The purpose of a family office is to organize and centralize the management of a family’s personal and financial affairs, and to maintain the financial house in as good an order as that of a well-run public company.

The origin of the family office concept came from extremely wealthy families. The family office was frequently a separate entity, with employees ranging from a chief executive or chief financial officer, along with a staff of bookkeepers, to personal assistants that could do everything from monthly financial statements through booking your travel and personal care appointments.

In a traditional family office, no service or calling is beyond the scope of the office's services. Employees may be called upon to pick up the car from the auto dealership or bail a troubled family member out of jail. In other words, the CEO of the family office is the CEO of the family, sans the parenting. Although, if you speak to those at the helm of the family office, you'll hear stories of the pseudo-parenting and mentoring that is frequently part of the job.

 

THE SOURCE OF THE MONEY

Many of these wealthy families have made their money from success in business. Typically, the family office staff will not be involved in the operations or even the accounting for that business. They will, however, be extremely familiar with the business as it relates to the family. The family office will stay on top of loan guarantees, timely reporting to shareholders and the family office, obtaining current valuations of the company, and succession planning for that business.

It is not uncommon for the family lawyer or accountant to sit in the chair of the executive of the family office. It is a role for an educated financial executive, and not a salesperson. This person should be well-versed in many areas, including accounting and record-keeping systems, law, finance, markets, taxes and risk management. In addition, they should be able to build a team of subject matter experts in any area to support the family's needs in all areas.

The traditional family office may or may not actually manage the financial assets. Oversight typically involves coordination and working with investment advisors and money managers, and not actually selecting the individual investments. The family office may perform due diligence on investment managers and consultants, but not always the actual day-to-day management of the assets. The office may perform overall allocation analysis and look for overlap or non-performance from the various managers and sectors in the portfolio.

The common tasks that a family office may oversee include:

  • Oversight of family assets;
  • Record-keeping of financial assets;
  • Daily management of property and other real asset holdings;
  • Preparing monthly financial reports to show cash flow, income, gains and losses, and a statement of assets and liabilities;
  • Coordinating advice and services received from the client's other professionals;
  • Being responsible for overseeing implementation and ongoing management for each matter under oversight;
  • Personal concierge services to the family members for personal or business matters;
  • Family governance and carrying out the wishes of the family matriarch or patriarch;
  • Oversight of philanthropic activities, foundations or gift trust accounts; and,
  • Oversight and management of trusts and other entities.

 
GROWING FAMILIES

Beyond the traditional family office, there are firms known as multi-family offices. These started from traditional family offices where the family decided to use their team to help others for a fee. But beyond a traditional family office that decides to serve others, many for-profit enterprises and CPA firms have flourished in the multi-family model.

The multi-family office frequently serves families less wealthy than the traditional family office, but essentially performs many of the same critical functions with respect to the financial side of the family life. For the CPA firm with clients whose net worth exceeds $25 million or so, this model offers lots of potential. The firm is probably already deeply involved in many family financial matters and often has a strong personal relationship with the founding or senior members of the family.

The best candidates for these services are clients who are busy. They have assets and investment accounts in many places, and like to spend their time traveling, with the family or on the golf course, and not looking at their statements and doing their own record-keeping. Don't pre-judge either the simplicity of a basic bill-paying and record-keeping service or the cost/benefit associated with outsourcing this clerical necessity. Let your client decide if they'd rather spend money to have the records kept timely and accurately while they enjoy the fruits of their labor.

 

YOUR RESPONSIBILITIES

A multi-family office is a for-profit entity. And as such, before you as an individual or CPA firm proceed, you need to document your value proposition and compensation methods, and obtain any licenses that may be required.

Many CPA firms will often want to track their time and simply send bills each month based on the time spent. While this can work, it is not the most common method of compensation. More common than hourly would be flat fees for a list of covered services. Some firms will also add fees for assets under management. If your firm does prefer to be paid for assets under management or advisement, then a separate entity and either licensing as an RIA or a fully disclosed solicitation agreement with another RIA would be required.

Whether your family office fees are based on hours or flat-fee billing, the issue of licensing will still apply. CPAs can avoid registration as an investment advisor if the engagement is pure record-keeping or if their investment advice or financial planning advice is merely incidental to the practice of public accounting, and not really advisory in nature. Naturally, this is a very subjective standard and many CPAs do not register. They could, however, be dancing on the edge of a highly regulated industry, and should seek professional counsel as to whether registration or affiliation with an investment advisor would make sense.

If your family office service gets involved in check-signing, then you may be subject to more scrutiny as to whether you are an investment advisor, as you would be deemed to have custody of your clients' funds. Avoid custody and check-signing if you can. A better way would be to queue up the clients' bills to be paid, but make them at least sign the checks or electronically release the funds for payment.

Many multi-family offices do oversee or actually manage assets for their family office clients. Offering these services is easier if you are already a larger investment advisory firm with experienced asset managers on staff. This is not the typical profile of the average CPA financial planning shop, and these are not the types of clients where you should be cutting your teeth in the investment advisory business. A model that makes sense here is to affiliate with a firm that already serves the types of clients that you are seeking to serve. This will shorten your learning curve, cause fewer mistakes and allow you to take advantage of a seasoned staff already in place. Of course, you will be sharing fees with the firm with whom you affiliate, but you may net as much utilizing this method as you would if you built something from scratch.

With the CPA firm heritage in record-keeping and financial analysis, there aren't many professionals who can do a better job. Start small, and consider taking on one or two clients in the first year. If your clients appreciate it, then take it to the next level for your other clients who may also benefit from this higher level of service.

John P. Napolitano, CFP, CPA, is CEO of U. S. Wealth Management in Braintree, Mass. Reach him at (781) 849-9200.

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