As families venture into the investment arena, driven by the next generation’s appetite for more direct and diverse types of investments, they face the dual challenge of understanding this complex world and assessing various risk factors. The rise of trendy and intriguing asset classes, including cryptocurrency and SPACs, further complicates the landscape, prompting families to strategize on how to navigate these new terrains effectively. The SPAC boom in particular, which saw companies merge with shell entities to go public, has fizzled out following a record-breaking year in 2021, underscoring the risk of these newer asset classes.
Demystifying family offices: common misconceptions
Amid the interest in family offices, there is a certain glorification that can lead families to consider establishing one without a clear understanding of whether it aligns with their needs. Demystifying the concept becomes crucial, and families are encouraged to reflect on whether they genuinely require a family office and, if so, in what form. I have developed toolkits to aid families in this introspection process.
When demystifying the concept of a family office, it’s essential to address common misconceptions. Family offices can take various forms and shapes, from highly structured and formalized to more flexible and modern iterations. Those include “hybrid” family offices that combine elements of both a single-family office (SFO) and a multi-family office (MFO).
An SFO is established to exclusively serve the financial needs of a single wealthy family, while an MFO serves the needs of multiple families. A hybrid family office combines the best of both worlds by serving a family with core services that sit within the family office and an array of satellite services that are brought in from outside partners. This blend allows for cost efficiency and economies of scale while still providing some level of personalized service.
Critical decision points: establishing a family office
For those considering the establishment of a family office, careful consideration of not only structure but also services (they typically provide a range, such as investment management, estate planning, tax advisory, or philanthropy, and can also include an array of other services to help manage the family and other affairs in their system) and long-term goals is paramount. Rushing into this decision after a liquidity event like an asset sale or IPO delivers a capital windfall can lead to costly mistakes – investments that don’t deliver a return.
Family offices must also be thoughtfully integrated into the wider family ecosystem, with governance aligned to overarching family strategies to avoid issues down the line, such as family conflict. Sometimes, one or two family members – perhaps those with a financial background – can push ahead with investments without taking the rest of the family with them without proper alignment around their wishes, needs, or risk profiles, leading to conflict.