Many business-owning families create an informal family office within the business administrative group. The company’s accounting team handles personal tax filings and financial record-keeping, while administrative staff keeps track of insurance, record-keeping and, often, bill-paying for senior management, and possibly for other family members as well. The benefits of an embedded SFO are obvious: the family can leverage an existing resource, so the family office is efficient and cost-effective—or seems to be.
There are serious drawbacks to an embedded family office. First and foremost, the focus of a family office—wealth preservation—is different than the focus of an operating business. Staff often doesn’t juggle the varied responsibilities well, and skills that are critical in the business realm don’t necessarily translate into the family office realm. For instance, partnership accounting and reporting for trusts and complex investment structures is quite different than corporate accounting, and staff may lack the time, training and technology to handle both jobs well. The legal structure and governance of a family office are also quite different than those of a business, and substantial missteps and mistakes may occur when business practices are automatically carried over to family office matters. Priorities may be unclear. For instance, if an emergency occurs in both the business and family office at the same time, which should staff attend to first? Risks of gaps in reporting and compliance rise exponentially when staff is responsible for both the business and the family office.
Families with operating businesses increasingly are developing separate family offices to handle their personal investments and manage their non-business assets. Having a separate office provides for greater privacy and confidentiality, and allows for delegating | outsourcing to a team with the specific skillsets required by the family office. A separate structure for the family office also encourages a longer-range focus for the family’s own strategic planning.
Building the family office apart from the business also increases opportunities for involvement of family members who don’t participate in the business. By expanding family involvement, the family office can become a force for strengthening family cohesion. Some families are using their family offices to create entrepreneurial venture funds, investing in promising new businesses or technologies, thereby increasing the odds of expanding rather than simply preserving the family’s capital.
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