Building a family office practice within the bounds of a CPA firm can be done in two ways.
The first can be a practice that is built to support the special needs of family offices. This may include tax work, financial planning or helping with business valuations. The second way that a firm can build a family office practice is to actually deliver the services directly to their wealthy clients. (watch the video Building a Family Office).
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, with net worth in today's dollars well in excess of $100 million. 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 and personal assistants who could do everything from monthly financial statements through booking travel and personal care appointments.
In a traditional family office, no service or request is beyond the scope of the office's services. Employees may be called upon to pick up a car from the auto dealership or bail a troubled family member out of jail. Sometimes, the CEO of the family office is the CEO of the family sans the parenting. Relationships between the employees of the family office and the family get close, especially as children and grandchildren grow, and the relationships become multi-generational.
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 the 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, dealing with tax planning or other benefit planning as it relates to family members, obtaining current valuations of the company, and making sure that the value of the business is enhanced by smart family and succession planning.
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, well-versed fiduciary. This person should be well-versed in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes and risk management. In addition to their own personal experience and knowledge, this person should be able to build a team of subject matter experts in any area to support the family's needs in all areas. For example, some family offices own property, businesses or investment accounts overseas. Unless this represents a majority of the family's interests, the CEO of the family office would not necessarily need to be an international expert, but should definitely have experts on the family office team who are extremely knowledgeable in such matters.
Pick and choose
The traditional family office may or may not actually manage the financial assets. It should be noted that asset oversight is different than asset management. Oversight typically involves coordination, evaluation and working with investment advisors and money managers, but 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 represented in the portfolio. Family offices that do get actively involved with day-to-day asset management typically represent families whose fortunes were built by skillfully managing investments, or the very wealthy families who may have built or acquired their own investment management staff.
The common tasks that a family office may oversee include:
- Comprehensive oversight of family assets.
- Contemporaneous recordkeeping of all 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 the advice and services received from all of 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 established.
- Oversight and management of trusts and other entities established to carry out the family's objectives.
Each family has its own set of unique issues, and each family wants to delegate some or all of these matters. But in a traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interest or other profit-making activities. The entity's sole purpose is service to the family.
Beyond the traditional family office, there are firms known as the multi-family offices. In a multi-family office, as the name implies, the entity is built to serve more than one family. The origin of the multi-family office comes from traditional family offices where the family decided to use their team to help others for a fee. In addition to a traditional family office that decides to serve others, many for-profit enterprises and CPA firms have flourished in the multi-family office model.
The multi-family office frequently serves families less wealthy than a single 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 involved deeply in many family financial matters and often has a strong personal relationship with the founding or senior members of the family, who may have created the wealth.
Clients who are candidates for these services are clients who are busy with complicated lives. They have assets and investment accounts in many places, like to spend their time traveling, with the family or on the golf course and not looking at their statements and doing their own recordkeeping. Don't pre-judge either the simplicity of a basic bill-paying and recordkeeping service or the cost/benefit associated with outsourcing this clerical necessity to a professional services firm. 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 without the stress of paying bills when overseas.
Often, the firms that serve these types of clients are larger ones with old-school partners who want nothing to do with matters beyond accounting and tax. Left to them, your firm will never add these services. It may take a strong managing partner or management committee to add this service to your menu of offerings. On the other hand, this could be the basis for your new firm where you can deliver the services that you believe are most beneficial to clients. Smaller firms can also succeed in this space, but would need to focus almost completely on these services. The typical small firm is inundated with little engagements and billable hours, and often not skilled enough at business management to understand the merits of casting the small clients aside to work on larger, more profitable and fun engagements.
Many CPA firms will often want to track their time and simply send bills each month. 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 prefers 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 recordkeeping 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 subjective standard, and many CPAs do not register. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel.
If you get involved in check signing, then your scrutiny as an investment advisor would be heightened, 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.
With the CPA firm heritage in recordkeeping and financial analysis, there aren't many professionals who can do a better job in family office services. Start small, and consider taking on one or two clients at first -- then take it to the next level for other clients who can 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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