A family with sufficient net worth, a shared vision for how to invest the family’s wealth, and the ability to communicate openly and resolve differences may be a good candidate to form a family office. There are a number of factors that a family should consider when deciding whether to form a family office. Here are a few of the pros and cons:
- The family controls how the family office is structured and operated.
- The family has flexibility and the ability to make quick decisions on investments.
- The family office can be operated with discretion and confidentiality. Family offices are lightly regulated. Typically, family offices are not required to register with the SEC or disclose the amounts they manage and invest (as money managers with outside investors are often required to do).
- Family members (including different branches of the family) can aggregate and leverage their wealth. This may result in more looks at better deals, the ability to attract better outside talent to help manage and invest the family’s assets, and, ultimately, higher returns.
- The family has the ability to invest directly in deals, without investing through private equity funds and hedge funds.
- Different family members (or branches of the family) sacrifice autonomy and independence in order to invest collectively.
- Structuring and operating a family office can be a complicated, time consuming and expensive process.
- There is potential for scope creep. The expectations of some family members for increasing returns and services rendered by the family office may grow over time.
- As the family grows, there is more likelihood for disputes and imbalances of wealth between family members and different branches of the family.
While forming a family office is not the right approach for everyone, using a family office to manage and invest the family’s assets has proven to be good option for many wealthy families.
In our next blog post, we will look at how family offices are structured.