Bernard Arnault’s recent real estate purchases in the United States have been making headlines. Interestingly, his family office uses the services of BFKN, a commercial real estate and business planning legal firm, to handle their real estate dealings in the region. BFKN is the primary North American real estate counsel for Bernard Arnault, Groupe Arnault, LVMH, and the LVMH brands in the Americas.
In this insight, we explore why family offices choose to outsource, what and who they typically outsource to, and how to determine which services are suitable for outsourcing.
Why do family offices turn to outsourcing?
Family offices often outsource to access specialised expertise, increase efficiency, and reduce costs. Although internal staff may handle day-to-day operations, sometimes external skillsets are required to handle special situations.
A recent research report by Ocorian showed that a significant proportion of family offices already rely on third-party support. The report revealed that 63% of family offices use third-party assistance for managing illiquid assets, such as private equity, while 60% seek help with personal financial management for family members. Additionally, nearly half (48%) receive support for liquid investments.
The study also found that outsourcing allows family office professionals to improve overall service levels (71%) and focus on their core strengths (59%).
Who and what functions do family offices outsource?
There is no shortage of service providers available to family offices. In fact, as the industry grows, more and more financial institutions are opening up segments of their businesses to offer customised solutions for wealthy families.
Investment management
Family offices can outsource investment management to external professionals or firms that specialise in portfolio management. This is becoming a growing trend in dealing with today’s uncertainty. One way to potentially improve investment performance for family offices is by seeking the assistance of Outsourced Chief Investment Officers (OCIOs).
Advisory services
When special circumstances arise, such as purchasing of a new asset class, the family offices can engage external advisors for strategic guidance. Perhaps an infamous example is the acquisition of Twitter by Elon Musk. The tech billionaire assembled a team of advisors to help with the takeover. It included Alex Spiro, a celebrity lawyer who handled the legal proceedings, Antonio J. Gracias, the Chief Investment Officer of Valor Equity Partners, and Jared Birchall, who runs his family office, Excession, LLC.
Accounting and financial reporting
Another area where family offices can outsource their activities is managing accounting functions, financial reporting, bookkeeping, and payroll services. They need to ensure there are internal controls to prevent any mishaps. In addition, family offices should have the legal authority to prosecute any wrongdoing. For instance, Rihanna settled a lawsuit with her former accountants, who allegedly mishandled her finances, resulting in significant financial losses.
Other services that can be outsourced include software providers or IT consultants for technology infrastructure, as well as compliance and regulatory services to manage governance frameworks.
The costs and fees associated with outsourcing these services depend on the complexity of the engagement, the scope of work, and the providers’ pricing models. Establishing clear fee structures and understanding the cost implications before entering into outsourcing arrangements is essential.
What are the benefits and drawbacks of outsourcing?
Outsourcing services are becoming increasingly popular in family offices due to rising inflation and compliance pressures. Some of the benefits of outsourcing include accessing a wide range of expert talent at cost-effective rates. And in particular, smaller firms can rely on third parties to offer more sophisticated services and resources. However, outsourcing has some drawbacks, such as losing control of operations and becoming dependent on external providers. Confidentiality breaches are also a significant concern.
Conducting thorough due diligence on potential service providers is essential when outsourcing services in family offices. That includes assessing their reputation, track record, and regulatory compliance. It is also vital to define clear service level agreements, maintain open communication channels, and ensure data security and confidentiality. These factors are crucial to consider for a successful outsourcing experience.
How to determine which services to outsource?
It is important to assess the goals, capabilities, and resource limitations of the family office to decide which services to outsource. Some tasks are more cost-effective and efficient for larger firms to handle. For example, if customised performance reporting requires expensive software and takes up a lot of personnel time, outsourcing to a partner firm already invested in this service may be a wise choice.
Providing their own tax planning, preparation, and legal services can be challenging for many family offices. Outsourcing these functions may be a good decision. Also, outsourcing administrative services is common practice. That allows family offices to concentrate on more important matters.
Family offices frequently outsource certain tasks to gain access to specialised knowledge, streamline operations, and lower expenses. This trend is rising, with many family offices already turning to third parties to manage their illiquid assets, personal finance, and liquid investments.
By outsourcing, family office staff can improve their service quality, concentrate on their core competencies, and take advantage of personalised solutions provided by financial institutions. However, it is essential to conduct extensive research, establish unambiguous service level agreements, and guarantee data privacy and confidentiality to ensure a successful outsourcing venture.