A family office evolution

In our work with many families and businesses, nuance abounds. Lines of business, management philosophies and execution tactics may be similar, but nearly always exist with subtle variation. Such is the case when discussing family offices. A family office, by its simplest definition, helps a family manage its wealth. Generally, a family office exists as either a stand-alone entity, or in an embedded structure within an operating family business. Further variations of the stand-alone variety include a single-family independently operated family office, a single-family office “run” by a specialty professional services provider or a multi-family office wherein several families utilize the same team of professionals.

Often the first step in a family office progression, many families operate a form of an embedded family office, sometimes even without acknowledging the functionality as such. It is not uncommon for business owners, as they become increasingly successful, to have select trusted personnel already working within their company additionally handle some of the owners’ personal affairs. Alternately, personnel may be intentionally hired to specifically perform these functions, along with those such as managing the family portfolio of properties, investments, etc. The embedded family office functionality may feel like an organic part of the everyday operation of the family business.

One of the main benefits of an embedded family office is the ability to provide tailored services to the family-owned business. Because the family office is integrated within the business, the team has insight into the business's unique financial needs and objectives. This allows the family office to provide customized solutions and strategies that are specific to the business.

Another benefit of embedding a family office within a family-owned business is the ability to provide a holistic approach to wealth management. The embedded family office can work with the family-owned business to develop a comprehensive wealth management plan that takes into account the family's goals and the business's financial needs. This plan can include strategies to manage risk, reduce taxes and protect the family's wealth for future generations.

However, there are also challenges to an embedded family office structure. One of the main challenges is maintaining the independence of the family office. The family office must be able to operate without interference or pressure from the business, ensuring that the family's wealth is managed with a fiduciary-mindset to secure the best possible outcomes for the family.

Another challenge is managing conflicts of interest. Family-owned businesses can be complex and often involve multiple family members with different priorities and interests. The embedded family office must be able to navigate these complex relationships and ensure that all family members are treated fairly and equitably.

Finally, ensuring the embedded family office team is adequately staffed with qualified personnel, including those with relevant experience, is critical. We find that embedded family offices, more often than stand-alone family offices, may not be getting the advice that they actually need from a wholistic perspective – especially regarding wealth management.

There also comes a tipping point as a family’s wealth grows when the embedded structure may become less suitable. At that stage, separating the family office functions from the operating business will likely be more appropriate. Post-pandemic, Baker Tilly is seeing more embedded family offices transition to stand-alone single-family offices. As a family business grows and gets more complicated, the comingling of family and business issues becomes problematic. Additionally, the separation of family matters from the operating business becomes important to maintain the confidentially of family financial information.

A stand-alone family office can be run by the family, or typically by outside advisors or solely by an external specialty firm, at the family’s direction. There are many reasons to set up a stand-alone family office, including:

• To address increasing complexity in the areas of tax, investments and accounting
• To provide shared services to family members across generations
• To provide a mechanism to invest together as a family
• To promote family involvement
• To provide next-generation development

A multi-family office, in which an external specialty firm manages the affairs of several families, is also an option, particularly for a family with less-complex affairs. This alternative generally offers a cost savings opportunity versus a single-family office.

In conclusion, while the number of embedded family offices seems to be increasing, we are also seeing the natural evolution from embedded to stand-alone family offices as families’ wealth increases and their need for more sophisticated counsel is greater. By providing a holistic approach to wealth management and customized services, a family office can help to ensure the continuity of the business and preserve the family's wealth for future generations.

To learn more, connect with our team.