An outsourced family CFO
The purpose of a family office is to organize and centralize the management of a family’s personal and business 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, and the family office was often a separate entity, with employees ranging from a CEO or CFO to a chief investment officer, along with a staff of bookkeepers and personal assistants.
Many of these wealthy families have made their money from success in business. The family office staff is separate from the business financial staff, and 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 business matters as they directly relate to family wealth. The family office may also assist with the acquisition and sale of various business entities via the lens of the family estate plan and investment objectives and best use of talent and resources.
Big shoes to fill
Frequently it is the family lawyer or accountant that sits in the chair of the executive of the family office. Clearly it is a role for an educated, well-versed financial executive, and not a salesperson. This person should be knowledgeable in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes and risk management. In addition to their own personal experience and knowledge, they should be able to build a team of subject matter experts in any area to support the family’s needs.
The traditional family office may or may not actually manage the financial assets. It’s worth noting that asset oversight is different from asset
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 financial reports showing cash flow, income, gains, losses and statement of assets and liabilities;
- Coordinating the advice and services received from all of the clients’ other professionals;
- Being responsible for implementation and ongoing management for each matter under oversight;
- Personal concierge services to the family members for personal or business matters;
- Family and entity governance and carrying out the wishes of the family matriarch or patriarch; and,
- Oversight of philanthropic activities, foundations or gift trust accounts established.
Each family has its own set of unique issues, and each family wants to delegate some or all of these matters. But in this traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interests or other profit-making activities. The entity’s sole purpose is service to the family.
The type of family office that could be provided by a CPA firm is known as the multifamily office. The MFO is basically a professional services firm that delivers family office services for more than one family. Many for-profit enterprises have flourished in the multifamily office model, including progressive law and CPA firms.
The multifamily 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 $25-50 million or so, this model offers lots of potential. The firm is probably deeply involved in many family financial matters and often has a strong personal relationship with the founding or senior members of the family.
Of course, the accounting firms that serve these types of clients are frequently larger firms with old-school partners who want nothing to do with matters beyond accounting and tax. This is another matter that really falls into the category of practice management. But fortunately, as aging partners retire, the younger generation sees the benefit of delivering elevated levels of service to the firm’s better clients.
A multifamily office is intended to be a for-profit entity. And as such, before you as an individual or CPA firm decide to offer these services, you must document your services, compensation methods, and the required licenses. Many CPA firms are still tied to the hours-and-rates economy, and will track their time and simply send bills each month based on the time spent. While this can work, it’s not the most common method of compensation. More common than hourly billing would be flat fees for a list of covered services.
Some firms will also add fees for assets under management or overseeing and helping to select the actual asset manager. If your firm intends to offer asset management also, consider segregating your fees for AUM versus traditional family office services. If the asset management division becomes significant, perhaps a separate entity may also make sense. Be careful with the asset management part: You do not want to deflect the important role of the basic family office to where the conversations are more about investments.
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 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 that I talk to do not register. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel as to whether registration as an investment advisor would make sense.
Don’t let the name “registered investment advisor” or RIA fool you. The registered investment advisor license and registration is the same license that covers all financial planners. You may be deemed by regulators to be practicing investment advice and financial planning to the extent that you get involved in matters such as shaping goals and objectives and providing advice that is more than incidental to the practice of accounting for the family wealth. Registration as an investment advisor will also subject you to the same rules about compensation, marketing and audit as other financial services firms registered as RIAs, requiring a compliance professional or consultant.
Some multifamily offices do oversee or actually manage assets for their family office clients. Offering these services is easier if you’re already a larger investment advisory firm with experienced asset managers on staff. This isn’t the typical profile of the typical CPA financial planning shop, and these are not the types of clients on which you should be cutting your teeth in the investment advisory business. A model that makes sense here is to use your intelligence to oversee other managers and critically evaluate their offerings in terms of the criteria that you are looking to fill.
Whether your CPA firm has a vibrant wealth management division or not is irrelevant when it comes to offering family office services.
The family office role for a CPA firm is just like outsourced CFO work, except for a family rather than an entity.