well as the strengths and weaknesses of its various incarnations.
The question of a family office often arises due to external influences such as hearing about others who have one, or due to a change in family circumstances like a death, marriage, or liquidity event. The answer to the appropriate structure for a family office depends on the family's desires and available resources.
This article originally appeared in Inc. magazine, and it also includes other popular articles such as tips for communication at work, the impact of coworkers on productivity, signs of AI-generated photos, the importance of apologies for leaders, a pre-flight checklist for startup scaling, a podcast episode on resilience in the face of setbacks, the impact of generative AI on creativity, strategies for success in a new industry, the reasons for the U.S. dollar's global dominance, and advice for making a career transition to a new industry.
Five critical questions families should ask about a family office include: How decisions about family real estate, financial assets, and entrepreneurial ideas are made? Who makes decisions about family resource management and support? How are decisions made about paying tuition and scheduling repairs? How are family resources managed and supported currently? How prepared is the family to manage a family office? The answers to these questions vary widely depending on the family.
In the context of managing family wealth, it's essential to question how decisions about family real estate, financial assets, and entrepreneurial ideas are made, as well as who makes decisions about family resource management and support. The family should also assess how decisions are made about paying tuition and scheduling repairs, and evaluate the current management and support structure of their resources. Additionally, candid self-reflection about the family's readiness to establish and manage a family office is crucial to its success.
