FAMILY OFFICE DESIGN
Types of Family Offices
A family office is designed to oversee the personal financial matters for a group of related family members by working with a combination of in-house professionals and third-party providers.
Each family office is designed for the level of wealth, types of assets, complexity, and objectives of the family it serves. While the specific design and activities of family offices vary widely, by-and-large there are three basic types: services family office, investments family office, or comprehensive family office.
Services Family Office
The services family office typically employs staff to provide some level of bookkeeping, administrative services, personal property management, project management, and concierge services. Investment management activities are outsourced and managed through contracts with external providers.
Investments Family Office
The investments family office keeps functions strategic to the family’s investment objectives in-house and outsources nonstrategic functions. In addition to overseeing investment functions, investment family offices may employ analysts or retain external providers to aid in asset allocation, manager selection, and direct investment due diligence. Certain investment management functions may be brought in-house particularly where it leverages a family’s expertise, for example in real estate, technology, or other industry experience.
Comprehensive Family Office
The comprehensive family office is designed to provide services for families who desire the maximum degree of control, security, and privacy. All functions including administrative, tax, legal, risk management, and investment management are provided primarily by in-house employees. Specialized investment management activities such as hedge fund, venture capital, private equity, or emerging market investments may be sourced externally depending on each family’s objectives, budget, and their ability to recruit and retain such talent.
Family Office Framework
To help people visualize the overall process of managing wealth, I’ve developed a proprietary analytical framework that integrates governance, planning, investing, and operations into a holistic system.
I utilize this framework to help people develop a solution that is flexible, cost-effective, and sustainable.
Martiros Family Office Framework
Family Office Investment Models
It is widely assumed that family offices are by design, investment offices. While most family offices are involved in overseeing investments, the actual investment process can be quite different from family to family. In fact, by examining the process by which investments are managed, one can identify four distinct models: the Investment Company model, the Institutional model, the Manager of Managers model, and the Outsourced model.
The Investment Company Model
With the Investment Company Model, the family office is structured like an investment management company or hedge fund, with the entire investment process managed internally. The Investment Company Model requires hiring experienced investment professionals and building research, trading, operations, and compliance functions. Compensation structures are often tied to investment results with profit sharing arrangements. The family office investment team may include family members and may be separated both physically and legally from the family office service functions.
The Institutional Model
With the Institutional Model, the family hires an independent investment consultant and creates a process that is similar to the process employed by an endowment or foundation investment committee. The investment consulting firm provides asset allocation and manager selection research, due diligence, and recommendations. The family office then decides whether and how to implement the recommendations, usually by a vote of the family office investment committee. The family office usually handles the implementation process (e.g., establishing accounts, wiring money, verifying transactions, etc.), although some investment consultants offer this service for an additional fee.
The Manager of Managers Model
With the Manager of Managers Model, the family office makes asset allocation decisions, and evaluates, selects, monitors, and tracks external investment managers. Those external managers then oversee the securities analysis and portfolio management process of the investment fund for which they’re responsible.
One of the challenges of the Manager of Managers Model is the need to evaluate a broad number of asset classes and investment managers with a small family office team—often numbering only one or two people. Family offices should consider supplemental research to support their internal research capabilities, and in certain asset classes such as hedge funds and private equity, fund of funds may be used as a way of offloading due diligence to a specialized research team.
The Outsourced Model
With the Outsourced Model, the investment functions of the family office are outsourced entirely to an independent multi-family office or wealth management company that provides asset allocation, manager selection, analysis, and reporting. Typically, these service providers charge a bundled fee based on a sliding scale of assets under management. (Services like bill paying and property management may also be available through an outsourced provider.)
Family Office Investment Models Compared
The table below shows how family office investment models compare based on whether core investment functions are managed internally by the family office (a "yes" answer") or externally by financial service providers (a "no" answer).
One of the great advantages of a family office is the ability to create a customized investment solution for current and future generations. It is therefore essential that family members clearly identify their objectives and understand the true long term operating costs and sustainability of their family office structure. Given the financial resources involved in managing a family office, a strategic plan, operating budget, annual audit, and formal governance structure are highly recommended.
Each family needs to evaluate alternatives based upon other criteria, such as the potential impact on their personal privacy, the degree of control they desire over the process, and whether they want to use the family office as a means to develop the investment skills of individual family members.