5 Questions to Consider When Deciding Whether to Start a Family Office

My somewhat facetious response is “You already have one.” Here’s why I respond that way and what I believe are better questions for next-generation family-enterprise members to ask.

The reasoning behind the common question

Global interest in family offices and related organizations has increased exponentially. A recent study by Deloitte Private estimates that the total number of family offices in the world will grow by 75 percent between 2020 and 2030. The combined wealth of high-net-worth individuals and families, meanwhile, is close to $20 trillion. That’s more than the gross domestic product of every country except the United States. It also represents almost 20 percent of global GDP. Private and family wealth is a big deal, so it makes sense that families will think a lot about how to manage that wealth and ask related questions.

Part of the confusion around the topic of family offices, moreover, is the sheer diversity of forms they can take. There are embedded family offices, virtual family offices, single-family offices, and multifamily offices. Newer definitions eliminate the “family office” term altogether in favor of the concepts of private investment offices and wealth-management firms. Indeed, the diversity of labels for family offices reflects the diversity of purposes.

Countering the question about family offices

The common question “Do we need a family office?” isn’t surprising. However, it’s not the right question. When I counter the query with “You already have one,” it’s not to be flippant but to point out what I see as reality and pique their curiosity.

When they inevitably ask what I mean, I’m able to ask additional questions like:

• How does your tuition get paid?

• How do repairs to the family lake house, boat, or cabin get scheduled?

• Who makes decisions about family real estate, family financial assets, and family funding of members’ entrepreneurial ideas, and how are those decisions made?

Of course, the answers vary widely depending on the family. For some, those tasks are performed by an employee of the operating company. For others, it’s the responsibility of a family member or group of them.

Regardless, the family already has some structure, policies, and processes in place to manage family resources and support members on multiple dimensions. This is the principal work performed by family offices.

The questions you should be asking about the family office

Since the family is already performing much of the work of family offices, the binary yes–no question about whether to have one is largely irrelevant. Instead, families would be better served asking themselves questions around need, purpose, sophistication, and preparedness related to a family office, including these five critical queries below.

1. What prompted the question in the first place?

Sometimes, the family-office question gets raised because families hear about others who have one, such as neighbors or friends or customers. However, their own needs may differ. In other instances, the question might arise due to a change in family circumstances, such as a death, marriage, or liquidity event. It’s possible that current structures and processes for addressing family-resource management or family needs are suboptimal. Asking what underlies the original question can help families pinpoint whether change is needed.

2. What do you hope a family office will do?

Rather than creating additional structure for the sake of it, families should carefully consider what they hope to accomplish with a family office. For example, is the purpose more focused on meeting family needs or adding strategy or sophistication to resource management? A clear understanding of intent will help families avoid inadvertently positioning a family office as a “solution in search of a problem.”

3. How much is the family willing and able to commit?

One of the primary considerations around establishing a formalized family office is cost. Families should consider what resources are available and, more specifically, how much they are willing to commit to family-office services. A single-family office, for example, is estimated to require $1 million to $10 million annually. For many families, this will be beyond their resources or may mean the costs won’t justify any benefits derived.

4. What is the appropriate structure to meet the family’s needs?

With an understanding of purpose and available resources, families can address the question of structure. There are as many potential structures for family office work as there are families seeking such services. Thus, to effectively broach the question of structure, families will likely benefit from outside support. The key is to match the structure to the desires of the family and the available resources.

5. Is your family aligned and prepared?

This final question is most often missed or ignored. It’s about the family’s alignment around the questions above regarding the purpose, structure, and cost of a family office. A family office should serve the whole family, not an individual.

The effort will be much more successful if the family is aligned around key questions before moving forward. This requires education (formal or informal) to ensure a common understanding amongst the family regarding the overall purpose of the family office as well as the strengths and weaknesses of its various incarnations.

In the end, “Do we need a family office?” is an important question for families to ask, but it’s not a simple yes–no question. Moreover, many families already perform many of the functions of a typical family office in some way.

Instead, ask better questions to understand the purpose, costs, structures, and the extent to which your family is aligned. The answers will inform you of what type of office works best for your family now and in the future.

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This article originally appeared in Inc.