Privacy, Affluenza, Social Media Fuel Growth of Family Offices

Myra Salzer is a financial advisor whose clients are often an extension of the family that maintains a family office. These clients come to her for help in managing their personal finances because the wealth advisors on staff at the family office overlook them.

“They are not feeling heard, and they are not getting the services they need from the family office staff whose objective is to manage wealth for the entity of the family and not its individual family members,” Salzer said.

Part of Salzer’s job is to contact the financial advisor on staff at the family office for clarity on the amount and nature of distributions her clients are receiving from their trusts or family operating business. Those beneficiaries might not be legally entitled to review trust documents, depending on the state in which they reside.

“It’s helpful to know how their family’s assets are allocated so that we can make sure the assets they do have control over are balanced,” Salzer said.

The number of family offices in the U.S. has increased by 33 percent to more than 4,000 in the past five years. This is due to wealthy individuals seeking to organize financially after the 2008 financial collapse, according to World Finance.

But there can be a downside to family offices where staff members, some of whom act as financial advisors, are engrossed with wealth enhancement goals.

“Individual family members can get lost in the growth process of the family office because everyone is working for the wealth creator, even if the wealth creator died 100 years ago,” said Salzer, whose firm The Wealth Conservancy is based in Colorado.

Family offices not just for the ultra-wealthy

Families with more than $150 million in private wealth are ideal candidates for establishing a single-family office structure, according to the 2015 Global Family Office Report. However, the number of offices overseeing smaller asset amounts is on the rise, according to Irwin Latner. As a partner in the corporate and securities practice group at the law firm Pepper Hamilton, which specializes in family offices, Latner has helped found family offices for retired hedge fund managers. These are clients who have $50 million of first-generation wealth and not as many extended family issues.

“The more financial skill the family has internally, the easier it normally is to set up a family office with a smaller asset size, and hedge fund managers know how to manage money,” Latner said.

Regardless of the amount of assets ultra-high-net-worth individuals have to manage, one reason they establish a family office is for privacy because outsourcing services can make it harder to control confidentiality.

“A family office can help keep the family’s financial information from leaking out to the public as much as possible,” said Todd Kesterson, director of the family office and business services department at the accounting firm Kaufman Rossin in Miami. “It’s a way to improve confidentiality by conducting as much business as possible internally.”

Vulnerability a concern

With the proliferation of social media and the Internet, personal vulnerability issues are of increasing concern to the wealthy.

“They are worried about the younger generations, since social media is now integrated into almost every aspect of their lives,” said Jason Ott. He is national director of field operations for Aon Private Risk Management, which specializes in protecting the wealth of accomplished individuals and families.

“The concern is growing due to how easy it can be to expose personal interests, hobbies, travel plans and personal data that could leave wealthy families exposed to liability issues, identity theft, or even extortion and kidnapping,” he said.

Not a cure for bad behavior

Privacy is also of utmost importance when family dysfunction — such as addiction, sibling rivalry or affluenza — rears its ugly head.

Affluenza refers to the impact of financial privilege on the ability to understand the consequences of one’s actions. This term was made famous when it was used by attorneys on behalf of Ethan Couch, a wealthy Texas teen charged in connection with a death. Couch was given probation after being charged with four counts of manslaughter while driving under the influence in June 2013.

Although Couch’s father, Fred, founded a metal roofing company that had estimated annual sales of $9.59 million, he and Couch’s mother have collectively accumulated more than 20 criminal and traffic offenses dating back some 25 years.

“Family offices are not a substitute for family values or good parenting,” Latner said.

Family governance initiatives include having a mission statement, written policies, board representations and a formal structure for decision-making. Although these initiatives are helpful in establishing order, they are no solution for societal ills.

“No matter how hard you try to plan, nobody can come up with bylaws that anticipate the future,” Salzer said. “You cannot protect family members who have not been born yet. It’s impossible. You have to accept uncertainty and the fact that all families are flawed, regardless of wealth.”

Todd Kesterson, CPA, is a Family Office Services Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.