FOA White Paper Creating A Single Family Office

WHITE PAPER

Creating a Single Family Office
for Wealth Creation and
Family Legacy Sustainability
The Benefits of Creating a Private Company of Dedicated
Professionals Exclusively Devoted to the Investment,
Legacy and Personal Needs of One Family

A White Paper by Angelo J. Robles, Founder & CEO, Family Office Association

www.familyofficeassociation.org | 203 570 2898
© Copyright 2009 All Rights Reserved. Family Office Association

Table Of Contents

I. Introduction VI. SFO Personnel
…………………………………………………………………………3-5 ………………………………………………………………………21-32

Definition SFO Recruiters
The SFO Market Compensation Specialists
Hiring the Team
Chief Executive Officer
II. When to Consider an SFO Chief Investment Officer
…………………………………………………………………………6-9 Chief Financial Officer
Chief Legal Officer
Market Considerations Director of Philanthropy
Where to Begin Director of Information Technology
Family Office Manager
Executive Assistants
III. Critical Planning Steps Bookkeeper
………………………………………………………………………10-13 Family Art Director
Family Security Director
Mission Statement
Business Plan
SFO Pro Forma VII. SFO Trends
Employee Hiring Plan and Manual ………………………………………………………………………33-34
SFO Advisory Committee
Contingency Plan
Review Process VIII. Examples of an SFO
Final Presentation ………………………………………………………………………35-38
Fine Tuning the Final SFO Plan
Entrepreneur – Aggressive Growth Strategy
Family – Legacy Sustainability
IV. Infrastructure of an SFO New York Financier – Long-Term Investment Strategy
………………………………………………………………………14-16 Silicon Valley Executive – Lifestyle Management
Brazilian Entrepreneurs – Expanding Global Interests
Business Entities
Registered Investment Advisory (RIA)
Private Family Trust Company IX. Conclusion
Insurance Risk ………………………………………………………………………39-40
Captive Insurance Company
Office Location
About Family Office Association
………………………………………………………………………41-42
V. Technology in an SFO
………………………………………………………………………17-20

Custody of Assets
Account Aggregation
Custom Reporting of Assets
Cost for Account Aggregation and Reporting Technology
Customized Technology Solutions
Emerging Solutions
Risk Metrics and Analytics
Hardware and Software
Family Communication
Family History www.familyofficeassociation.org | 203 570 2898

for Wealth Creation and Family Legacy Sustainability
The Benefits of Creating a Private Company of Dedicated Professionals Exclusively Devoted
to the Investment, Legacy and Personal Needs of One Family

WHITE PAPER

I. Introduction

© Copyright 2009 All Rights Reserved. Family Office Association www.familyofficeassociation.org | 203 570 2898


WHITE PAPER

I Introduction • Family unity and legacy sustainability
• Vision and value development
Definition
A single family office (SFO) is a private company Although a private company of dedicated
of dedicated professionals exclusively devoted professionals exclusively devoted to the investment,
to the investment, legacy and personal needs of legacy and personal needs of one family is the
one wealthy family. The concept of an SFO can classic definition of an SFO, the services the family
be traced back to the Roman major domus (head desires as provided by their own SFO vary widely.
of the house) and the Medieval major-domo
(chief steward)*, but the modern SFO originated An SFO almost always acts as a private investment
in the 19th century for the benefit of families of office for the family. In addition, a variety of
significant wealth created during the American services can be provided to the family from their
industrial age. SFO including:

Interest in SFOs has grown over the last decade as • Private Investment Allocation
worldwide wealth has expanded exponentially due & Implementation
to entrepreneurialism, access to capital, market • Investment Due Diligence
globalization, and technology. Recent global • Custom Aggregation & Reporting of Assets
economic turmoil, coupled with banking failures • Accounting Services (business & personal)
and investment fraud, has motivated many families • Trust & Estates Planning
of significant wealth to take total control of their • Asset Protection
personal and financial affairs and preserve their • Risk Mitigation
family legacy. • Family Banking and Private Trust
Formation
An effective SFO provides a family of significant • Managing Family Business Enterprises
wealth (i.e. $30,000,000+) with the ultimate in: • Identify and Filter Business Opportunities
• Family Philanthropy and Foundations
• Control of investment, business and • Family Mission and Governance
personal services • Preserving Family Legacy and Values
• Privacy • Family Retreats
• Customization of services and benefits • Residence Management & Staffing
• Coordination and effective management of
outsourced providers
• Purchasing leverage and cost savings
• Dedicated focus on needs and requirements
of the family
• Integrating investments, philanthropic *WHARTON GLOBAL FAMILY ALLIANCE: Single Family Offices: Private
causes and passion interests successfully Wealth Management in the Family Context. By Raphael Amit the Wharton
School University of Pennsylvania

