Sheila, a third-generation
shareholder and CEO of a $150 million family business, asked me to help
her resolve a quandary. She and her company’s other 27 (mostly inactive)
family shareholders were considering various options, including selling
When I asked her whether they had a family office, she dismissively answered,
“Oh no. A family office is only for families who have sold their
companies. And we already have a family council—what would we need
a family office for? Besides, we’re too small. We could never afford
In that one breath, Sheila had managed to mention three of most common
myths about family offices. Like Sheila, many families who can benefit
from a family office rule this option out, and thereby miss out on opportunities
to tighten family bonds, bolster the family’s financial and legal
savvy, and enhance their purchasing power. It’s time to debunk these
• Myth 1: Only families who have sold their businesses
need a family office. A family office can be useful for many
multi-generation companies, especially those with inactive shareholders.
There are many different types of family governance structures. As the
company and the family evolve in size and complexity, the family governance
structure should also evolve:
A family council mainly provides a forum for discussion
and communication among family members. A family trust or holding company
owns shares in the operating company and concentrates family control,
facilitating the input of outside capital in the business.
A family investment company is a structure that parallels
the family business and manages assets outside the family company, such
as real estate or liquid assets.
A family office can take many forms, such as a family
limited partnership, but in all cases addresses four main roles when the
family still owns a business:
1. Family as owners. The family office can provide stewardship of the
family’s patient capital, including defining and monitoring the
investment guidelines for the operating company. My family office, for
instance, works with management and the board of directors to clarify
shareholders’ return expectations—both return on equity and
return on assets. Those guidelines and return expectations can be communicated
to the board, which transmits them to management. The family office can
also decide which family members will fill board seats.
2. Family as employees. The family office can determine rules of entry
for family members seeking to join the business, as well as what kinds
of training and development programs the business should provide for relatives
who have management aspirations.
3. Family as family. How will the family perpetuate its heritage, maintain
communication and resolve conflicts? How, if at all, will it support family
members, and under what circumstances? One example is a family bank, whereby
a family office creates a fund to invest in ventures created and managed
by family members.
4. Family as community. A family office can decide how and where the
family wants to direct its philanthropic giving. It can also identify
leadership opportunities, such as open board seats, at non-profit organizations
where the family may want to maintain a presence.
Especially during times of family and business transition, a family office
can help educate relatives about various options, help the family articulate
and live by its values and strengthen patient capital. A family office
could help Sheila and her relatives consider opportunities and challenges
Without a family office, the only glue holding together a growing, dispersed
family is the business. So shareholders may cling to the business to preserve
family identity and closeness, even if that means passing up opportunities
to expand, evolve or sell the company. By providing another organizational
structure around which the family can unite, a family office enables the
family to base decisions on business and financial factors, not emotions.
• Myth 2: Family offices are solely for managing a family’s
wealth. Family offices often provide many services and products
beyond investment management. Today family offices may navigate different
products for the family, such as insurance, personal lines of credit,
and business and family travel and legal services. Family offices can
also harness the family’s purchasing power, enabling it to negotiate
better prices and terms on these products and services than individuals
could negotiate on their own. The professional staff at some family offices
can review business plans developed by family members attempting to launch
new business ventures.
One critical role the family office can play is sponsoring educational
programs on topics like the family’s business, new developments
in the industry, personal finance, technology or career planning. In addition,
the family office can help connect disparate family members and keep them
informed about business, family wealth and other issues.
• Myth 3: Our business is too small; we can’t afford
a family office. The size of your business isn’t the most
relevant factor; it’s the size of your family, and how dispersed
your relatives are. For example, take a second-generation business with
one parent and three children active in the company, plus two other inactive
children. This family may be able to learn and make decisions effectively
among themselves. But what will happen in the next generation? That same
business family may have expanded from six members to 20, with only a
handful of shareholders involved in day-to-day management. The rest of
the relatives may have spread throughout the country, or even overseas.
The company may have grown, stagnated or even downsized in this time frame.
A family office doesn’t have to be a big expense. At first, the
office might consist of one administrator to provide the services mentioned
above. In the founder generation, the founder’s secretary often
handled such details. Fourth-generation Freedom Communications, which
owns 28 daily newspapers, 37 weeklies and eight TV stations, employs one
“shareholder relations” person, who actually provides the
functions of a family office. She attends family business conferences
to find new services and ideas for family shareholders, organizes educational
seminars and researches financial and legal resources.
At the next level, a family office can include a staff—a lawyer,
an accountant, an insurance specialist, an investment counselor—to
provide, or perhaps help outsource, those services. The last stage could
be a full-fledged, legal structure, a holding company that has some shares
of the family business not owned by shareholders. It also can provide
asset management, legal services, helicopter services or time-sharing
on a private jet.
Another option is outsourcing your family office function to a multi-family
office (MFO) without incurring the overhead expense of operating a family
office internally. Many families with $5 million or more of investible
assets have become clients of MFOs like Bessemer, Glenmede, Pitcairn and
Whittier, primarily farming out their investment management and other
family office tasks.
Large institutions (Credit Suisse First Boston, J.P. Morgan, Citibank
Private Bank) have also gotten into the game of advising high-net-worth
families. The competition among external service providers for family
offices has cut down the margins in the business. This prompted a consolidation,
resulting in large MFOs such as Pictet in Europe and Atlantic Trust in
the U.S. At the same time, services that a single family office can no
longer provide competitively to its clients are being outsourced.
By navigating through the various investment products available and outsourcing
when appropriate to an MFO or an institution, a family office can offer
family shareholder clients the most competitive investment strategy and
There are at least two possible caveats to family offices, which shareholders
should try to avoid at all costs. First, shareholders may come to depend
on the family offices, to the extent that they do not know how to take
care of basic things for themselves, such as balancing a checkbook or
understanding a basic contract. Smart business families make sure that
their family office enhances members’ abilities through constant
education that leaves them more, not less, empowered to handle life’s
complexities. The family office merely serves as a convenience and uses
the power of its numbers to bargain for services and products at a better
price than members could negotiate as individuals.
The second potential problem is that, especially in the personal finance
realm, when family members depend on the family office to take care of
everything, they often fail to oversee the family office staff, who may
find—and take advantage of—opportunities to bilk the family.
To avoid that, some families have turned their single-family office into
an MFO, providing its services to several other business families. Becoming
an MFO helps align the interests of its own shareholders with those of
outside clients and staff.
Family shareholders like Sheila may find they don’t have to wait
to sell a business in order to benefit from a family office to manage
the family’s wealth and serve its other needs. But families should
not relegate all decisions and oversight to hired hands, inside or outside
the company. A family office is most effective when it enhances—rather
than diminishes—family members’ business, financial and life