Should you outsource your family office? 6 questions to consider

The modern family office is complex, requiring the balancing of emotions, relationships and diverse needs across generations while addressing growing privacy and digital-security concerns and complex investment structures. Managing a private family office can often be more challenging than running a business of the same size.

For some families, outsourcing the family office to a qualified professional services firm might make sense. Whether you’re starting a new family office or considering changes to your existing one, here are six factors to consider before deciding to manage your family office in-house or outsource it either partially or wholly.

1. Who will the family office serve?

Fewer adult family members and family units typically make a private family office more viable. As the family’s size and complexity increase, outsourcing may become more attractive, enabling you to leverage experienced employees and additional resources for managing finances. An outside firm can also help you avoid family conflicts while managing assets and decisions collectively, catering to the unique needs of multiple family units.

Another consideration is whether family members are aligned in their financial approach. For example, a strong shared-risk profile and the same level of patience with funds can make a private family office a good choice. Remember to periodically reassess the financial philosophies and needs of family members, as they can change over time.

2. Who will the family office employ?

Running a modern family office is akin to running a business, complete with its requirements and challenges. Consider if a family member wants to and is qualified to run it and if other family members agree. If so, a private family office might make sense. However, keep in mind the potential challenges of employing family members, including determining compensation and deciding who will take over when needed, as well as dealing with family-member employees who may not be right for their job.

Employing nonfamily members introduces additional expertise but also potential privacy and liability concerns, along with regulatory complexities. Incentive compensation — often necessary to attract top financial professionals for nonfamily-member positions — may be subject to regulatory scrutiny if the family office is regulated.

Regarding size, a single-family office can require five to 10 employees plus consultants, while those managing multiple family units can become even larger and more complex.

Outsourcing can ease compensation worries, as trained and often licensed professionals handle the work. If family members expect jobs in the family office, consider a hybrid approach, retaining some functions in-house while outsourcing others.

3. What will the family office do?

The primary purpose of a family office, whether private or outsourced, is to act as an investment vehicle for the family’s assets. Investments can be extensive and complex, involving both liquid and illiquid assets. Many family offices also offer real estate management, domestic staff management, family governance, philanthropy, art and collectibles management, and more.

An outsourced office can assemble the right experts for various services. If a wide range of services is needed, outsourcing might be a better option than a private office. Alternatively, consider separating noninvestment activities from investment activities, outsourcing some while keeping others in-house. This also allows for employing family members in specific roles.

4. How much money will the family office manage?

Consider the combination of net worth, assets under management, personal assets and investments to understand the financial complexity. More assets means more regulatory complexity, often making outsourcing more attractive. A critical threshold is $100 million in assets under management, which may trigger additional regulations and possible Securities and Exchange Commission filing requirements.

5. Is the family office prepared for registration and compliance requirements?

Even family offices with less than $100 million in assets might face regulatory requirements. The Investment Advisers Act of 1940 necessitates SEC registration for asset managers advising others on securities for compensation, unless exempt. The Family Office Rule exempts some offices, provided they meet specific criteria — such as advising only lineal descendants and their spouses, full ownership and control by those family members, and not representing themselves to the public as an investment adviser.

Outsourced providers can handle reporting and compliance, easing the family’s regulatory burden.

6. What are the family’s security and privacy concerns?

Maintaining the family’s privacy depends on keeping information confidential, both by employees and family members. A smaller private office might feel safer, but having fewer employees can increase fraud risk by making it harder to implement proper internal controls, such as segregation of duties.

Cybersecurity is also critical for family offices to keep up with the evolving threat landscape and minimize the risk of bad actors stealing money or information. Engaging outside cybersecurity professionals can help family offices mitigate cyber risk and be ready to respond to an attack if needed.

On the privacy front, families might worry about regulators and outside examiners accessing their personal financial information if they outsource their family office to a professional firm. While the compliance requirements of professional firms do mean regular reviews, some families view this as a benefit. In fact, private offices sometimes hire external auditors for this level of reassurance.

Consult professionals

The complexity of a family’s needs often dictates the complexity of its office. Consult with financial advisers and attorneys specializing in family offices to understand the legal and financial implications of having a private family office versus an outsourced family office and which may be right for you.

Read the full article at Crain Currency.