04


WHITE PAPER

• Managing Passion Investments (i.e. fragmented and frequently uncoordinated
art, collectibles, sports, etc.) relationships with multiple private banks, wealth
• Family Medical Management managers, and other providers of services for
• Family Lifestyle (i.e. concierge, their business and personal needs. Now, more
travel, aviation, leisure, etc.) than ever, wealthy families need to coordinate
these relationships, centralize their investments
A great benefit for a family of significant wealth is and manage their family affairs more efficiently
the customization of their own SFO. No two SFOs and effectively to build their wealth and sustain
are alike. Other topics and services which families their legacy for generations. An SFO for a family
often consider from an SFO include: of significant wealth offers benefits that are too
hard to ignore.
• Engaging Younger Generations
in Entrepreneurialism Some families mention the cost of an SFO as a
• Socially Responsible Investment deterrent. Through education and professional help,
and Business Opportunities families can learn how to determine benchmarks
• Family Connectivity and SFO and create an SFO that delivers a measureable
Management through Technology ROI to ensure they receive value in return.
• Integrated Investment Approach
(business, passion, philanthropic) With the globalization of investments, technology
advancements, and the speed of market changes,
The SFO Market a family of wealth not weighing their options and
According to the 2008 Capgemini Merrill Lynch considering an SFO, or dismissing such solely on
World Wealth Report, there are 103,000 ultra high cost, can be detrimental to a family’s investment
net worth individuals worldwide, defined as having portfolio and sustainability.
at least $30,000,000 in financial assets, excluding
collectibles, consumables, consumer durables and Technology and outsourcing has significantly
primary residences. reduced both the costs and minimum net worth for
a family of significant wealth to consider an SFO.
Currently, there are approximately 1,000 single
family offices in the world.** There are many
reasons for the modest number of SFOs, including
the lack of awareness and education on all the
benefits of an SFO, perception of costs, set up and
management complexities, challenges in hiring
talented employees, and the lack of professional
guidance.
**WHARTON GLOBAL FAMILY ALLIANCE: Single Family Offices: Private
The majority of wealthy families currently have Wealth Management in the Family Context. By Raphael Amit the Wharton
School University of Pennsylvania

05


WHITE PAPER

II. When to
Consider an SFO



WHITE PAPER

II. When to Consider an SFO • Passion investment opportunities synchro-
nized in a coordinated effort with all assets
Frequently, the question “when to consider an owned by the family
SFO,” focuses only on net worth. Making a deci- • Effective and fully integrated coordination
sion based solely on whether a family has a certain of the family’s investment, estate, tax,
net worth is not looking at the full picture of the business, philanthropic and personal af-
benefits that can be realized from establishing an fairs
SFO. There are many benefits and value for a fam-
ily with net worth of $30 million+ to start an SFO, In section VIII “Examples of an SFO,” illustrations
including: are given of various SFO structures highlighting
the customization created by families and the val-
• Creating a team of internal dedicated pro- ue received from those entities.
fessionals advancing family investment and
business opportunities through proactive An effective SFO synchronizes the efforts of tal-
research and sourcing to expand upon the ented professionals exclusively focused on the
family’s net worth in any market condition desires of one family, offering much more than a
• Total control and privacy of the family’s private investment office. An SFO coordinates and
personal and business affairs, buffering the fosters family legacy and wealth sustainability,
family from undesired solicitations philanthropic initiatives and personal passions.
• Internal due diligence and safeguards (re-
views, audits, etc.) to avoid ponzi schemes, A family would have a very difficult time establish-
frauds and downward market conditions ing an SFO on their own due to the multiple con-
• Crystallizing family values and developing siderations, tax implications, hiring, technology
a mission statement and plan that guides sourcing, and other actions required. The family
and encourages generations to follow the needs a team of experts organized and coordinat-
family vision ed by a family office expert to help them formu-
• Building a sustainable family legacy through late and execute a plan that covers a holistic view
a unifying entity (the SFO) of the family and future generations, with bench-
• Philanthropic giving coordinated within the marks and measurable goals in place to ensure
complete family investment, tax and estate success.
plan, promoting family values and reputa-
tion worldwide Market Conditions
• Coordinated family effort educating young- The current global economic conditions are unprec-
er family members on the family’s mission, edented, and families of significant wealth desire
financial resources, business enterprises to stabilize their investments from further disas-
and opportunities to improve wealth and trous declines and secure their legacy for genera-
reputation tions. This coupled with ponzi schemes and the
fear that similar frauds exist that have not been

07


WHITE PAPER

uncovered, are leaving families of significant Where to Begin
wealth seeking new solutions. Because of the time and focus needed to set up an
SFO, families should seek the advice of experts,
An SFO provides the ultimate option for a family including organizations, consultants or service pro-
desiring to take control of their finances and family viders that are solely focused on the task at hand.
legacy. NO other option allows for such total con- Private bankers, legal, accounting, and other ser-
trol, privacy and customization. The SFO provides vice providers for families of wealth may be able
the family with internal entities with a sole focus to provide some guidance, but these companies
on THEIR best interests. are focused on their business, not the creation of
SFOs. Many professionals lack enough knowledge
A proactive SFO increases the likelihood of family to guide families in the establishment and man-
financial and legacy success and allows the family agement of an SFO.
to adapt faster and effectively to global changes
and opportunities, market downturns, and the In considering starting an SFO, the family should
best investment strategies. retain a knowledgeable expert who can objectively
compare all options and prepare a feasibility study.
Every family of significant wealth should consider A family office consultant is one such professional.

