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How EY can help
For families looking to establish a family office, understanding its significance and the critical considerations involved in its formation is key to building and protecting a lasting legacy. With this in mind, we developed the EY Family Office Guide as a resource for families that are considering (or have begun) embarking on this journey. Below, we share some of the most significant takeaways.
Why a family office?
A family office sits at the center of owners, families, and the businesses and investments they own. It supports vision and legacy, leadership, ownership and wealth transition, and it is responsible to grow, protect and improve.
Establishing a family office enables a family to strategize along four core dimensions:
- Privacy: providing confidentiality regarding critical information
- Control: giving the family the ability to direct when and how tasks are accomplished
- Risk management: identifying, assessing and mitigating financial and other risks
- Cost: pooling assets and activities to create economies of scale with vendors or to gain access to greater investment opportunities
“Family offices are not just about managing wealth; they are about nurturing legacies. In a rapidly changing world, they provide the stability and foresight necessary to protect family assets and adapt to new challenges, ensuring that future generations can thrive,” said Brock Griffiths, EY Americas Family Enterprise Leader.
What should the family office do?
At its core, a family office is a business — it just so happens to be in the business of family. This means it should run no differently than any other business. And similar to a new business, a family needs to start its family office with a written business plan. The business plan should reflect the values of both the family and the family office.
One of the foundational elements of a business plan is what services will be provided. Services that can be included in a family office fall into four categories:
- Financial planning (investment management services, philanthropic management)
- Strategy (estate and wealth transfer, business and financial advisory)
- Advisory (tax and legal advisory, compliance and regulatory assistance)
- Governance (succession planning, administrative services)
What’s the right operating model?
A family office’s structure, organizational design and infrastructure depend on the family’s unique needs. When determining the right operating model, the family needs to consider which functions they’ll staff with their own people and infrastructure and which ones they’ll leverage third-party vendors for. Keeping services in-house protects the family’s confidentiality and enables family customization, while outsourcing can lead to cost efficiency and enhanced access to expertise. There are benefits to both approaches.
Strategic planning
Besides the initial business plan, the family office needs solid short- and long-term strategic planning, as well as annual business plans. This should be an ongoing effort that includes five- and 10-year strategic plans. Such planning should address critical matters such as talent recruitment and retention, liquidity and risk mitigation, and growth of the family — in alignment with the family’s values and goals. It’s a means of protecting the family’s financial stability and continuity across generations.
The investment process
One of the attractive reasons for many families to establish a family office is the ability to invest in a personalized, diversified portfolio. Family offices operate with a high degree of flexibility in their investment strategies, largely due to the absence of fixed regulations that govern their activities. This allows them to diversify their assets more broadly than institutional investors, and families with family offices often venture into alternative investments that reflect the personal interests of family members, such as art, farmland and forests.
The investment process within a family office is influenced by various factors, including the family’s economic background, involvement in business and the role of the chief investment officer. Overall, the investment strategies of family offices are deeply intertwined with the family’s legacy and values.
Reporting and technology
Family offices face a significant challenge in verifying the secure management of the diverse assets, complex ownership structures, and varied business and personal interests of their client families. To operate successfully requires many kinds of information: financial data to support decision-making, portfolio data to confirm the effective oversight of assets and continuous monitoring of processes to spot and mitigate risk.
In today’s digital world, producing relevant information requires gathering and synthesizing data from a web of sophisticated — and specialized — service providers and partners. Technology plays a central role in supporting this process.
Philanthropy
When considering philanthropy, family offices have various options beyond traditional charitable giving, including nontraditional philanthropy, impact investing and venture philanthropy. To effectively pursue philanthropic goals, families should define their objectives, select appropriate structures such as donor-advised funds or private foundations, and navigate challenges related to legacy, generational transitions and staffing.
Governance
Governance is a critical yet often overlooked priority for family offices — a necessity for managing family, investment and business needs effectively. Family offices play a crucial role in governance by helping families navigate delicate dynamics surrounding investments and other complexities to drive harmony across generations.
Establishing a robust governance framework, particularly through parallel governance, can enhance long-term sustainability and success by clearly defining roles and creating frameworks for decision-making.
Family office risk management
Family offices face a complex array of risks, including family succession challenges, market disruptions, and increasing privacy and cyber threats, which necessitate a holistic approach to risk management.
Effective risk management involves establishing a risk-oriented culture, clear communication and continuous monitoring while specifically addressing cyber risks through robust cybersecurity measures and incident response plans.