Is a Family Office the Right Structure for Your Wealth Management?

Explore the world of family offices with Comerica Wealth Management's in-depth guide. Understand benefits, structures and how a family office can transform your wealth management experience. Learn to navigate potential pitfalls and decide if a family office is the right fit for your financial goals.

Key Takeaways:

• A family office centralizes wealth management, streamlining interactions with your advisors and simplifying complex legal and compliance matters.
• Each family office is unique, tailored to specific family needs and should evolve over time to align with your family’s objectives and financial priorities.
• Use the checklist at the end of this article to determine if a family office is the right structure for your wealth management.

Managing wealth can easily become a full-time job. Juggling a portfolio of investments, speaking with various advisors who don’t always communicate effectively, as well as challenges presented by complex legal and compliance rules. At the end of the day, it’s enough to leave anyone exhausted.

That’s where a family office comes in. This structure enables a family to bring all services and decision making to be consolidated under one roof, making it simpler and more organized. This not only ensures your money is protected and growing, but also frees you up from the day-to-day hassle of coordinating every effort. 

In this guide, we'll explore what a family office is, where it can be beneficial and help to decide if a family office is right for you.

What is a Family Office?

A family office is a private organization that manages the financial and family assets of a wealthy family. Its primary goal is to sustain and grow wealth across generations. As such, it may involve estate planning, tax strategies, philanthropy, cash flow planning, bill payment, educating/preparing heirs and investment management, among other financial responsibilities.

An Important Caveat

That said, before diving deeper, it's important to debunk a common misconception. A family office isn't merely about assembling a group of independent professionals and tasking them with wealth management. Instead, it represents a coordinated, holistic approach that brings together all of your financial support.

Think of a Family Office Manager as the conductor of the orchestra. Each member of the orchestra is talented in their own right, responsible for a specific task. But the conductor sees the bigger picture. They bring together the various members to work toward a common goal. In this case, the goal of the family office is to grow and maintain your wealth without breaking family bonds/ties. 

There is No One-Size-Fits-All Structure

It’s also worth noting that family offices can vary greatly in size and responsibilities. No two families are the same, so no two family offices are the same.

Here are some of the factors that may go into the organization of a Family Office:

• Your family’s financial objectives
• Your liquidity needs
• Your family’s on-going cash flow needs
• The complexity of your assets
• The size of your family
• Any philanthropic endeavors
• In-house expertise needed

When properly designed, a family office can remove the burden of everyday management from your shoulders.

Two Main Types of Family Offices

As you consider a family office, it can be helpful to recognize the most common structures used in the market today. There are two main types of family offices, each with its own unique benefits and drawbacks.

Let’s explore them in-depth:

• Single Family Offices (SFOs): Serving the unique needs of a single family, an SFO often operates from a designated physical location. It's tailored to address the specific requirements, values and preferences of that family. This highly customized approach ensures that every aspect of the family's financial world is managed under a unified strategy, providing clarity, cohesion and efficiency.  
  • Outsourced Family Office: Within the realm of SFOs, there's flexibility. Instead of managing all services in-house, an SFO might opt to outsource certain functions to external specialists. The rationale behind this approach is to keep core, high-priority services in-house while tapping into external expertise for more specialized or occasional needs. It's a balanced approach, blending the bespoke nature of an SFO with the breadth of expertise available in the broader market. 
• Multi-Family Offices (MFOs): Scaling the concept of a family office, MFOs serve multiple families, pooling resources to provide a suite of shared services. While it might seem like a departure from the personalized touch of an SFO, MFOs still deliver customized solutions and a high-touch experience. They often operate virtually, reducing overheads and ensuring flexibility. Families can benefit from the collective wisdom of multiple advisors or engage with a dedicated firm that brings a broader perspective due to its diverse clientele. 

In essence, the type of family office you choose should match your specific needs, the scale of your wealth and your comfort level with shared resources.

