Considerations for structuring a family office
Considerations for structuring a family office
Executive Director, Amy Collins highlights how family offices usually evolve alongside family wealth and become more complex, requiring dedicated professional teams to operate them.
At Ocorian, we often get asked what the most common form of family office structure is. There's usually an expectation that there will be a definitive guide comprising a complete structure chart showing how trusts, companies, key family assets and the operational costs of the family office operation can be neatly tied together. The fact is, there is no such thing.
Every family is different. Their investment needs and outlook will be different and their culture, current residence and investment location will all have a massive bearing on how the family can be organised. Key aspects to be considered as part of planning for the structure of the family office are considered at high level below:
The role of the family principal(s)
The first key aspect is to identify whether there is any expectation or need for the family members who are supervising the affairs of the family office to have any sort of executive or non-executive role within it. There is no right or wrong in this scenario, it is all dependent on the needs of the family, their time constraints and skills, and whether they expect the family office to manage operations effectively without them. However, in my experience the situations where the family principal has an active role allows for the most effective communication and common level of understanding between family principals and the family office executives.
What skills are required?
This is a crucial question. This goes back to the nature of the family office that is to be established and what the major tasks are to be. If the family are expecting to manage all investments in-house, including equities and debt, then it would be reasonable to expect the Head of the Family Office to have deep investment experience, and possibly take the position of Chief Investment Officer of the family office. However, if the role is primarily investing in real estate or private equity, then it is usually necessary for the Head of the Family Office to have in-depth experience in that discipline.
Existing family structures
It is very unusual for a family thinking about establishing a family office to have no structures in place at all - there will normally be some legacy element of structuring which has been put in place because of the historic family needs. Therefore, the family office planning needs to take account of these structures and how they are managed. This could well mean that there is a need for experienced corporate or trust administrators within the team.
Recruiting and motivating the family office talent
This is one of the key challenges for any family looking to hire good people. A family office environment is very different to a large corporate, and whilst this brings some perceived advantages to the potential staff base (clear structure, transparency of core activities and those expected in the future, family business environment), there are some perceived downsides. These relate to:
- Perceived lack of career growth - the workload may not differ much from year to year and therefore there is a risk that there is a perceived glass ceiling.
- Incentives - as a privately-run firm, often with core costs that are unavoidable (salaries, office space, IT costs) it is harder to incentivise key employees with anything other than salaries and bonusses. I have seen some examples where family principals operate a capital bonus scheme so that they can motivate senior executives through growth of assets under supervision.
- Minimum level of compliance with employment laws and regulations - each year the burden on an employer, in most jurisdictions, is rising. It may not be cost effective for the family office to manage a full HR function, along with manuals and procedures, which may need to be outsourced.
- Key person risk - even in the larger family offices, there are usually individuals who have worked for the family for a long period and who have historic knowledge of the family's affairs. If that person is unavailable this may pose a threat to the ongoing family office operation.
Introducing A Guide to Family Offices
Intended to demystify, inform and help those who are considering establishing or raising capital from a family office, our Guide to Family Offices highlights key issues and solutions relating to the efficient operation and life-cycle of the diverse businesses that fall under the description of a family office. Download the guide below.