Customize Your Wealth Management With a Family Office

As we move into the holiday season, I find myself thinking more and more about my family. My wife and I have seven children of our own, and both come from families with five children.

She’s the eldest of five daughters, and I’m the youngest, with one sister and three brothers. Our extended family has literally dozens of siblings, nieces, nephews, grandparents, grandchildren, and even a few great grandchildren.

Who’s coming home for the holidays? Where are we going? When will we see our parents or this kid or that one? This time of the year is wonderful and nerve-wracking, and that’s the dynamic of a lot of families I know, personally and professionally.

Most people would do anything for their family. After all, why get married and have children and create a family if you aren’t willing to make the commitment to protect and preserve your family however you can?

It makes sense to leave your wealth to your children when you pass away. I see hundreds of clients a year who formulate wills and trusts, and in most cases, their children are the central recipients of their wealth through lump sum bequests or monthly income gifts.

I was recently walking near Central Park in New York City, visiting two of my daughters, when an unusual bumper sticker caught my attention. It read: “Fly first class or your son-in-law will.”

I thought about it for a moment and laughed. But then I thought about it a bit more and considered the two options being presented. Either you spend your money (implying perhaps even spend it wastefully), or someone else (perhaps not even your linear dependent) will.

Should We Trust in a Trust?

Sadly, most people think in this type of two dimensional “either/or” way. But it doesn’t have to be that way, and many wealthy and smart families already know this.

There are a variety of ways I can direct my money during my life and even beyond. The common law asset protection and estate planning trust, for example, lets me dictate, even from beyond the grave, who gets what, when, where, and how. It’s a great tool that’s been around more centuries.

The downside of a trust by itself (no matter how well created), is that the beneficiaries are separated from the important decision-making process of actually generating and stewarding wealth. In many cases I’ve seen wealthy families turn their children and grandchildren into glorified welfare bums, doing nothing as they wait for their next hand-out.

The highly educated daughter of one wealthy client told me she didn’t work because “there was nothing” she could do and no amount of money she could earn (and she had degrees in education and law) that would “make any difference in her lifestyle.” I’m quite sure that wasn’t the intention of her father when he sent her to expensive private schools and created an extensive and well-funded trust for her.

While a trust is helpful in asset protection and estate planning, often it isn’t enough by itself to achieve the effects that our clients want, including raising up and empowering their children and grandchildren to become good stewards of generational wealth rather than simply consumers and destroyers of that wealth.

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Introducing the Family Office

The most effective way to achieve the goal of protecting, preserving, and passing on wealth is to build a wealth stewardship platform around your legal structures. This is the basic concept of a family office, which can be as individual and unique as needed.

Think of it as a family “constitution.” It can include the family’s philosophy, motto, wealth goals and objectives, decision making processes, governance, and a succession plan to choosing future directors, managers, corporate boards. These principles are then woven into legal and corporate structures that in turn hold the families’ assets.

In the past, establishing a family office was the purview of only centimillionaires and billionaires. The annual budget for amassing specialized and full time in-house legal, tax, accounting, banking, and investment advice could run into the millions of dollars.

But now, a number, of established professional advisers (generally lawyers, former bankers, CPA’s and investment advisers) have built their own flexible platforms to serve a limited number of clients called “shared family offices.”

SFOs bring the major core skills together while still allowing the individual family to customize their family office to their own needs. This might include a core services agreement with the SFO for integrated legal, tax, accounting, banking, investment, insurance, and real estate services with additional and uniquely outsourced specialized agreements as desired by the family with doctors, travel agents, house manager, and even a family concierge.

The family office or shared family office is really designed to do two very important yet separate things. The first has to do with putting a corporate business structure around family wealth, to protect, preserve, and grow that wealth over time. It’s basically making the commitment to formalize your investments, legal, tax, estate planning issues, insurance, etc., in an organized and corporate manner. A family office elevates those sideline activities to a dedicated full- time business with growth and secession goals in mind.

The second goal is to appoint family members to various positions within the family office structure based on their skills, age, and preference. Over time, different people may assume different roles based on their desire and capacity. Busy family members with other full-time jobs might serve on the family office board or as a part-time consultant. Another family member might work full-time in some capacity for the family office itself.

The Value of a Family Office Officer

In one interesting case, one of my clients put his twenty-something daughter in charge of the family’s charitable and philanthropic giving. Rather than give her a trust allowance that made her “dependent,” the salaried position within the family office structure gave her a meaningful career overseeing the family’s charitable activities. She also became the leader in that area of the family business, which gave her standing and purpose.

