A Simple guide to family office structure
StrategyUpdated on May 9, 2023
Table of Contents
- Family offices have come a long way
- The evolution of family office structures
- Trust structure
- Embedded family office structure
- The single family office
- Multi-family office
- Virtual family office
- Legal entity considerations for family offices
- The importance of jurisdiction
- Governance structures
- A typical family office organisational structure
- Take a structured approach
Family office structures have evolved significantly over the past few decades, becoming far more sophisticated and efficient. Changes in organisational, legal and governance structures reflect the ambition of modern families to manage their own destiny and thrive into the future, despite complex regulatory environments and emerging risks.
Family offices have come a long way
Family offices can be traced back to the industrial revolution when many successful entrepreneurial merchant families created informal structures to manage and support investments into new business opportunities. Historically, these structures always emerged subsequent to significant wealth being generated by a successful family business. Over the last four decades, family office structures have evolved significantly in response to changes in the regulatory and tax landscape as well as the increasing need for improved risk management and faster decision-making in a new world of business where wealth can be created and lost in a much shorter space of time. Sophistication, efficiency, sustainability and performance have become key drivers of the changing face of family offices around the globe. Establishing a family office with the appropriate organisational, legal and governance structure has become essential to achieving these goals.
The evolution of family office structures
Some commonalities still exist between modern family offices and those of the Industrial Revolution, the most important being the connection to an operating family business. More than half of current families who have a family office also manage one or more operating businesses and many of these modern family offices started in a similar informal fashion to those of the past.
Up until the early twentieth century, trusts were very popular as a vehicle to acquire and hold assets on behalf of the family. Wealth preservation and asset protection were the key drivers of this trend, however, this approach did not provide enough control to the family itself due to trustees having far too much authority over decision-making. The growing importance of autonomy, privacy and purpose to modern wealthy families has rendered the traditional trust structure rather obsolete.
Embedded family office structure
As in the past, many family offices of the modern era were initially started informally using existing resources within the family and family business to carry out various administrative, accounting and wealth management functions. Essentially the ‘family office’ structure becomes embedded in the family operating business. There is no separate legal or organisational structure in this instance which generally becomes a significant challenge as family wealth increases and family demands become more complex and nuanced. Not only does it become too difficult for resources to be adequately split between the needs of the operating business and the family but compliance and governance issues generally pose an even greater problem. Breaches of contract, breaches of fiduciary duty, conflicts of interest and tax reporting violations are common concerns that arise from this approach. Additionally, this structure does not allow for deductions of expenses related to investments, tax planning, estate planning and asset protection.
The single family office
Following the second world war, single family offices began to take hold in North America and Europe. These enterprises, almost always structured as stand-alone business entities, are dedicated to managing the financial and personal affairs of a single wealthy family. Originally, these family offices were primarily focused on investment advisory with little participation in tax planning, estate planning, philanthropy and succession planning etc. From the 1980s, single family offices began to evolve into more sophisticated structures shifting specialised resources in-house and offering a more comprehensive and integrated suite of services. Single family offices generally have several staff members. The bigger, more established single family offices will typically include an executive team comprising a chief executive officer, chief investment officer, chief financial officer, operations manager and legal counsel. This team will manage a diverse set of employees ranging from administrators, accountants and book-keepers to those responsible for HR, IT and real estate to name but a few. More often than not, complicated tax planning, specialised private equity and wealth transfer planning are still outsourced but not in all cases. Single family offices are therefore expensive to run and are most appropriate for ultra-high net worth families who prioritise investment autonomy, privacy and purpose.
The multi-family office has emerged as a significant and fast-growing player in the family office sector. These are companies that are structured in a similar way to single family offices and offer similar services, but manage the wealth of two or more unrelated families and create synergies and economies of scale among them. Many multi-family offices began as single family offices and grew to an extent that they could become a commercial entity offering their services to other families. Most multi-family offices are family owned however, private banks and wealth management firms have also become increasingly active in this space, now offering dedicated in-house family office teams (Commercial multi-family offices) to service multiple wealthy families. Multi-family offices don’t offer the same level of control and autonomy that an single family office offers but cost efficiency is usually an attractive reason for choosing this structure.
