The Family Office

T H E FA M I LY O F F I C E

A Comprehensive Guide for Advisers,

Practitioners, and Students

William I. Woodson and

Edward V. Marshall

Columbia University Press

New York
 Columbia University Press
Publishers Since 1893
New York Chichester, West Sussex
cup.columbia.edu

Copyright © 2021 Rybat Advisors, LLC.

All rights reserved
EISBN 978-0-231-55371-1

Library of Congress Cataloging-in-Publication Data

Names: Woodson, William I., author. | Marshall, Edward V., author.
Title: The family office : a comprehensive guide for advisers,
practitioners, and students / William I. Woodson and Edward V. Marshall.
Description: New York : Columbia University Press, [2021] | Includes
bibliographical references and index.
Identifiers: LCCN 2021004239 (print) | LCCN 2021004240 (ebook) |
ISBN 9780231200622 (hardback) | ISBN 9780231553711 (ebook)
Subjects: LCSH: Investment advisors. | Financial planners. | Financial
services industry. | Families—Economic aspects. | Rich people—Finance,
Personal. | Wealth—Management.
Classification: LCC HG4621 .W66 2021 (print) |
LCC HG4621 (ebook) | DDC 332.6—dc23
LC record available at https://lccn.loc.gov/2021004239
LC ebook record available at https://lccn.loc.gov/2021004240

A Columbia University Press E-book.

CUP would be pleased to hear about your reading experience with this e-book at cup-
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Cover design: Milenda Nan Ok Lee

Cover image: KjellBrynildsen © iStock
Information is not knowledge. The only source of knowledge is
experience. You need experience to gain wisdom.

—Albert Einstein

Главное, самому себе не лгите.

—Fyodor Mikhailovich Dostoyevsky

I dedicate this book to my beautiful wife, Cynthia, whose patience
and support know no bounds; my wonderful children, Olivia, Chase,
Jack, and Henry, who challenge and inspire me; and my many great
bosses, colleagues, and clients from whom I’ve learned all that I
have to share.
–Bill Woodson

Once again to Natalia

And to Isabella, Veronika, Emilia, and Evelina
Many Fêtes
–EVM
 Contents

Foreword

Acknowledgments

Disclaimer

Introduction

SECTION ONE
Formation

Background Information for Case Studies 1 through 3

SUMMARY OF CASE STUDY CHARACTERS

CHAPTER ONE

Types

Challenge

Background Information

For Emperors and Kings

Classifications and Attributes

 Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER TWO

Services

Challenge

Background Information

What to Do, When, and By Whom

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER THREE

Leadership and Staffing

Challenge

Background Information

Roles and Responsibilities

 The C-Suite in Family Offices

Hiring for Both Fit and Function

Compensation Plans

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

SECTION TWO
Services

Background Information for Case Studies 4 through 9

CHAPTER FOUR

Finance

Challenge

Background Information

Accounting and Bill Paying

Investment Reporting

Tax Reporting

Information System Management

Assessment and Issues Surfaced

 What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER FIVE

Lifestyle

Challenge

Background Information

Managing Lifestyle

Managing Estates

Managing Planes

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER SIX

Investments

Challenge

Background Information
 Regulatory Issues

Investing Generally

Investing in Private Companies

Investing in Venture Capital

Investing for Impact

Investing in Art and Collectibles

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER SEVEN

Risk Management

Challenge

Background Information

Ensuring Safety

Managing Healthcare

Insuring against Risks

Obtaining Legal Advice

Assessment and Issues Surfaced

 What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER EIGHT

Philanthropy

Challenge

Background Information

Giving as a Family

Charitable Entities

Private Foundations

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER NINE

Next Generation

Challenge

Background Information
 Wealth Education

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

SECTION THREE
Governance

Background Information for Case Studies 10 through 12

CHAPTER TEN

Communications and Planning

Challenge

Background Information

Communications

Building a Sustainable Plan

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER ELEVEN

Structures

Challenge

Background Information

Boards and Committees

Learning from Family Businesses

Private Trust Companies

Assessment and Issues Surfaced

What Did We Learn?

Case Questions

Recommended Solutions

Responses to Case Questions

CHAPTER TWELVE

Succession and Leadership Insights

Challenge

Background Information

Succession

Leadership Insights

Assessment and Issues Surfaced

What Did We Learn?

