Five Critical Questions for Family Offices

Five Critical Questions for Family Offices
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Dr Alexander Koeberle-Schmid, family business expert at PricewaterhouseCoopers GmbH, Germany, has helped more than 100 entrepreneurial families from around the world navigate the complexities of communal investing. His latest book, The Family Office: A Practical Guide to Strategically and Operationally Managing Family Wealth, co-written with Canessa, Escher, Preller and Weber, explores the many aspects that lead to a successful transition from family business to family office.

Despite their semantic similarities, success in the former does not necessarily translate to success in the latter, and designing a bespoke family office solution to meet the unique requirements of its stakeholders can prove challenging. We sat down with Alexander to learn more:

No two family offices are alike, and there is no one-size-fits-all model. The structure of the family office should be tailored to meet the specific requirements of the family it serves at a foundational level. Family members should consider their options carefully with the realisation that founding a family office requires the same amount of planning and active participation as did founding the family business.

The definition itself offers a great place to start the dialogue. According to Koeberle-Schmid, for an organisation to be considered a family office, it must meet three fundamental requirements:

1. It is a self-contained organisational unit.
2. It belongs to one or several families.
3. It manages a sizeable portfolio of complex investments.

Once all parties are aligned – at least where terminology is concerned – family members should ask themselves these five questions:

Is Everyone Committed?

Building a family business and running a family office offer completely different rewards. Entrepreneurship requires passion and dedication – every new level of achievement brings with it excitement and satisfaction. Family members are inspired to work together towards a common cause.

Managing familial wealth through a series of investment structures doesn’t necessarily produce the same tangibles. As goals and benchmarks for success become more esoteric, family members may lose interest.

What Kind of Family Office Works Best?

Family members must identify a shared vision of what their investments might look like. Without alignment where interests are concerned, success is unlikely.

Three distinct types of family offices exist:

Own structure – the separate legal entity is owned by a single family, and the family office is the holding for the investments.

Embedded – the structure of the existing family business influences the structure of the family office. Often, employees of the family business manage the family office at the same time.

Virtual – the family members hold all assets directly and the family takes care of the assets as a separate legal entity.

The more wealth a family has, the more reasons a family office has to be its own legal structure.

Is the Investment Threshold Adequate?

Nascent family offices sometimes make the mistake of overextending themselves.

In launching a single-family-owned structure, families should have at least €70 million to invest, which translates to a cost burden of around 0.6 per cent. Any less, and families should consider investing as part of a multi-family office where capital and resources are pooled.

Those considering larger, more elaborate structures with two family officers and two investment experts will need substantially more. To maintain wealth, a 3 per cent return is necessary to cover tax, inflation and operating costs.

Is there a Succession Plan in Place?

The existence of a well-thought-out succession plan is critical and carries an even greater significance in the family office context.

In a family-owned company, the family is bound to the business because, most often, selling ownership is complicated by both logistics and emotional attachment. In a family office, however, this is not the case. Typically, it’s easier for family members to sell their assets and dissolve or dilute the family office. In addition, they know exactly how much their wealth is worth, which is different to the value of a business. Thus, ensuring a stable transition to the next generation becomes all the more important.

Family Governance is crucial, especially as the family grows and interests become more diverse.

Could External Help Make Reaching Financial Goals More Feasible?

Too often, successful entrepreneurs believe the skills that allowed them to grow their business are automatically transferrable to building and managing wealth, which isn’t necessarily the case.

Growing a business and growing wealth by successfully investing money are completely different endeavours. For example, the industry-centric network that played an integral role in expanding the family business won’t be able to offer the same assistance when it comes to investing. Family offices need a dedicated financial network to give them the right access to people and investments.

By installing an experienced investment adviser from the very outset, family members will have the opportunity to lean on them as a resource and learn from them at the same time.

Five Critical Questions for Family Offices
Image courtesy of Alexander Koeberle-Schmid.

Alexander, author and fourth-generation member of a German/Bavarian business-owning family, advises medium-sized to large multinational family enterprises around the world. He is an expert in strategy, governance, succession, boards, family council, family office, philanthropy and family constitution.