The Ins and Outs of Family Office Investors and Why You Should Consider Joining the Club

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Victoria Kennedy   Contributor

The Ins and Outs of Family Office Investors and Why You Should Consider Joining the Club

Photo: Ritossa Global Family Office Investment Summit conference for discussions on legacy and impact investing, Monaco.

Family office investment groups, or family offices, are one of the most effective ways to broaden and safeguard a person’s investment portfolio. Family office members spend time analyzing their group's purpose, discussing and planning where they want to be in the long-term future. The groups create cohesive delegation systems with the knowledge that time is their most valuable resource, as it is finite. With that comes clarity, and this clarity extends to full transparency with all family office members about their group's investments, each member's responsibilities, and where they are heading.

For those of us who are used to making EFT and indirect, managed-fund and investments, family offices might be the next logical step in our financial growth. In most cases, we would be right, and this article aims to explain the benefits through a realistic lens. Perhaps some of us are even ready to found our own family office.

We will discuss what family offices are, their general internal structure, benefits and some cautionary guidance, and, finally, advice for those who are not quite ready to join a family office.

The Basics: What, Precisely, Is a Family Office?

As an intermediate investor, setting a considerable portion of one's investment portfolio into index reserves or defensive acquisitions is pretty standard. On the other hand, family offices put a small piece of their investment portfolio in significantly conjectural but conceivably immensely profitable investments.

Some examples of this formatting, known as asymmetric risk, are pre-IPO seed, unlisted businesses, or private equity. While there is a higher chance of losing the entirety of their investment in one particular venture, the entire portfolio is protected because there is a wide array of assets rather than one hazardous investment. The beauty of this setup is that the payoff of each risky investment is often up to 10 times what they put in while protecting their entire portfolio on the whole.

That is what family offices do in a nutshell. So, what exactly are they?

Family offices are institutions that take care of the member's acquisitions, systematize the group as a whole, and have authority outlined in a family charter. The term 'family' here does not mean blood relatives but rather a collective of like-minded individuals intent on securing the same goals.

Reasons for founding a family office include immense asset sales or the sudden freeing up of capital for a multitude of reasons. Large amounts of money, in the case of family offices around or exceeding $100 million, need direction to grow. Family offices create that structure by accumulating many significant assets — and intelligent members to govern them — in one place.

Additionally, family offices often include the opportunity to share assets (such as sea vessels, luxury homes, or private planes) among their members. They participate in philanthropic endeavors. Family offices sometimes hire and pay their members in one capacity or another if needed. Large family offices will often have tech services and overarching employment regulations. Typically these items are outlined during regular meetings.

Introductory Tour: Inside a Family Office

While each family office's structure and assets are understandably confidential, there are some basic similarities that most family offices share.

The two styles of family offices are single- and multi-family. A single-family office is set up exclusively by and to look after its members. Multi-family offices are strings of family offices that work together and sell financial services to one another while keeping themselves technically separate.

There is sometimes a chain of command in a single-family office and frequently a succession and generational plan - of the funds and the members. With this style of organization comes the perk of total transparency. Family offices aim to exploit this feature for decision-making purposes about the family's lending, investing, borrowing, or acquisition plans and for creating trust between group members.

Further, a holding company actually takes care of a family office's capital, and each family member owns shares of said company - ultimately equalling ownership of 100% to the family office but divided among its members. The holding company also maintains unique-intent commodities and syndicates.

How do family offices keep these assets and information aligned and managed? Enter: The family charter. This document outlines the family office's expectations, rules, and regulations regarding the funds maintained by said holding company, who each family member is, their duties, and the mission and objectives of the family office.

Family offices are also highly philanthropic; they clearly outline their intentions and policies for donating to previously agreed-upon causes in their family charter.

The family charter outlines the chain of command, who can make what decisions, the day-to-day SOPs, how to revise or change the family charter, a succession plan or glide path, philanthropic projects, and more. The group does all of these things to create an ambiance of accountability that benefits the family office. Every family office also has an investment policy statement that outlines the distributions, timelines, targets, and ethics surrounding each investment.

Regarding caveats, some things that family office founders and family offices should be careful of are ensuring sufficient planning around key people and responsibilities. Further, some issues can arise if the family office is too tunnel-visioned towards one outcome or vision, which can result in losing fruitful connections and opportunities.

Investment Eloquence: Why One Should Join a Family Office

Family offices offer investment security, estate planning, and a lack of 'one-trick pony' advice when investing. There are also delightful perks, such as ease of acquiring and sharing toys and vacation properties.

A note on 'one-trick pony' investment advice and how family offices do away with this phenomenon: Often, if one is investing alone, we might have a single financial advisor and generally follow most of what they recommend. In the case of family offices, there are a multitude of resources at the group's disposal to vet investment opportunities, seek the advice of various professionals, and even poke around in their networking circles to see how many people are investing in the same offer, essentially shopping around. To reiterate the metaphor, family offices have access to entire stables with many ponies.

Final Parting Notes: How to Think Like a Family Office

If one were to consider entering the proverbial' family office club,' one would need circa $30 million, 1.5-2% of which going into operating costs alone.

If one is not in the place to found or join a family office just yet, experts recommend following investment basics inspired by family office methods. These inspired actions include:

  • Learning how to deconstruct deals and decipher for oneself - or with an un-conflicted third party (think colleague over paid advisor) - whether a deal is a worthwhile investment

  • Considering group purchasing a luxury toy such as a boat or vacation rental - a bonus here is that vacation rentals are additional streams of revenue

  • Ensuring investment portfolio diversification by not putting all of one's eggs in one basket (avoiding one-trick pony style investing)

  • Utilizing experts such as lawyers to ensure all areas are covered for more significant investments, thus minimizing ancillary risks (i.e., those additional to money loss)

  • Refraining from getting too excited about deals and digging deeper rather than believing everything one hears

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Victoria Kennedy   Contributor

Victoria Kennedy is a Wall Street Journal Best-Selling Author, TEDx speaker, and well-respected authority in public relations. She is the CEO of Victorious PR, an award-winning, multi-million dollar PR agency that has helped dozens of entrepreneurs become the #1 Authority in their niche by getting them featured in top podcasts and press.