While the appeal of opening a single family office is often undeniable and sometimes appears as the logical next step, for example, after a major liquidity event, too often, families decide to start an SFO without adequately thinking through important questions that may determine its success in the long run. As advisors, you can help your clients avoid an SFO failure by helping them be thoughtful about why they’re starting an SFO and aligning their individual and group expectations upfront.
Here are some important questions to ask to help the family think through their decisions.
Why do you want an SFO? What’s motivating you individually and collectively? This is the first and, arguably, most important question to answer. Each family member must do some soul-searching and be as honest as possible with the answers. Before talking about the great new services that an SFO could offer, dive deep into what problem the family is trying to solve or the opportunity they’re trying to seize. Once each family member has articulated why they believe the family would benefit from an SFO, they’ll need to see how well the reasons match up. There doesn’t have to be a perfect overlap, but there must be enough in common to see the merit of establishing something together.
Are the personal relationships among the family leaders healthy enough now (before starting an SFO)? Too often, an SFO is glamorized and viewed as a white knight who will save the family enterprise. If there’s already conflict or politicking in the current system, that won’t miraculously disappear once the SFO is up and running.
The good news is that an SFO will have a dedicated team of professionals with high intelligence and emotional quotients to help resolve such issues. While the SFO team will likely experience growing pains before hitting its stride in managing family dynamics, part of a successful SFO team’s scope will be to navigate a variety of perspectives and try to find alignment across the group.
Are you comfortable sharing your private information with the SFO? Ask family members to rate their answers on a scale of one to five, with one defined as “I’m fine being fully transparent,” three defined as “I’d like to approve what’s shared or not,” and five defined as “My personal information is for my eyes only.”
One way to help them answer this question is to ask what they wouldn’t want others in the family to know. For example, how would they feel about sharing their personal finances or estate plans? What about legal situations, such as if they ever need bail or are involved in a lawsuit? Defining expectations about information sharing and boundaries upfront helps. Families should be aware there’s always a potential risk for spillover consequences whenever they consolidate such sensitive information.
Are you clear on how the SFO would be structured for joint ownership? Will the SFO structure be “opt-in,” “opt-out” or “all in?” Consider how the SFO will fit into the pre-existing culture of the family and family enterprise. Do they have a history of “all in” regarding other businesses or assets, or do they fiercely value independence? How much flexibility for choice do they want to build into the SFO?
Look deeply at the family’s history and what other experiences have taught them. Do shared assets or ventures tend to bring them together or apart? Are they interested in connecting more of their net worth, some of which may be in illiquid assets? All options have benefits and tradeoffs. You can help them figure out what best fits their family.
Are you aligned on what types of services the SFO must provide? An integral part of the design process will be determining what services the SFO will provide. First, the family needs to align at a high level what types of services they want to provide: investment management, financial/tax/estate administration, risk management, governance, education and development and concierge support. Second, they should prioritize specific services in each category based on what’s essential to provide right away, what can be added once the SFO is more settled, what are longer term “nice to haves” and what they don’t want to include.
Are you ready for the financial and non-financial commitment of an SFO? How do the services desired align with the financial commitment you’re willing to make? The type and level of services will impact the cost of the SFO. Will there be investment services that can generate profit and fund the SFO? Or will the SFO intentionally be a cost center? How will the family collectively provide the seed money for the SFO? And once the start-up expenses are covered, how will they fund the SFO on an ongoing basis? Many families set an annual “membership fee” for services for their shared benefit. Additional expenses may be covered individually, akin to a country club model, so if anyone desires special concierge services, they’ll want to factor this into their planning.
How will decisions be made in the SFO? Will there be a leader, and if so, who will that individual be? What happens if two or more individuals disagree? Most SFOs that serve more than one nuclear family have a non-family executive who leads the SFO and multiple family owners who own a share of the SFO. The executive generally reports to an SFO board, usually comprised of at least a majority (if not exclusively) of family members and will need insights from the family to truly meet the needs of its owners.
Under what circumstances would you mutually agree to fold the SFO? Before a family commits funding to the SFO, they should align on what criteria would make them agree to fold the SFO. What happens if the SFO doesn’t generate profit in a year or longer? What if it doesn’t break even or is a cost center? What if a substantial family conflict arises? Are they committed to the employees and their compensation? (After all, top talent must be well incentivized and compensated to stay.) Clarify the potential scenarios that would make the family consider folding an SFO.
This article is an abbreviated summary of “Essential Questions to Ask Before Starting A Single Family Office,” which appears in the July/August 2024 issue of Trusts & Estates.