And if you think that charitable giving is only about being philanthropic, think again. This woman became quite shrewd at using philanthropy to open doors for the various family businesses: sponsoring and attending charity events; and rubbing elbows with other business leaders, politicians, movie stars, and professional athletes.

Through this position, she learned how to lead, collaborate, make decisive choices not only for herself but also for her extended family. Ultimately, her efforts helped increase the family’s overall wealth. She’s now highly respected within and outside her family. Compare that outcome to the teacher/lawyer mentioned above who truly felt worthless despite her great wealth.

I recently helped a single-family office recruit a new CEO. Several family members are actively involved in their family office business, where a half dozen diverse professionals also work full-time. Here’s an excerpt of the desired skill set included in the ad for the position.

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Areas of Responsibility:

1. Finalize and oversee and the implementation of all corporate, trusts and other legal structures.
2. Oversee structural operations on an on-going basis.
3. Help maximize tax efficiency of structures and investments.
4. Assist with due diligence and analyses of primary investments.
5. Focus on efficient strategies for generational wealth stewardship.
6. Participate in relevant conferences, seminars and continuing education matters pertinent to the family’s activities and other events as needed.
7. Oversee strategic legal work (internally or externally) for family members such as pre- and post-nuptial agreements, wills, and powers of attorney.
8. Manage the family office team as well as external service providers and hold team members including family members accountable.
9. Help set up and implement short, medium, and long-term goals on an ongoing and profitable basis.
10. Preserve and protect the dynasty elements of the family’s trusts and other structures in order to perpetuate the family wealth.

Hundreds of resumes poured in from all over the world and the family ended up hiring a top executive out of Mellon Bank with thirty years of private banking experience. He also had a law degree, an MBA and various securities licenses including series seven and sixty-three. The starting annual salary was $1.5 million plus generous incentive bonuses that could easily push his compensation above $5 million.

A Family Office for Every Kind of Family

Of course, not every family can afford to hire such a talented (and expensive) executive to lead their family office. Yet there are shared family offices, which serve families collectively with anywhere from 5-20 client families within the SFO leveraging the same caliber of talent, often spread out over multiple advisers.

These SFOs may require a minimum amount of assets under management ranging from $5-$100 million depending on their range of services. Fees for SFOs generally range on a reverse sliding scale from 0.5-2 percent of assets under management, along with a performance fee of 10-40 percent of annual profits.

Personally, I like to see the base percentage fee lower and the performance fee on the higher side. This aligns the interests of the client and the interests of the SFO service provider, giving both sides an interest in continually growing the family wealth in a strategic and long-term manner. I think the sweet spot on the bell curve is 1/20 with one representing a percentage fee for assets under management and the twenty representing a percentage performance fee.

Family offices and shared family offices with the appropriate legal structures (trusts, companies, foundations) are ideal vehicles for manufacturing companies, as well as banking, insurance companies, family farms, factories, and other productive methods of producing long term revenues which are better left intact rather than being divided into the hands of multiple (and frequently very unqualified) children and grandchildren.

It is also quite relevant in the cases of post-exit business owners who sell their business and now have large investment portfolios that can generate sufficient income to support beneficiaries without chipping away at the portfolio’s capital.

FO’s and SFOs provide a “one-stop shop” and a valuable service for people looking for one point of authority and responsibility as well as a high degree of individualized attention. SFO’s can also integrate your existing tax and investment advisors into your SFO team, which many clients desire because of favorable family, business, or friend relationships in those areas.

So if you’re examining how to manage your money today and long into the future, the family office and shared family office provide a solid foundation to protect, preserve and pass on wealth.

It can simultaneously help your heirs to participate effectively in the overall stewardship process and be a conduit for passing along the principles and values of the family from one generation to the next.

If done effectively, the FO and SFO structure can help you and your son-in-law “fly first class,” while making sure your grandchildren and future generations of your family also receive the same opportunity. It doesn’t have to be an either/or proposition.

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Joel Nagel is an international asset protection and corporate lawyer who heads SOFOS Partners, a unique shared family office (SFO) with global interests in banking, insurance, sports, media, real estate development, hospitality, and timber. Limited spaces are available in his SFO for qualified individuals and existing domestic family offices seeking to diversify their holdings internationally with bespoke offshore solutions.