Start with the incentive problem
Ask a private bank whether you need a family office. Then ask a consultancy that staffs them.
You will hear a yes, delivered with genuine conviction, because the people saying it have seen family offices work and would like to help you build one. That does not make them wrong, but it does mean the question has not been independently tested.
What a single family office demands of you
A single family office is a small company. It needs premises, staff, systems, an audit and a governing body. Someone has to run it, and someone has to manage the person who runs it.
That someone is usually the founder, who has just retired in order to stop managing people.
The demands are ongoing:
- Employment. You are now an employer of professionals in a competitive market. They will be recruited away from you.
- Oversight. A family office without effective supervision erodes value slowly and quietly.
- Cost. It is a fixed cost against a variable return. In a poor year it does not shrink.
- Key-person risk. One person often understands the whole picture. Their departure is a serious event.
- Family politics. The office becomes the place where family disagreements are conducted by proxy, through hiring and budget.
Signals that it is not for you
This list is not conclusive, but each should give you suitable pause:
- Your wealth is concentrated in one operating business that already has a finance function.
- Your investment activity is straightforward and could be handled by two or three external relationships.
- No family member wants to supervise the office, and none intends to.
- The main appeal is privacy or status rather than a task that is currently going undone.
- You cannot name the five tasks the office would undertake in its first week.
The alternatives, taken seriously
An embedded team.
A small unit sitting inside the operating business, sharing its systems and its finance staff. Cheaper and faster to build. It works well while the business remains the centre of the family's wealth, and becomes awkward once you sell.
An outsourced arrangement.
A multi-family office or a professional services firm provides consolidation, reporting and administration. You give up some control. You also give up the recruitment and the audit.
A coordinating adviser.
One person, part-time or retained, who holds the whole picture and manages the providers. Suits families who need coordination rather than infrastructure.
Deferring the decision.
Often undervalued. Many families build an office two years before it is warranted, then spend those two years finding work for it.
The question is not whether a family office would be useful — almost anything is useful. It is whether an office is the most efficient way to obtain what the family needs.
What changes the answer
The case usually strengthens when several of the following arrive together: a liquidity event that leaves a large pool of capital outside the operating business; a family that has grown past a handful of decision-makers; direct investing done seriously rather than occasionally; and a genuine need for a team that answers to the family and nobody else.
That last point is the real one. A family office exists to give you people whose only client is you. If that is what you need, pay for it. If it is not, you are paying a considerable premium to hold assets that could be held far more efficiently elsewhere.
Where families get this wrong
They decide to build a family office and then look for reasons to justify it. The decision arrives first, usually after a sale, in the emotional aftermath of it. The analysis is then commissioned to support it.
At McAllen Agency, we suggest reversing that order. Establish what work is not being done, then ask what the cheapest structure is that would do it. Sometimes the answer is a family office. Often it is not.
If you are weighing this decision, McAllen Agency is structured to answer exactly this question.
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