How to choose a family office advisor
OperationsUpdated on May 2, 2023
Table of Contents
Given the growing complexity that family offices are confronted with, advisors are expected to continue playing an important support role. Family office requirements are evolving in line with a more ambitious investment agenda and in response to changes in the business and regulatory landscape. Selecting the right advisor is a process that needs to be managed professionally, with consideration to the current and future priorities of the family and family office.
The family office sector is evolving
Modern family office structures reflect a greater level of in-house expertise and specialisation as well as a broader service offering. Investment strategies have evolved, evidenced by the increasing appetite for active, direct investments that are more aligned to an overarching, long-term purpose and investment goal. At the same time, these trends are creating a sector that is becoming increasingly diverse, with each family office structure being shaped around the unique needs and priorities of the family it serves.
The role of the external advisor
Family office advisors seem to have become seasonal in their level of importance to the family office sector. They sit at the intersection of strong conflicting influences, one being the family office’s intent to actively manage their own wealth and legacy and the other being the increasing complexity and risk associated with wealth management. Not too long ago, the majority of family offices took a more passive approach in the decision-making space, assuming the role of facilitator and administrator. With this approach, a family office would be responsible for connecting the family to various expert advisors for support with investments, estate planning, tax planning and other specialised areas. In this scenario, the value of the advisor was elevated.
In recent years, this dynamic has changed significantly. Family offices are taking more control over their wealth. Investment decisions are more often being made in-house, with the family office playing more the role of advisor versus administrator. Specialist resources are often employed within the family office set-up to support this intent. Below are some of the key drivers behind this trend:
1. Families are becoming more purpose-driven and family offices are seen as the vehicle through which to achieve their desired impact and unique legacy. The growing allocation of wealth to sustainable and impact investments is evidence of this shift.
2. Increased allocation of assets into direct, private investments reflects a shift away from the passive, more liquid investment products traditionally recommended by advisers. Many family offices are rather flexing their own business network and collaborating with other family offices to seek investment opportunities.
3. Family offices are prioritising performance over wealth protection. Taking a longer-term, multi-generational view on wealth preservation has led many family offices to take a more active role in managing their own investment decisions, assuming that they can achieve higher returns. Concerns around high inflation and lower returns of cash and fixed-income assets have triggered interest in alternative investment opportunities that will deliver enough growth to support future generations.
4. Advisors often do not focus enough attention on building a relationship with next-generation leaders. Instead, they focus all their attention on the family patriarch and, as a result, often get their marching orders when the younger generation takes over.
Advisors are making a comeback
Whether a family office supports the concept of seeking guidance from external parties or not, the fact is that ultra-wealthy families require professional and expert support more than ever before. The family office landscape has become far more complex in recent times, especially in the regulatory, tax and wealth management space. The business and economic environment is also evolving rapidly, requiring specialised support and sophisticated risk management processes. Below are some key reasons why advisors are, once again, becoming an attractive option to many family offices:
1. Succession and wealth transfer: As first-generation leaders begin to hand over the reins to the next generation, many family offices realise that they are not fully prepared for all the implications and risks that emerge in the process. Issues with governance, family dynamics, business strategy and wealth transition tend to highlight the need for expert support.
2. Investment strategy: One of the reasons for family offices parting ways with advisors is the very reason for them finding their way back to each other. Ironically, the new family office investment agenda—redirecting significant amounts of wealth into purpose-driven, direct investments—has also exposed some knowledge and competence gaps, with many family offices turning to specialised partners who have the necessary know-how and insights.
3. Family office costs are rising: Given the intent of family offices to become more autonomous and independent, structures are becoming more complex and multi-layered with overhead costs escalating significantly. As indicated above, a higher degree of in-house specialisation is also required to support the unique investment strategies of the modern family office, adding further to the staffing cost. Advisors who can step in when required or assist with restructuring and streamlining the family office can save the family office a lot of money.
4. Tax compliance and regulatory changes: The complexity associated with tax compliance and navigating new regulatory requirements has increased significantly in recent years. Family offices now also operate in a far more litigious environment than ever before. Expert advisors still have a very important role to play in these areas, helping the family office to redirect their attention to core priorities like family strategy.
5. New emerging risks: The digital age has revolutionized the way we live and do business and has been the key driver of new wealth generation over the past decade. However, technological advancement has come with new threats like rampant cybercrime and increasing reputational risk. Innovation is behind the accelerating pace of change but is also a disruptive force that can turn riches into rags. Many family offices are therefore turning to specialist advisors to assist with technology planning and cyber security.
Selecting an advisor
Finding the right advisor begins with understanding your current and future priorities and assessing the expertise and capacity within the family office structure to support these priorities. The logical next step is to determine whether additional internal resources need to be employed or whether to consult with an external advisor or multiple advisors to support the family office objectives.
1. Clarify the challenge
Family offices need to clearly identify their gaps and the specific expertise required. In order to do this, there first needs to be an honest assessment of whether the family office has the necessary facts and expertise to define the issues and determine business priorities.
2. Clarify stakeholders
Once the challenges have been identified and agreed upon, the relevant stakeholders need to be identified. These will be the individuals who need to agree on requirements for a solution and who will develop criteria for evaluating potential new advisors.
3. Develop benchmarks
Identify the specific attributes that are required of a potential advisor. The purpose of this step is to enable objective and comparative assessments of the advisors that are approached. A holistic approach should be taken here, ensuring that qualitative attributes like communication style and culture fit are included.
4. Define interview process
Agree on how the questions will be asked, how advisors need to respond and how responses will be assessed. Agree on who will be involved in this process and ensure that they have the necessary capacity to do so.
5. Request proposals
Approach potential advisors and share your requirements. Set specific timelines and be clear on expectations.
6. Advisor selection
Once advisors have been shortlisted, references need to be extensively questioned. Shortlisted advisors should be further evaluated in terms of what additional value they can add to the family office and how they align with the family office’s long-term objectives and purpose, from a professional and personal perspective.
Traditional and emerging advisor services
1. Family dynamics consulting
One of the main reasons for generational wealth erosion is conflict and misalignment within the family. Issues relating to communication, decision-making authority, roles and responsibilities and succession can be extremely destructive. Often, family offices need an expert to foster consensus and collaboration, aligning the family behind a shared goal and helping them to find better ways of working together, making decisions and resolving conflicts
2. Technology planning services
In the modern world of business, data is taking the centre stage more than ever before. Family offices are needing to be more agile in their decision-making and have to stay abreast of the latest trends impacting their investments. Consequently, technology advisors who assist with implementing appropriate technology solutions are becoming sought-after resources. Additionally, advisors who can assist with cyber-security solutions and processes are also in high demand.
3. Reputation management
Modern society demands a higher level of transparency and ethical consideration from businesses. The next generation wants companies to prioritise their social and environmental impact and they want to feel a personal connection to the companies that they support. This means that they are more likely to support businesses and brands that are run by people they trust. In this modern, digital age, reputation is not only hugely important but also very fragile as the distinction between personal and business becomes more blurry.
4. Traditional services
Below are some traditional advisor services that are commonly sourced by family offices:
- Risk management
- Tax planning and preparation
- Estate planning
- Wealth management
- Investment management
- Philanthropic planning
- Strategic planning
- Governance structure
- Family office design and set-up
For family offices, the administration and preservation of wealth has never been more complex. In addition to the growing complexity within the investment space, family offices also have to contend with the challenge of navigating new regulations, tax compliance, cyber-crime and economic volatility. Although modern family offices have become more sophisticated and independent, advisors still play an important support role. Selecting the right advisor for your specific needs is key to success.
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