 Case Questions

Recommended Solutions

Responses to Case Questions

SECTION FOUR
Industry Data and Resources

CHAPTER THIRTEEN

The Numbers

Demographics

Investment Allocations

Costs

Compensation

Risk and Threat Management

Industry Resources

For Students and Academics

For Principals, Practitioners, Service Providers, and Vendors

Conclusion

Appendix

Glossary

Notes

Index
 Foreword

It is my genuine pleasure to introduce you to a book that I am highly

confident will help guide families and their advisers for decades to
come. This book’s unique pedagogical approach, founded in
decades of the authors’ experiences, gives family office principals,
the professionals who work for them, outside advisers, and students
of the industry a front row seat to how the best family offices help
families successfully navigate complex issues: managing personal
and financial affairs, mitigating numerous risks and threats, raising
well-adjusted children, conducting important philanthropy, and
providing a legacy.
I have known and worked with Bill and Edward for most of the
last two decades. In addition to their formal education and training,
they have what is most important: hands-on experience working with
many of the world’s most successful and iconic families and their
family offices. A lot of different things have to add up to produce a
superb adviser, but the most valuable thing excellent professionals
bring to the table is their perspective. That perspective is born out of
working for decades, often alongside other professional services
experts, to deliver bespoke solutions, while also observing what
works and what doesn’t. While advisers’ expertise can help produce
superior financial outcomes, their perspective also helps manage
complexity and family dynamics, which in the end often proves to be
priceless.
My own perspective comes from past experience at Merrill Lynch,
UBS, and Credit Suisse, along with my current role as CEO of
Boston Private. One of my final positions at Merrill was serving as
Head of the European Private Banking business, which gave me the
ability to see up close the services and advisory culture in the
birthplace of family offices, Europe. At UBS, I was Head of the
Private Wealth team in the U.S. and helped found the group in 2003.
As the CEO of Credit Suisse Private Banking–Americas, I had the
privilege of working with remarkable clients and advisers. In many
cases, the North and South American clients we served were highly
complex families with very unique needs. However, no matter how
unique the stories and the original nature of their family’s path to
success, there was always one common denominator—they all
wanted to protect the well-being of current and future generations.
Bill and Edward often found themselves squarely in the middle of
these discussions and provided pivotal guidance to lead families to
their desired outcomes.
Anyone who has worked with me over the years has heard me
say, “no client ever wakes up in the morning hoping someone will
sell them a financial product.” They wake up with hopes, dreams,
and goals for themselves and their families. They want to work with a
trusted adviser who can guide them to the best advice and solutions
to produce the most efficient and effective path to their desired
outcomes for their families, their businesses, and their legacies.
Moreover, they want an adviser who understands their family’s
dreams and motivations—which is critical to effectively supporting
them to achieve their goals. This is the core of what readers can
hope to gain from reading Bill and Edward’s book. They have
synthesized years of hands-on experience to help those who work
within and around family offices find solutions for both simple and
deeply complex problems.
The importance of the approach outlined in this book and its
benefits cannot be overstated. Select few families now control a
disproportionate amount of wealth globally, and this wealth—and
how it is managed and used—has significant societal implications.
Family offices, given the wealth-managerial function they play, have
an important responsibility and unique opportunity to assist families
in channeling this wealth for good, whether by helping children
become responsible stewards of their wealth, investing in game-
changing technology, or engaging in meaningful philanthropy and
impact investing. The professional maturation of a family office
“industry” that includes robust guidance on best practices, expert
and peer collaborations, and academic training is therefore of
immense importance to families, and to those who serve and advise
them. This book will quickly become an important and seminal work
in that maturation.
I personally enjoyed reading this book and valued the way it
allows readers to engage with realistic case studies. I have always
felt that learning from experience—your own or your educators’—is
best, and who you learn from is equally important. In reading this
book, you will simply be learning from the best. I have often told
young executives, along with my own children, to be very deliberate
in choosing to whom they apprentice themselves. Try to learn from
people who are not only well educated but also have deep
experience and a proven track record of success. That’s what you
have in this book. Enjoy it. I did.
Anthony DeChellis
 Acknowledgments

WE WOULD LIKE to express our appreciation for the substantial

contributions by so many industry colleagues, without whom this
book could not have been written. As will be made clear in the rest of
this book, managing a family office properly requires the active
involvement of a broad range of professionals, advisers, and service
providers, each providing the family and their family office with
discrete expertise, experience, and advice.
This is also true with respect to this book, which is intended to be
a comprehensive guide for academics, students, principals, and
practitioners as they study the industry and/or navigate the
challenges of starting and running a family office. As such, the
insights and advice shared in this book come, in part, from a number
of contributors who developed content for specific chapters,
permitted the use of their prior writings on the subject, or provided
detailed advice to the authors.
While we have endeavored to list all these contributors in the
endnotes and the Appreciations section, we would like to formally
recognize and thank those who contributed significant content to the
book (in the order presented). Please note that contact information
for each of the substantial contributors can be found at
www.thefamilyofficebook.com.