A proactive SFO increases the likelihood of family financial
and legacy success and allows the family to adapt faster and
effectively to global changes and opportunities...

an SFO due to the complexities of life, the mag- If progressing with an SFO (after the feasibility
nitude of global business opportunities, control of study) the family office consultant develops a fam-
personal and business affairs, as well shaping and ily mission statement, business plan, assists in or-
guiding the family’s values and legacy for genera- ganizing the SFO advisory committee (sometimes
tions to follow. multiple advisory committees for different areas
covered by the SFO) and the SFO infrastructure.

A family office consultant is not afraid to challenge
the family to fully understand the dedication

08


WHITE PAPER

(especially early on) in organizing and running an
SFO. Does the family want to organize and man-
age this business entity? In reality, it is like run-
ning a business, only the business is focused on
the family it serves. An SFO still needs to be run
like a business with a mission statement, business
plan, performance benchmarks, governance, bud-
gets and an advisory committee. The family will
need to hire and fire employees - are they up to
that?

An SFO clearly defines and focuses its capabili-
ties on that one family, protecting wealth, procur-
ing wealth creation opportunities and advancing
the family legacy. An SFO that navigates through
the current financial crisis and protects the family
from mismanagement and fraud is easily worth its
costs.

09


WHITE PAPER

III. Critical
Planning Steps



WHITE PAPER

III. Critical Planning Steps including outlining measurable benchmarks the
SFO needs to accomplish, a short-term and long-
Below are critical planning actions and documents term timeline, employee qualification and perfor-
that are absolutely necessary when deciding to mance goals, an employee hiring and firing policy
move forward with an SFO to ensure success and and employee manual.
a positive return on investment.
The family business plan outlines and coordinates
Mission Statement all aspects of the services provided within the SFO
The family, in conjunction with the family office (i.e. wealth management, estate planning, philan-
consultant, first develops the family mission state- thropic, passion investments, personal services,
ment. The mission organizes the family vision etc.). The plan focuses on a process for each ser-
around the family’s desires, values and expecta- vice rendered, describing in detail the services to
tions, not simply for the current generation, but be provided, employee talent required, projected
those that follow. Without a family mission state- costs and measurable benchmarks to gage the ef-
ment, a family often deviates off course and their fectiveness of the services rendered and employ-
wealth and legacy may suffer. In developing the ees responsible for these services.
family mission statement, the family frequently
improves internal communication. A family mission An example of a benchmark for a wealth manage-
statement provides for a stewardship of timeless ment function could be setting expectations for
family values, objectives and passions. In times investment returns of 3% above a measurable in-
of challenge it reminds, motivates and unites the flation index (i.e. CPI, etc.), with a specified di-
family of a sense of purpose. versified asset allocation - mix of cash, bonds and
equities. The portfolio is reviewed quarterly by the
Business Plan family and SFO advisory committee and/or specif-
The family office consultant, in close collaboration ic investment committee against a total standard
with the family leaders, needs to develop the fam- deviation of measurable investments not to ex-
ily business plan. Although the family leaders are ceed a negative 15%. In addition, no one money
paramount to helping to shape the SFO, the fam- manager manages more then 5% of total family
ily office consultant should talk with many family assets.
members from multiple generations (if applicable)
to get all input needed to complete the business SFO Pro Forma
plan. As with any new enterprise, in addition to a strong
mission statement and business plan, a newly
The family business plan needs to breakdown each created SFO requires a pro forma with detailed
area of interest that the SFO will address and pro- estimated costs of every area, including admin-
vide a framework in coordinating an action plan to istrative, infrastructure, employees, outsourced
bring it all together. There needs to be a process services, etc. The pro forma should be used to es-
(a hierarchy as well as a system for all to follow), tablish many goals and benchmarks for the SFO

11


WHITE PAPER

is properly managed and achieves a positive re- consultant, should organize an advisory commit-
turn on costs. tee. Initially this may consist of only family mem-
bers, however, the committee can include inde-
Employee Hiring and Manual pendent, unbiased professionals that add needed
The employee positions within an SFO (i.e. CEO, specific expert insight. In larger SFOs or estab-
CIO, CFO, etc.), need to be identified in the family lished smaller SFOs, multiple advisory committees
business plan, including the qualifications of each are created to focus on various single family of-
desired position, job descriptions and responsi- fice functions (i.e. financial, trust & estate, philan-
bilities. Sourcing qualified employees can occur thropic, etc.).
through existing family relationships and profes-
sional SFO recruiters. All candidates should have a Contingency Plan
complete background check and the family should The family needs to develop a contingency plan in
develop a process for reviewing each hire (i.e. the event of a natural disaster, theft or technology
family leader and advisory committee all agree on breach. At the most basic level, this includes a
a candidate of hire). back up of all contact information, calendar man-
agement and important investment and business
An employee manual describing expectations, accounts and reports. A more comprehensive

In larger SFOs or established smaller SFOs, multiple ad-
visory committees are created to focus on various single
family office functions

family privacy policy and SFO guidelines and ben- plan allows for emergency office space and reor-
efits should be developed to assist in providing an ganizing hardware and software capabilities within
organized and professional environment. The em- days or hours of disaster.
ployee manual should also include vacation and
sick time, dress, employee leave, and other poli- Review Process
cies important to the family. The family office consultant needs to commit the
family to periodic reviews of all activity within the
SFO Advisory Committee SFO. Initially, the consultant will help to establish
The family, in collaboration with the family office goals and benchmarks and review each against

12


WHITE PAPER

results to measure success.

