Understanding the Pros and Cons of Managing a Family Fortune

The Complexities of Managing Wealth and the Role of Family Offices

Managing significant financial wealth often involves dealing with various complexities. It’s not just about enjoying the luxurious lifestyle and financial freedom that comes with such wealth but also about ensuring its sustainability across generations. This involves making strategic investment decisions, managing risks, dealing with family dynamics, protecting against cyber threats, and maintaining the physical safety of family members. Essentially, managing wealth becomes akin to running a family business.

To handle these tasks, wealthy families typically require the services of dedicated professionals, such as a family office. A family office manages family affairs in a way similar to a corporation, but with the added complexity of managing intergenerational wealth. This could be a single-family office serving one family, a multi-family office serving multiple families, or an outsourced family office providing services to multiple families at lower costs.

Types of Family Offices

The Family Office Resource Group (FORG) outlines three types of family offices. The most common type is a single-family office, a private entity established to oversee the affairs of one wealthy family. Another type is a multi-family office, which manages the affairs of multiple families under one roof. Lastly, an outsourced family office offers the same services as a multi-family office but at a lower cost by outsourcing some services. In the U.S. there are an estimated 6,000 to 7,300 family offices, according to the Family Office Exchange.

Considering a Family Office: How Much Wealth is Required?

Family offices generally start serving families with a wealth of approximately $30 million and upwards. This is when the complexities of managing family finances and affairs start to increase significantly. A family earning a 10% return on their money could potentially see their wealth double every seven years, which adds to the complexity of managing the wealth. Further, traditional financial advisors or wealth management firms may not be equipped to deal with personal matters such as adult children’s substance abuse issues or sibling rivalry. In such cases, a family office may be the best solution.

When Forming a Family Office Might Make Sense

There are several scenarios in which forming a family office could be beneficial. For example, if you have no interest in managing your family fortune or find the task too complex, hiring a multi-family office could be a viable option. Other factors include the need for specialized expertise and services, such as personal bookkeeping or bill payment, and the prospect of the family office becoming your new career path. In any case, the primary aim of a family office should be to provide peace of mind to the family it serves.