Virtual family office
A virtual family office typically employs only one or two people to coordinate outsourced family office services as and when needed. It is normally contained within a separate legal structure but without separate office facilities. VFOs have become increasingly popular amongst families that are looking for a more cost-effective option to achieve compliance and accounting integrity and who require a less complex array of services. Private banks and wealth managers have responded to the growth in the virtual family office concept by establishing specialised departments which provide investment, succession, philanthropy and governance support to these entities.
Legal entity considerations for family offices
Family offices around the world are generally structured as traditional corporations and their equivalents or as Limited Liability Companies (LLCs) and their equivalents. In the United States, family office corporations are either structured as Subchapter C or Subchapter S corporations. Family offices can also be structured as proprietorships or partnerships but this generally isn’t advised as these entities do not protect family member assets with respect to personal liability.
Tax regulations and new laws governing securities exchange and investment advisory services have evolved significantly over the past couple of decades. In many cases, these regulatory changes have rendered many established family office structures inefficient or obsolete.
When determining the appropriate family office structure, one must consider both the planned and future services to be provided, the size of AUM and applicable government regulation in a particular jurisdiction. Optimal, best-in-class structures take into account specific regulatory, liability and asset preservation considerations and therefore often include multiple legal structures. This is to ensure optimal tax efficiencies whilst ensuring compliance and good governance. Common legal entities that are formed include the central family office operation itself as well as related entities like ancillary family offices (secondary family offices set up in other jurisdictions), real estate property management companies, captive insurance companies, registered investment advisors, private trust companies and family holding companies. Family holding companies, set up as family limited liability companies are particularly effective in centralizing asset ownership, protecting personal assets, estate planning and tax planning.
The importance of jurisdiction
Available legal structures and the tax implications of each structure differ greatly from country to country. Additionally, government regulations pertaining to family office operations and services are also not consistent across the globe. Some of the most important considerations in determining jurisdiction for a family office are income taxes, liability protection, asset protection, executive compensation and benefits.
Of course, there are other practical considerations like where the family is based and where the majority of assets are. When considering these aspects, it is important to take a long-term view, understanding future migration plans and taking into account future investment plans in other jurisdictions.
A robust governance structure is essential for supporting the sustainability and long-term objectives of a family office. Drawing up an agreed constitution in consultation with all family members is a good starting point. This would include a mission statement and an articulation of the family’s core values and purpose. Setting up a board of directors to manage the strategic direction of the family office, in line with the family’s long-term vision, is crucial. It can sometimes be very beneficial to include independent directors who can bring experience, knowledge and new thinking. Everyone needs to understand their roles and responsibilities within the structure and decision-making, strategic planning and conflict resolution processes should be well defined.
A typical organisational structure of an established single family office or family-owned multi-family office
Most established family offices have an executive team comprising a Chief Executive Officer, a Chief Investment Officer and a Chief Financial Officer. The Operations Manager role within a family office is sometimes absorbed into other executive positions however, as the complexity of the family office increases this position tends to stand on its own. Below is a very brief overview of the roles and responsibilities of the CEO, CIO and CFO in the family office context:
Chief Executive Officer (CEO)
The CEO position in a family office requires unique strategic, operational and interpersonal competence. A family office CEO needs to have a deep understanding of the family and their specific needs and goals. The CEO is in charge of the family office and has the responsibility and authority to develop strategy, design the organisation, hire and fire employees, establish managerial roles, and determine how required services are to be delivered.
Chief Investment Officer (CIO)
The responsibilities of a CIO vary widely from family office to family office, based on the size, complexity and investment objectives of the family. Whether the family office outsources its investment services or manages its assets in-house, CIOs will focus their time and effort on developing the investment strategy, executing the strategy and evaluating performance.
Chief Financial Officer (CFO)
The CFO is a specialised role, traditionally focused on preparing the monthly financial packages, finance audits, assets and controls, oversight of forecasts and budgets and coordination of the preparation and filing of required tax reports. In addition, the CFO is often responsible for supporting projects relating to IT and real estate as well as due diligence for new investments.
Take a structured approach
As family offices become more complex in terms of their objectives, needs and investment strategies, establishing effective organisational, legal and governance structures becomes increasingly important. A family office needs to understand the long-term goal that they are working towards, the resultant structure that supports that goal and how best to structure the business from a legal perspective to remain compliant and tax-efficient within a particular jurisdiction.
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