All areas should be reviewed, including the family’s
mission statement, business plan, pro forma, con-
tingency plan, advisory committees, employees,
infrastructure, and technology. Reviews should
occur at least every year, however, quarterly re-
views should be considered (especially in a newly
established SFO), to adjust goals, strategies, and
plans as needed.

Final Presentation
The family office consultant helps the family crys-
tallize their vision and desires, and organize the
blueprint for the SFO. The family needs to be ac-
tively engaged in this process and provide the
information to be correlated by the family office
consultant into a presentation for final approval by
the family leaders.

Fine Tuning the Final SFO Plan
Not uncommonly after the final presentation, the
mission statement, business plan, pro forma, em-
ployee hiring plan and manual, and other process-
es and documents are fine tuned. This fine tuning
takes into account further reflection and feedback
from all parties on the direction of the SFO, includ-
ing what will be performed in-house, what will be
outsourced and cost considerations.

13


WHITE PAPER

IV. Infrastructure
of the SFO



WHITE PAPER

IV. Infrastructure of the SFO Situs (location) of the SFO entities (particularly
the private investment company) should also be
It is at this stage that the family along with the a consideration of the family and its legal, tax and
family office consultant, engages legal council ex- family office consultant. Most common location is
perienced in SFOs to organize the business entity the family’s primary state of residence (if in the
(or entities, see below) of the SFO. Legal council U.S.). However, depending on family desires and
also assists as needed with advisory committee needs, more favorable tax havens and/or active
documents, employee confidentiality, non-disclo- and vibrant financial centers may be a better op-
sure agreements and other guidance and docu- tion. The location can also be important in recruit-
ments. ing talented employees for the SFO.

Business Entities Registered Investment Advisory (RIA)
Coordinated legal and tax counsel, along with a It is highly recommended that experienced legal
family office consultant, frequently advise to or- council also advise on whether the SFO should or
ganize multiple business entities (usually LLCs), is required to register as a registered investment
which make up the SFO. One business entity may advisor (RIA). If only internally managing money
be the core SFO that manages the family money, for the family, this is rarely required; however, it is
another for real estate, another for personal af- best to have legal council review.
fairs and a separate entity for the family philan-
thropic foundation. Private Family Trust Company
A private family trust company is worthy of con-
One reason is to segregate the legal liability to sideration by a family of significant wealth in con-
each specific entity. Another viable reason may junction with an SFO (or in place of the money
include the ability to clarify and obtain tax deduc- management SFO entity).
tions for some of the expenses within these busi-
ness entities. A Private Family Trust Company is a formal fam-
ily trust company created by the family leaders
Certain expenses within legitimate business en- to provide maximum privacy and control of family
tities may be tax deductible, including start up trust and trustee engagements.
costs, employee salaries, hardware and software.
This effectively reduces the “net cost” of the SFO. Few U.S. states allow for a private family trust
If all family services are under one business en- company organized outside of the family’s domi-
tity, including services for personal family affairs, cile. South Dakota is one of the states that does
this may cloud the tax issue. Separation of busi- allow non-domiciled family formation of a private
ness entities and appropriate internal structure of family trust company and has highly favorable pri-
such by legal and accounting council experienced vacy laws and asset protection clauses (of trust
in SFO infrastructure can assist in helping the fam- assets), making this state a popular choice for
ily take the appropriate deductions. U.S. citizens.

15


WHITE PAPER

The process and costs of organizing a private fam- This represents significant risk to the family. An
ily trust company have come down, making this SFO is a business entity like any other. There needs
opportunity even more attractive. The benefits of to be an insurance valuation and implementation
a private family trust company include: of applicable coverage, including:

• Highly private family trust services • Business property
• Reduce liability of family members acting as • Personal property
trustees. Such trust entities commonly al- • Liability
low for directors & officers (D&O) and other • Excess liability
insurance solutions to such family fiduciary • Employment practice liability
risks (acting as trustee of family trusts) • Error & Omissions (E&O)
• Depending on private family trust company • Directors and Officers (D&O)
situs and the situs’s rule against perpetu- • Workers compensation
ity, continuity of family trust administration
over multiple future generations Captive Insurance Company
• Reduce likelihood of needing to register in- A Captive Insurance Company is a multi-faceted
vestment management function of an SFO family company utilized for many purposes, includ-
(as a registered investment advisory “RIA”) ing insurance risk management (specifically for
by organizing investment management difficult to insure risks), income tax, asset protec-
through the private family trust company tion and estate-planning purposes that warrants
• Improve ability to maximize tax deductions consideration by the family. A family formed cap-
of expenses related to managing the family tive insurer is a very powerful vehicle that is high-
money ly underutilized by families of significant wealth.
• Formally provide fiduciary services directly A detailed discussion is beyond the scope of this
to the family as opposed to simply support- white paper, however, this strategy is worthy of
ing the family’s trustees follow up discussion with the family office consul-
tant and appropriate legal council to determine if
There are multiple oversight and other obligations it is right for the family.
and decisions within the private family trust com-
pany. A family office consultant, in coordination Office Location
with legal and expert trust council, should present The SFO for the family’s enterprise(s) should be
the opportunity to the family, who ultimately need at a formal business location, separate from the
to make the decision whether establishing a pri- personal residences and usually separate from the
vate family trust company is right for them. family business locations (other businesses owned
by the family).
Insurance Risk
The family office consultant needs to address in- Earlier in this chapter we discussed SFO domicile
surance risk. Many SFOs, as well as family busi- considerations for various SFO entities that factor
ness and personal assets, are underinsured. in family needs, tax haven considerations and vi-
brant financial centers.

