Key Considerations for an Effective Family Office

Family offices are exclusive and private entities designed to provide critical support to wealthy individuals and families, focused on helping the family achieve its goals and objectives, such as preserving and growing the wealth and safeguarding the confidentiality and privacy of the family. These organizations exist to serve the unique needs of affluent families and often function very discreetly. This inherent focus on privacy can sometimes lead to family office owners and staff lacking trusted networks to learn about emerging leading practices and operating trends, despite estimates of 6,000 family offices in the US, and another 5,000 that operate informally inside privately controlled businesses, according to the Family Office Exchange.

According to the North American Family Office Report 2022 by Campden Wealth, 33% of family offices reported a rise in staff numbers over the past 12 months. As the functions performed by family offices expand and evolve to match the growing needs of the families they serve, it can be very beneficial to evaluate opportunities to further optimize the family office services and operations.

In this article, we delve into eight key categories of services that are commonly provided by family offices. We provide some questions in each of the eight areas for wealth owners and their advisors to consider when designing and evaluating a family office. These questions, among others, are intended to help family offices evaluate opportunities to improve their efficiency and effectiveness, or reduce risks within the family ecosystem, but are not an exhaustive list.

Strategy and Legacy

Strategy and legacy are fundamental considerations for multi-generational families. Establishing a family office to help steward these objectives is a significant commitment. It can provide stability during financial uncertainties and help preserve the family’s legacy over multiple generations.

Questions to consider:

• How well-defined is the purpose of the family office? Is this clear to all family members?
• Do you have a comprehensive strategic plan, and how does it align with your long-term legacy goals?
• Have you assessed the needs and aspirations of multiple generations within the family?
• What human capital practices are in place to ensure the continuity of the family office and the preservation of wealth across generations?

Recommendations:

• Conduct a comprehensive family survey to understand the family’s values and objectives.
• Develop a strategic plan that includes contingencies for different financial scenarios and generational transitions.

Enterprise Risk

Every operating business manages risks to ensure its sustainability and success. A family office should adopt a similar approach. Identifying potential risks and developing mitigation plans is crucial to preserving the family’s wealth and assets.

Questions to consider:

• What are the key risks (disaster planning, cyber, physical security) that your family office currently faces?
• How well-prepared are you to navigate financial crises or unexpected events?
• Is there a documented process for identifying, assessing and mitigating risks within your family office?

Recommendations:

• Perform a thorough risk assessment to identify potential threats.
• Develop a risk management framework and crisis response plan. It is important to have these plans in place to help you navigate a crisis. If you wait until you need it, it is too late.

Continuity

Ensuring the continuity of the family office, its ownership and critical functions is crucial. Questions surrounding the ownership transition and decision-making processes should be addressed to maintain stability and prosperity over time.

Questions to consider:

• What does ownership and decision-making look like in the next 5, 10 or even 50 years?
• Is there a clear understanding of who the key stakeholders are within the family and family office system?
• Have you established continuity plans and policies for generational transitions?

Recommendations:

• Create a clear succession plan for family leadership and the family office that includes both family and non-family members.
• Develop governance policies that specify roles and responsibilities of stakeholders.
• Be proactive about education and leadership development.

Investments

Many family offices are created to manage or oversee shared family capital. Effective investment management, whether internal or outsourced, is crucial for preserving and growing wealth.

Questions to consider:

• How are your family’s investments currently managed, and what is the level of involvement from family members?
• Are there clear reporting and education mechanisms for family members involved in investment decisions?
• Do you have a comprehensive investment policy that addresses eligible investments, diversification requirements, and risk with appropriate governance and oversight provisions?

Recommendations:

• Implement a well-defined investment strategy that aligns with the family’s financial goals.
• Foster financial education for family members involved in investment decisions.
• Establish a process to approve and oversee compliance with the investment policy.

Operations

Operational efficiency is a cornerstone of any successful organization. Developing a set of policies and procedures incorporating leading practices and embracing a culture of continuous improvement can streamline operations, enhance transparency, and improve accountability and overall performance.

Questions to consider:

• Do you have a documented set of policies and procedures to guide your family office’s operations?
• How do these policies evolve over time and how often are they reviewed?
• How do you ensure transparency and accountability within your family office?

Recommendations:

• Develop a comprehensive operations manual which is reviewed on a consistent basis.
• Regularly review and update policies to adapt to changing circumstances and ensure alignment with family
  expectations and effective risk management (typically annually).

Technology

Technology plays a pivotal role in managing various services within a family office, from processing transactions to information access and reporting and analysis. Technology innovation continues to rapidly evolve across all industries and family offices are no different.

Questions to consider:

• How automated are your processes and have you surveyed the technology landscape for opportunities to upgrade or enhance your systems?
• Do family members have near real time access to information?
• What security measures and controls are in place to protect sensitive information and facilitate IT support when needed?
• Have you conducted a cyber security review?

Recommendations:

• Conduct an independent review of your technology capabilities and controls to identify areas for improvement and optimization.
• Name an individual within the organization to be responsible for technology innovation and security controls.

Compliance

Managing compliance and risks should be a year-round commitment, with regular assessments to identify strengths and weaknesses in your processes. Miscalculations or oversights can be costly, so ongoing vigilance is crucial.

Questions to consider:

• Is your family office treating compliance and risk management as an ongoing continuous process?
• Are the appropriate policies in place?
• How do you identify areas of strength and potential weakness in your compliance and risk management procedures?
• Are you making structural and process adjustments to improve efficiency and effectiveness?

Recommendations:

• Implement a continuous compliance monitoring system utilizing both technology and internal review processes.
• Conduct regular audits (internal and externally driven) and assessments to identify areas for improvement.
• Pay particular attention to high risk areas such as cash management, data integrity and cyber security.

Governance

Governance is the overarching framework that influences all aspects of family office operations. It should be adaptable and reflect the current family ethos while being ready to evolve with generational changes.

Questions to consider:

• Do you have the right individuals and skill sets involved to effectively govern your organization?
• Is there active engagement from owners, family members and executives in maintaining and improving the governance structure?
• Is the governance structure supported by strong transparency, reporting and analysis?

Recommendations:

• Regularly assess and update the governance structure to ensure alignment with family values using family values template, needs, and expectations.  Governance will likely need to evolve as circumstances change and when younger generations start to get involved.
• Foster a culture of transparency and active participation from all stakeholders in governance discussions.

Family offices play a vital role in managing and preserving the wealth and legacy of affluent families. By asking crucial questions like the ones outlined above for each of the eight categories – strategy and legacy, enterprise
risk, continuity, investments, operations, technology, compliance, and governance –family office leaders can help ensure that their organizations operate optimally and adapt to the changing needs of each generation.

PwC’s Family Office Diagnostic

PwC offers a Family Office Diagnostic assessment that consists of over 200 questions covering the eight categories mentioned above. This diagnostic assessment provides family offices with valuable, independent insights into their current operational status, risks and opportunities for enhancements. It also provides a benchmark by comparing family office practices against similar organizations. The findings and actionable recommendations offered by PwC’s diagnostic can strengthen your family office’s current strategy and provide a roadmap for improving the organization and its ability to effectively manage risk and serve the family for generations.