By Daniel G. Berick
Family office professionals increasingly find themselves filling broader roles in the process of stewardship of family assets than the traditional functions of investment management and bookkeeping. The family office can play a central role in guiding a family through the process of consensus building, values-setting and transmission of a family’s culture in much the same way as a private foundation’s leadership is central to the communication and dissemination of the foundation’s mission and history, in addition to its asset management.
Information Hub. In its investment management role, the family office acts as a clearinghouse for family financial information. It typically will be responsible for coordinating the collection, collation and dissemination of information regarding the family’s investments and performance. In that central role, it’s critically important for the information provided to the family to be transparent, accurate and verifiable. For that reason, many family offices undertake the organization and review of that audit or verification function centrally.
The family office can likewise be the hub for sharing a range of information beyond investment results. Using social media and other technologies, the family office can help maintain connections among far-flung family members and serve as a repository of family history and experience. As “convener” and “communicator,” the family office can act as a brain trust to succeeding generations in their new business ventures, personal investments or commercial relationships, facilitating intra-family connections for networking purposes and hosting a database of information on prior relationships with external services and vendors.
Training and Education. Along with organizing, analyzing and communicating financial information and investment performance results, the family office can play a valuable role in planning and coordinating family retreats and other educational and training activities. Many families combine a tradition of family retreats with a regular program of seminars and other educational sessions for family members. Depending on which generation is being addressed, these educational sessions can develop familiarity with basic financial and investment topics, and frequently involve interviews and teach-ins with the family’s investment managers and other topics related to financial and risk management matters.
Risk Management. A family office’s most important role is to protect the assets of the family it serves. Beyond investment management, families are increasingly looking to their family office professionals to advise on risk management issues, such as reviewing a family’s overall suite of personal and business insurance coverages, and working with insurance advisors to optimize coverage and cost, while reducing exposure. Families are increasingly concerned with cybersecurity, data privacy and identity protection. Family offices are now acting as the central hub for data protection services, even coordinating the establishment of the family IT networks and information security for a family’s computers and smart devices around the world.
Ancillary Services. Historically, family offices have provided a range of related support, such as bookkeeping, bill-paying, and overseeing tax return preparation. We see global families looking to family offices and their advisors to assist in an increasingly wide range of other ancillary services. These can include arranging the vetting and hiring of household staff, philanthropy management, assisting with personal budgeting and providing “concierge” services, such as vacation home management, travel planning, aircraft rental, and the like. As described above, families are also increasingly responding to data security concerns by looking to centralize their personal technology, with group cellphone plans covering multiple generations of family members and their personal devices, family websites and private networks.
Family Bank. Inevitably, families with substantial means will be the recipients of seemingly endless requests for investments, loans or donations from business associates or others seeking capital, as well as for philanthropic donations. The family office can serve as a gatekeeper and evaluator of those requests and, by interposing itself between the family and those seeking funding or donations, provide a helpful element of objectivity, distance and, if need be, deniability for the family members. Perhaps even more valuable, the family office can address similar requests from family members, which inevitably are more emotionally charged and difficult to address as purely business propositions.
Many families will earmark an amount of funds for intrafamily disbursement as the “family bank,” to finance everything from purchases of residences or other personal property to investments in business ventures and, in coordination with family office executives, create a systematic process through which family members can request funds for identified projects. A family bank can provide a way for a family to build cohesion across generations, encourage intrafamily collaboration, expand financial literacy, instill family values, prepare future generations for leadership and encourage innovation. The funding of business ventures can be combined with entrepreneurship or other financial education programming. Project selection and funding requests may be performed by family office professionals and/or a family committee, through the evaluation of an established criteria. The interposition of family office professionals in the process can add a measure of objectivity to the intrafamily-lending dynamic, lessen the inevitable potential for discord, ensure appropriate legal protections for the family lenders and optimize the tax effects of such transactions. Creating “market standard” documentation to evidence intrafamily loan and investment transactions can protect family members from potential creditor claims, legal questions arising from ambiguous documents, and potential gift tax and other tax issues arising from with non-arm’s-length transactions among family members.
Daniel G. Berick, Esq. is Americas Chair–Global Corporate Practice and Co-Chair, Global Family Office Practice at Squire Patton Boggs.