16


WHITE PAPER

V. Technology



WHITE PAPER

V. Technology Custody of Assets
The family’s liquid assets are often held in cus-
Integrated with the infrastructure decisions for an tody by financial institutions of choice. The largest
SFO is the supporting technology. State of the art custodians of assets (many of the world’s largest
technology is essential for an impactful and well financial companies) have significant global plat-
managed SFO. This is an area where many SFOs forms which allow almost all imaginable cash in-
fail to maximize technology capabilities. Technol- struments, bonds and equities to be traded and
ogy within an SFO needs to address: held in custody.

• Account aggregation Some custodians, depending on the value of as-
• Customized accounting and reporting of all sets under custody with them (substantial assets)
SFO investments and costs as well as the family’s total services utilized with
• Risk metrics/analytics them, can aggregate and comprehensively report
• Office management on assets held both inside AND outside of their
• Family connectivity and communication platform (other custodians, hedge funds, illiquid
• Security of information investments, etc.).
• Family history (photos, videos, documents,
etc.) A potentially significant expense from a technolo-
gy perspective is the ability to aggregate all assets
A family office consultant should be able to sup- and then report on those assets in an organized
port this initiative by helping to identify and build format. Leveraging relationships with financial in-
out technology within the SFO, along with other stitutions that provide needed custody services
decision makers including the family and the SFO and may also provide aggregation and reporting
Chief Executive Officer (CEO) and Chief Invest- on all assets may result in a savings, however, this
ment Officer (CIO). also affords less privacy from a family’s perspec-
tive. A family office consultant can add great val-
It is preferable to work with the CEO and CIO to ue in choosing and negotiating with custodians to
build out the technology infrastructure of the fam- provide total aggregation and reporting solutions
ily SFO, particularly as it pertains to account ag- of all family assets.
gregation, investment reporting and risk metric/
analytics solutions. Account Aggregation
Account aggregation means that all investment
This does not mean that the CEO and CIO recom- accounts, no matter where held in custody, includ-
mendations are the only decision makers the fam- ing illiquid investments, are sourced and organized
ily should rely upon regarding technology. Multiple in a central technology based account aggregation
sources and products should be explored to obtain solution. A challenge can be in the reconciliation
optimum solutions and favorable pricing. of these assets, verifying data and checking for
errors.

18


WHITE PAPER

Customized Reporting of Assets a significant cost savings.
Customized reporting of assets, pulled from the in-
formation provided through account aggregation, Customized Technology Solutions
should include considerations on how the family Another option is for the SFO to build there own
wants to access the data, the frequency, and the in-house custom account aggregation and report-
reporting structure to view their total assets. Re- ing platform. This will require an outsourced in-
porting requirements may include cost basis, cur- formation technology (IT) firm experienced in de-
rent value, currency conversions (if applicable), signing such software. Costs can vary significantly,
assets in trusts & partnerships, and other custom- however, it provides maximum privacy of the fam-
ized needs. ily assets and total customization to satisfy all re-
quirements.
Costs for Account Aggregation and
Reporting Technology With a custom account aggregation and reporting
A small to mid size SFO can expect to pay $75,000 solution, the software takes account feeds from
- $135,000 per year for comprehensive account all the family’s custodians, investment advisors,
aggregation and comprehensive reporting. Larger hedge fund managers, etc., and aggregates all
SFOs can expect to pay $150,000 - $200,000+ this data to produce the custom reports. This will

Another option is for the SFO to build there
own in-house custom account aggregation
and reporting platform.

for such services. These figures do not include require internal SFO personnel that have the time
account aggregation and reporting technology and the ability to manage this process.
start up costs which can range from $50,000 -
$100,000. Emerging Solutions
Technology start ups are currently introducing low-
The costs of technology solutions for account ag- er cost solutions for account aggregation and cus-
gregation and custom reporting is a reason why tom reporting. These solutions are not as robust
obtaining such services through custodial relation- as the offerings from the more traditional firms,
ships (discussed earlier) can be valuable and however, depending on assets, titling of assets,

