Editor’s note: There are many good reasons for very wealthy client families to explore forming a family office. Wealth managers can help those clients decide whether this is the right path for the family and which structure and services will help them to achieve their goals. Contributor Michael Faber, an attorney who advises families as CEO of the investment advisor NextPoint Management Company, Inc., has created a roadmap for wealth managers whose client families are considering this path.
Families with sufficient wealth to consider creating a single-family office (SFO) should also evaluate the suitability and sustainability of joining an existing multifamily office (MFO), where resources and costs are shared by similarly situated families.
Of course, first- and second-generation creators of wealth who desire to establish a legacy for future generations, and a structure that will allow those family members to more easily manage and preserve that wealth, are best served by creating and owning a permanent and well-managed family office (FO).
Managing wealth (and wealth preservation and growth) is the most important role for the typical family office. Evaluating, selecting and replacing investment managers is more or less complex depending on the number and type of managers used.
Since few, if any, families allocate all of their assets to one investment firm, the FO must have access to the skill sets required to select and evaluate, at least quarterly, a large number of diverse third-party managers. Many families also become involved in direct investing strategies (investing directly in private and public companies), which requires additional and very different skills and often is poorly managed by FOs.
Family offices should maintain detailed investment guidelines relating to allocation percentages, diversification, liquidity, etc. and have some understanding of the variety of investment manager due diligence and evaluation tools, such as alpha, Sharpe ratio, etc., in order to accurately assess investment risk, portfolio risk and operating risk. It is no longer acceptable to rely only on the advice of third-party managers and funds of funds.