A helpful starting point is to ask: “What services will the family office provide?” Then ask, “Do I want to share resources with other families or build a dedicated family office?"

The Evolving Family Office

Family Offices aren't static. When done right, they evolve to mirror the changing landscape of the families they serve. As the dynamics of your family and assets shift, so should the strategies and structures of your family office. By being vigilant and recognizing key trigger events, you can ensure your family office remains relevant and effective.

Below are several pivotal moments to watch out for, ensuring your wealth management approach is always in its prime:

• Significant Liquidity Event: A sudden increase in wealth, due to a business sale or inheritance, may necessitate more comprehensive management. 
• Family Expansion: The birth of new family members or marriages can introduce new financial considerations and beneficiaries. 
• Generational Transitions: As wealth is transferred from one generation to the next, new financial strategies and structures may be needed. 
• Changes in Regulatory Environment: New laws or tax regulations may require a shift in wealth management strategies. 
• Major Asset Liquidation: Selling significant assets, like a company or real estate, can bring liquidity that requires a new approach to investment and distribution. 
• Introduction of Philanthropic Goals the Use of Strategic Philanthropy: Combining a charitable giving approach with the sale of a highly appreciated asset and longer-term charitable intent can lead to restructuring your family office services. 
• Investment Strategy Expansion: An expansion of investment policy to include traditional investments and alternatives, such as private equity or venture capital, can alter the family office's focus.

How to Avoid Common Pitfalls

Establishing or engaging with a family office can be a transformative decision for your wealth management. However, like any important venture, there are potential pitfalls. Be aware and proactive to ensure you set up a thriving financial legacy.

Common Mistakes:

• Lack of Clarity: Not having a clear understanding of the family's goals and needs can lead to misaligned strategies. 
• Cost Oversight: Underestimating the operational costs can strain resources. 
• Rushing the Process: Hurriedly choosing a family office without thorough research can lead to compatibility issues later. 
• Neglecting Due Diligence: Failing to vet potential advisors or professionals can jeopardize the family's financial well-being.

Key Considerations:

Before diving in, it's important to ask the tough questions and tailor the family office to your unique situation:

• What's your primary objective for the family office? Is it wealth preservation, growth, family unity, philanthropy, or a combination? 
• What services do we want the family office to provide? Which of these should be handled by family office employees and which should be outsourced? 
• How involved does your family want to be? Do they desire hands-on involvement or prefer to delegate? 
• Are there specific asset types that require specialized management? 
• What's the budget for setting up and maintaining the office? 
• How will changes in the family dynamics, such as new generations or family members with different financial philosophies, be managed? 
• What new risks have emerged for the family that require monitoring? 

By identifying potential pitfalls early and thoroughly considering these questions, your family can build a robust, adaptable and thriving family office.

As with any significant financial decision, it’s worth taking the time to carefully consider and organize your family office.

A Family Office May Be Right for You, If . . .

Lastly, if you’re considering a family office, here is a helpful checklist. If you’re able to answer “yes” to the majority of these questions, then a family office may be the right solution for your wealth management needs.

1. Do you have multiple private investments that require time commitments and expertise to manage? 
2. Do you have several homes or real estate projects that require tracking of expenses? 
3. Are you looking for an expert to evaluate new private investments? 
4. Do you routinely need help keeping track of your affairs, including bills? 
5. Do you need help coordinating your advisors? 
6. Do you anticipate your children and grandchildren will need help managing the family wealth? 
7. Do you have a complex estate plan? 
8. Do you need help establishing and maintaining financial and family objectives? 

Like any financial tool, a family office is best used when it fits your financial needs. Use this checklist to determine if a family office is a good fit for you and your family.

Ready to Talk Through a Family Office Structure?

Work with the experienced advisors at Comerica. We’ll help you identify an optimal family office structure and avoid wealth-draining pitfalls. Contact your Comerica Relationship Manager or contact Comerica today.