19


WHITE PAPER

custodians and desires, particularly for smaller Hardware and Software
SFOs, these solutions may cost less and are ad- The family office consultant should recommend
equate for the family’s needs. the best hardware and software solutions based
on the specific needs of the family and the infra-
Risk Metrics and Analytics structure of the SFO.
Risk metrics and analytics is another area that
should be considered when developing the tech- A secure document storage system is highly im-
nology infrastructure. Certain custodians have ba- portant to SFOs, as well as back up systems and
sic programs and tools, which may be included in secure calendar management and family commu-
their offerings to SFOs. More comprehensive pro- nication devices.
grams identifying measurable risk factors within
the portfolio and illustrating multiple “what if” sce- Security is critical for the family’s private infor-
narios and possible solutions are available through mation and communication. A technology expert
technology service providers. or outsourced IT company should be contracted
to advise, implement and coordinate the desired
A small to mid size SFO can expect to pay $60,000 choices and solutions.
- $120,000 per year for comprehensive risk metrics
and analytics solutions. Larger SFOs can expect to Family Communication
pay $150,000 - $200,000+ for such services. Secured intra-net sites, telecommunication solu-
tions, and connectivity strategies should be imple-
A family office consultant can also assist in sourc- mented to facilitate family business and personal
ing qualified outsourced professionals with an ex- communication. Customized IT solutions can fos-
pertise in risk metrics and analytics specifically to ter family connections and enhance communica-
SFOs. In addition to advising on technical solution with service providers around the world, thus
tions, these professionals have the internal prod- improving the timeliness and effectiveness of de-
ucts and experience to provide significant value to cisions and actions.
the SFO as an outsourced consultant.
Family History
Families should consider all of these areas as they A great asset to any family is their ability to record
develop their technology infrastructure as they and share their history, including important docu-
are highly valuable and provide a great custom- ments, photos, videos, etc., for current and future
ized service to the family. The SFO personnel must generations. Technology offers the family various
understand how to utilize and maximize all the options to record and secure their history, includ-
benefits these solutions provide. Ongoing training ing professionally produced DVDs, secure servers,
of the SFO personnel and desire to maximize the web sites, and other mediums that are secure, but
capabilities of these solutions by the team is easily accessible by family members.
critical.

20


WHITE PAPER

VI. SFO
Personnel



WHITE PAPER

VI. SFO Personnel to the family.

With the mission statement, business plan, and all There are some SFO positions that are specific
the other pieces in place, the family and their fam- to the personal needs of the family, which can be
ily office consultant (and other advisors) are now placed through other recruiters specializing in the
ready to source and hire the SFO team. high end services area, including luxury hotel and
travel.
Commonly, as noted in prior sections, the SFO key
personnel are involved in the process of the infra- The key positions soon to be outlined require ex-
structure and technological solutions. It is recom- perienced professionals who are not only talented,
mended that the family hires key personnel before but a good fit for the family. The executives hired
finalizing the SFO infrastructure and determining for the SFO is highly personal and customized by
the technology solutions needed. every family.

With any position, there needs to be a process for Compensation Specialist
hiring and a due diligence investigation conducted The family office consultant should engage a com-
for all potential hires. More than simply a credit pensation specialist experienced in SFOs to assist
and criminal check, a comprehensive report com- in designing a compensation and benefits plan
piled by a professional investigative firm with a to attract, retain and motivate the most quali-
focus on comprehensive background checks is a fied candidates. More than simply base salary
must. ranges, a compensation specialist artfully designs
a compensation package that may include short
A family office consultant solely focused on SFOs and long-term incentive bonuses, carried interest
can help with sourcing appropriate and experi- opportunities, co-investment opportunities, quali-
enced staff as well as developing the process of fied retirement plan offerings, insurance, deferred
qualifying and interviewing candidates. compensation (409A) and phantom stock “golden
handcuff” strategies. The right mix encourages
The family office consultant may be aware of long-term employment and productive relation-
available candidates and the family’s inner circle ships.
of business relationships could be a good source
as well. Hiring the Team
The most common SFO positions are outlined be-
SFO Recruiters low. It is recommended to hire slowly to ensure the
The family office consultant should have multiple right personnel and cost control. A family should
and completely independent high-level relation- hire ONLY the employees that are absolutely re-
ships with recruiters who specialize in SFOs (there quired initially and outsource the other services
are very few recruiters that specialize in SFO place- needed. Over time, additional employees can be
ment). No compensation is necessary to the family hired to replace outsourced services in a phased
office consultant in introducing any relationships approach where the benefits outweigh the costs.

22


WHITE PAPER

Chief Executive Officer involvement and education of critical business ar-
The Chief Executive Officer (CEO) is a business eas is a great asset.
savvy, highly diversified and connected profes-
sional who spearheads the SFO. This can be an In larger, more established and geographically di-
actively engaged and suitably knowledgeable fam- versified families, the ability of the CEO to under-
ily member. In new or small SFOs, that is most stand family dynamics and communicate solutions
commonly the choice. In mid size or larger SFOs, a facilitating family unity is critical.
professional outside the family is more common.
A CEO should embrace modern technology as a
Job Responsibilities family communication and business management
Usually, the CEO is an experienced business pro- tool to advance the success of the SFO in servicing
fessional and leader (whether family or non-fam- the family.
ily member CEO). They should have expertise in
financial, accounting and other technical areas, Depending on family desires and the expectations
however, they do not have to be true experts in from this position, a well connected business-sav-
every aspect of the SFO. vy CEO can create opportunities to expand family
wealth by sourcing business, real estate, passion
There are times when a very strong accounting, and other investment opportunities for the family.
financial, or legal background is preferable to busi-
ness and leadership savvy. There is no set formula Additionally, some families desire to seed fund
and the SFO and its personnel are customized per and develop partnership interests with young and
a family’s specific needs. talented traders (i.e. hedge fund, private equity,
etc.), as well as invest in emerging growth com-
The CEO needs to be engaged in all aspects of panies. A proactive CEO can help with researching
the SFO, yet understand they must delegate and and sourcing valuable opportunities.
trust the talent in the SFO to perform their specific
functions (with oversight and accountability). The It takes a talented professional with diverse skills
CEO needs to communicate on an on-going basis (business, technical, communication, human re-
with the family and focus all their efforts on the sources) and a deep rolodex of very high quality
SFO fulfilling its mission to serve the family. This connections to succeed in this extremely impor-
position answers directly to the key family leaders tant leadership position.
and SFO advisory committees.
The CEO needs to carry out the mission and coor-
Although the CEO must be a fit for the family and dinate effectively all aspects of the SFO in a syn-
follow the protocol of the assignment, the ability to chronized effort in fulfilling the family’s mission
engage multiple family members and generations and vision. This is why leadership, business savvy
is critical. The abilities of the younger generations and communication are a constant theme in the
will determine the long-term success of the family description and responsibilities of this role. Using a
and the SFO. A CEO that encourages and fosters sports analogy, the family is the sports franchise

23


WHITE PAPER

“owner” and the CEO is the “coach” who needs CHIEF INVESTMENT OFFICER
to maximize and coordinate the efforts of all the The second position filled in a SFO after the CEO is
“players” (i.e. employees). the Chief Investment Officer (CIO).

CEO Salary Ranges and Compensation Job Responsibilities
The CEO in a small SFO commands $250,000 - The CIO, under the direction of the family leaders,
$400,000 and in a larger SFO (or small SFOs with investment advisory committee and CEO (some-
extensive requirements and/or family members times this is a joint CEO/CIO position), initiates
that see the value in a great candidate) can cost and coordinates the primary investing decisions
anywhere from $400,000 - $2,000,000 (inclusive in fulfilling the family investment objectives. Such
of base salary and bonuses). families are already significantly wealthy (at this
stage it is a matter of degree), therefore, the CIOs
The CEO and CIO positions are sometimes offered primary obligation is to maintain and expand the
co-investment opportunities by the family. This family’s wealth. Some families take a more ag-
can be attractive to certain professionals (and can gressive investment approach, however, the ma-
make up for a smaller salary and bonus structure) jority of families DO NOT want to lose their wealth
and is most applicable with a family who is through risky investments.

The challenge to a family in remaining
significantly wealthy is much more than
smart investment decisions.

actively engaged in direct real estate, private eq- The challenge to a family in remaining significantly
uity and venture capital opportunities. wealthy is much more than smart investment de-
cisions. The effects of income, capital gains and
This is not a position where families should skimp. estate taxes play a significant role, which involves
If the family does not offer pay commensurate with tax, trust and estates issues. So does business
the importance of the position, they may have a and entrepreneurial pursuits, particularly in the
hard time competing for top talent and the return generations to follow. The CIO plays an integral
from the SFO may not meet expectations. role in assisting the family by fulfilling investment
objectives as laid out by the family, and

24


WHITE PAPER

coordinating efforts with other in-house and out- possess the diverse talents required by families of
sourced financial professionals to minimize risk significant wealth. The current global financial cri-
and maximize returns. sis has left many qualified candidates out of work,
or desiring the favorable environment working di-
The CIO needs to be able to create, implement rectly for a family. This is an optimum time to cre-
and coordinate a comprehensive family financial ate an SFO given the qualified talent available to
strategy, including an accompanying Investment fill the financial leadership positions.
Policy Statement (IPS). The CIO commonly needs
to develop multiple family financial strategies and In addition, the CIO needs to be able to work with
IPSs for various intra-family fractions (if applica- the staff and outsourced financial service provid-
ble) as well as assets titled within trusts and part- ers and communicate effectively with the CEO and
nerships. family. The CIO should be able to seamlessly uti-
lize the available account aggregation, reporting
The CIO coordinates family financial objectives and risk metrics/analytics capabilities of the SFO
and outlines investment parameters and bench- in customizing the services and data to the desires
marks. As with almost all activities of the CIO, the of the family.
family financial plan and IPS needs to be approved
by the family leaders, investment advisory com- We have yet to discuss actual investment deci-
mittee and CEO. sions in carrying out the coordinated family fi-
nancial plan, IPS and asset allocation strategy. A
Paramount to all this is the ability for the CIO to question that needs to be answered by families is
organize and implement an asset allocation strat- whether they want the CIO to choose the underly-
egy built around the principles and benchmarks ing investments.
as indicated and agreed upon by all the decision
makers in the IPS. A comprehensive plan on asset Broadly, the asset classes that make up an asset
allocation and the method, tactical or strategic as- allocation strategy include cash, bonds, equities,
set allocation, is a critical responsibility of the CIO, alternatives (technically, alternatives are one of
but beyond the scope of this white paper. the three prior asset classes, however allow for
various shorting, leverage and other strategies, by
Our terminology “family” is singular, however if an a talented manager) and derivatives.
SFO is serving multiple intra-family fractions (vari-
ous siblings and relatives within the same fam- Although there are exceptions, it is usually recom-
ily), then multiple and segregated family financial mended that the CIO does not actually choose the
strategies, IPSs and asset allocation strategies underlying individual investments that make up
need to be maintained and monitored. the allocation in each particular assets class. How-
ever, the CIO researches and identifies the best
A traditional challenge for families and their con- money managers around the world to implement
sultants sourcing and vetting a CIO, was the lim- the applicable allocation towards each specific as-
ited availability of qualified individuals who set class.

25


WHITE PAPER

Very large SFOs may elect to employ an invest- These issues and parameters need to be addressed
ment research team and hire internal experts in in the IPS. There needs to be diversity among mul-
each asset class in designing a truly custom port- tiple money managers executing the investments
folio for the family, all coordinated and managed for each applicable allocation. This diversification
by the CIO. and allocation to multiple money managers re-
quires more management work from the CIO, but
The CIO needs to be first and foremost excellent it is a critical strategy for successful SFOs.
at planning, organizing, sourcing (money manag-
ers and business opportunities), monitoring, vali- For example, the strategy could be the equity por-
dating and reporting on all investment activities. tion of the portfolio, agreed to in the IPS and as-
set allocation strategy, will be 30% of the overall
Once the investment plan is in place, including portfolio (ignoring for now the actual breakdown
the family financial plan, IPS and asset allocation of growth, value, domestic, foreign, etc.), and the
strategy with approval from the family leaders, selected money managers will manage no more
CEO and advisory committee, the CIO needs to than 5% of the amount allocated towards equi-
source best in class money managers who carry ties.
out the actual investing of their given allocation.
Again, the choices on money managers should be Besides diversity of well chosen money managers,
presented and approved by the family leaders, in- experienced and proven in their given specialty,
vestment advisory committee and CEO. further risk management efforts need to be taken
beyond performing basic due diligence. The fol-
The CIO needs to be able to source, select, diver- lowing key questions need to be asked about the
sify and monitor the money managers who carry money managers before selection is finalized:
out the actual investing of various aspects of the
portfolio, including cash management, bonds, eq- • Who is the money manager’s clearing
uities, alternatives and derivatives. Consideration firm?
should be given to highly competent outsourced • Who is their legal and accounting council?
consulting firms specializing in alternative and • If an alternative investment manager is
other illiquid investments, which can maximize re- used, who is their prime broker?
turns for the family on these specialized invest-
ments. The CIO or other trusted SFO employees need to
verify all information provided to ensure accuracy
Because of the major financial losses from invest- and validity.
ment scandals and ponzi schemes and the troubled
global banking system, diversification of invest- Risk metric/analytic programs and services at the
ments and the thorough research and monitoring SFOs disposal were reviewed earlier, which per-
of those individuals, companies and institutions in- form mathematical evaluations as well as monitor
vesting a family’s money, are so imperative. potential portfolio risk. A risk management consul-
tant can provide excellent value to the SFO and

26


WHITE PAPER

assist the CIO in managing investment risk. The CIO also needs to organize, coordinate and
monitor the money managers in a tax sensitive
Additionally, an investigative background check manner. In addition to providing data to make
on the money management firm and its principals smart decisions, various tax overlay software pro-
and selected money managers is highly suggest- grams and analytics can assist in monitoring many
ed. More than simply a quick online check, a more aspects, including an overlap in actual holdings
detailed background report should be done. The among the various money managers, tax basis of
family office consultant and/or the CIO should be holdings, capital gains exposures, and more. This
able to source reputable investigative firms to per- should be coordinated with the SFOs in-house or
form this important task. outsourced tax professionals.

Families of significant wealth and their SFO lead- CIO Salary Ranges and Compensation
ers, including the CIO, need to be more cautious As with the CEO position, the CIO position is sim-
than ever before with their selection of individu- ilar in cost. Salary can range from $250,000 to
als and companies managing the family’s money. several million, depending on responsibilities re-
Working with selected legal firms who specialize in quired such as amount of assets to invest, type
comprehensive investment due diligence is highly of assets, and family needs as well as the CIO’s
recommended (your family office consultant should experience.
source such relationships) to review your portfo-
lio, and in particular, alternative investments. The The CIO (as noted earlier with the CEO position)
$50,000 - $200,000 in legal consulting fees is well can also be offered co-investment opportunities by
worth avoiding costly investment mistakes. the family, which again can be attractive to obtain
qualified professionals.
In addition to the basic due diligence and back-
ground checks, the legal firm can evaluate alter- Special Considerations
native investment contractual provisions, provide With the growing interest in socially responsible
advice on alternative investment offshore gover- and “green” investing, families expressing great
nance, source for silent partners and review crimi- interest in this area can attract a like-minded CIO
nal and regulatory concerns. by allowing that CIO the opportunity to coordinate
the family’s financial affairs around these core
Many families and their SFO leaders may not re- principles.
alize that such legal firms, highly experienced in
alternative investments and BUY SIDE represen- There are no set formulas. In some SFOs, there is
tation (representing the purchaser of such invest- no CEO and an advisory committee of family lead-
ments), can sometimes negotiate special con- ers is formed. In this case, the CIO would assume
tractual terms, including lower fees and improved the leadership role (as an employee) within the
liquidity of that family’s assets within the fund. Not SFO, with an SFO manager running more of the
only is this a critical step for reducing risk, but day-to-day operations. Conversely, there may be
could result in cost savings in the long run. a CEO, no CIO position, and the family

27

FOA White Paper Creating A Single Family Office

FOA White Paper Creating A Single Family Office

Recommended

Recommended

More Related Content

Similar to FOA White Paper Creating A Single Family Office

Similar to FOA White Paper Creating A Single Family Office (20)

FOA White Paper Creating A Single Family Office