Linda Mack of Mack International, for her contributions in human

capital and staffing.
Trish Botoff of Botoff Consulting, for her contributions in
compensation plans.
William Farren of My Accountant, Inc., for his contributions in
accounting and bill paying.
Jason Brown of SEI Archway and Proteus, for his contributions in
consolidated reporting.
Stephen Prostano of PKF O’Connor Davies, for his contributions in
tax reporting.
Brad Deflin of Total Digital Security, for his contributions in
information technology (IT).
Kathy Reilly of Lifestyle Advisors, for her contributions in lifestyle
management and concierge.
Anne Lyons and Judy Boerner-Rule of Tapestry Associates, for
their contributions in estate management.
Keith Swirsky of GKG Law, for his contributions in private aviation.
Daniel Berick of Squire Patton Boggs, for his contributions in
regulatory issues.
Joel Palathinkal of Sutton Capital for his contributions in venture
capital.
Beth deBeer of iImpact Consulting Network, for her contributions in
impact investing.
Mary Elizabeth Klein, for her contributions in art and collectibles.
Chad Sweet of The Chertoff Group, for his contributions in security.
John Prufeta of Medical Excellence International, for his
contributions in managing healthcare.
Michael Gray of Neal, Gerber & Eisenberg, for his contributions in
legal services.
Suzanne Hammer of Hammer & Associates, and Vahe Vartanian of
Global Family Office Community, for their contributions in family
philanthropy.
Darren Moore of Bourland, Wall & Wenzel, for his contributions in
private foundations.
Dennis Jaffe, for his contributions in wealth education.
Al King, Matt Tobin, and Tom Cota of South Dakota Trust
Company, for their contributions in private trust companies.
Robert Casey, for his significant editorial contributions throughout
the book.
Jamie McLaughlin of James H. McLaughlin & Co., for his advice,
reviews, and guidance.

We would also like to thank Columbia University Press, its

publisher, Myles Thompson, and Brian Smith for their guidance
throughout and unwavering support for this endeavor.
 Disclaimer

THE MATERIAL AND information contained in this book is for

general information and academic study purposes only. While best
efforts were made to provide accurate and up-to-date information,
the authors make no representations or warranties of any kind,
express or implied, about the completeness, accuracy, reliability,
suitability, or availability of the information contained in this book.
The family office world is complex, dynamic, and nuanced.
Therefore, the reader should not rely upon the information contained
in this book as a basis for making any business, investment, legal,
tax, or any other decision. Readers should always seek and rely
upon the advice of their business, legal, regulatory, tax, investment,
and related advisers prior to and when engaging in any and all of
these areas. In no event shall the authors, the publisher, their
employees or agents be held liable or responsible to any person or
entity with respect to any loss or incidental damages caused, or
alleged to have been caused, directly or indirectly, by the information
contained in this book. Any acknowledgments, appreciations, or
references contained in this book, of or to, a person, company, or
organization does not constitute an endorsement or an approval by
the authors or the publisher of any of the products, services, or
opinions of that individual, corporation, or organization. All names,
characters, businesses, and events used in this book are fictional
and any resemblance or likeness to actual persons, living or dead,
companies, family offices, advisers, and service providers is solely
coincidental.
 Introduction

FAMILY OFFICES TRADITIONALLY have been repositories of great

wealth, and their activities are conducted behind closed doors and
shrouded in secrecy. Many families would prefer to keep it that way.
Yet as a group, family offices have acquired a dramatically higher
public profile over the last decade or so. The Dodd-Frank financial
reform legislation of 2010 threatened them with regulation if they
served any nonfamily investment clients, and later offered them an
exemption if they didn’t. It was one of the first times that family
offices faced the prospect of being in the regulatory hot seat.
Subsequently, several high-profile hedge fund managers jettisoned
their nonfamily clients and converted their operations to family
offices, thereby escaping regulation through that same safe harbor.
The result was a sustained burst of attention to the family office
world in the news media that continues to this day.
Equally significant in terms of raising their profile has been the
emergence of family offices as major players in the financing of
private companies. After the financial crisis of 2008, some notable
family offices reduced their exposure to public securities markets
and private equity funds, turning increasingly to direct equity
investments in private businesses. The participation by family offices
in high-profile deals helps them attract more investment
opportunities, but it also brings with it a whole new level of attention,
allure, and scrutiny from the media. Thus, over time, the public has
been getting a bigger and bigger look at the private world of family
offices.
 And what is to be seen there? Vast wealth, to be sure, but also
the vast challenge of managing this wealth and preserving it for
future generations of the family. Power struggles among relatives
and lack of family cohesion are as perilous to the health of a family
office as overzealous spending by family members or investment
losses. Keeping things right among family members helps to enable
the peaceful transition of control of the family office from one
generation to the next, which is essential for continued sustainability.
That’s the long-term challenge.
The more immediate challenge is the subject of this book:
understanding family offices, why families create them, what they do,
and how to manage them effectively. It is a formidable undertaking
when one considers the complexity and personal dynamics that
come into play when advising and supporting wealthy families.1
The Family Office is a first-of-its-kind combination academic
textbook and comprehensive practitioner’s reference manual. It
provides an insider’s view of family offices to those looking to
understand them, whether they be graduate students, family
principals, current practitioners, or advisers/vendors. The book
presents these insights through a series of problem-based learning
(PBL) cases across multiple topics designed to provide readers with
a foundation of knowledge about family offices, insights into the
services they provide, and the practical application of family office
management principles. The cases follow a single family’s journey
from the time of a significant liquidity event; through the creation,
staffing, and management of their family office; and on to its
succession. Each case study is supported by detailed reference
material that can be accessed separately. Through this
methodology, readers get a practitioner’s view of issues that wealthy
families face and the solutions they adopt to address them
throughout a family office’s life cycle.
The book is aimed at three primary audiences:

• Academics and university students, who can use the learning cases format to
better understand why wealthy families create family offices, their various
constructs, the services they provide, and how they should be managed and
governed
 • Family office principals and professionals, who can use the detailed reference
material provided here across multiple service, advisory, and managerial areas to
obtain guidance in one or more discrete areas of interest
• Service providers and vendors, who can use the case studies and background
information provided here to understand family offices, including their issues and
needs, in order to better provide services and advice to their clients and customers

The book is organized into four separate sections arranged by the

major components required to start and run a family office. Section
One focuses on the issues around the formation of a family office,
including the different types, the services they provide, their design,
and how they are staffed. Section Two provides an overview of the
key services that family offices provide, including how best to deliver
them. Section Three discusses governance structures and provides
overarching managerial insights. Section Four provides important
industry data on family offices, as well as a link to access additional
educational and industry resources.

Figure Int.1 Chapter design

Each of the first three sections of the book contains multiple

individual chapters that provide insights into and context on the
major concepts for family offices. These are introduced through
problem-based learning cases and detailed background reference
material.
Each chapter is broken into four sections:
 • A case study that presents topic-specific challenges faced by a family office in a
realistic setting, with background information that the reader can use to uncover
and solve the specific issues raised
• Extensive reference material in each of the topic areas to provide readers with
both an understanding of the issues pertinent to the case and technical resources
for those looking for advice in a particular area
• A case summary and set of questions designed to analyze the critical
components and examine potential future considerations of the case
• Detailed solutions to the questions that reveal best practices and informed insights
focusing on how to assess, unravel, and address issues raised in each of the cases

For students and academics looking to learn about family offices,

the reasons they are created, and the various services they provide,
the book is an educational textbook. The case studies are an
established and effective way to introduce the subject and educate
by providing context on real-life challenges that wealthy families
face, including when and how they are resolved.
For principals, practitioners, and family members, the book
provides technical reference material across the myriad of service
and advisory needs of a wealthy family. This background information
can be accessed directly without having to review the case studies,
questions, and answers, including by consulting the glossary and
index in the book.
For advisers and vendors to family offices, the book offers deep
insights into the numerous service and advisory needs of wealthy
families. As such, it gives important intelligence on customer
needs, preferences, and behaviors.
So long as families have had significant wealth, there have been
established approaches and practices that can serve as a guide.
These are found by understanding the issues that significant wealth
creates, knowing how other families have addressed them, and
learning from professionals and organizations that work with similar
families.
This book provides a summary of the solutions that apply to the
formation, services, and governance of family offices. It also helps
readers understand how family offices are similar and different.
Understanding these nuances is as important as knowing what to do,
when, and with whom.
 SECTION ONE

Formation

BACKGROUND INFORMATION FOR CASE STUDIES 1

THROUGH 3

John always enjoyed hearing the satisfying, quiet squawk as he

landed his Cessna 172 at Marshfield Airport (KMFI). Getting up there
always meant that he was that much closer to getting away from it all
via a weekend in waders.
It had been six months since John sold his company, and even
though he was technically not working, he felt like he had no time to
himself. John had let go of his baby, Rybat Manufacturing, which he
had built over two decades, and now he wanted this time away to
think about the next chapter in his life.
John Oskar Thorne was the quintessential Midwestern kid. He
grew up in the suburbs and spent summers on Lake Michigan with
his large, extended family. He developed an appreciation for
manufacturing, helping his father and mother with the small tool and
die shop that they had started after retiring from a large
manufacturing firm just west of Chicago. John left Chicago and
headed for West Lafayette, Indiana, to study industrial engineering
and economics at Purdue University. John was a focused student
and took on as many internship opportunities to work with
manufacturing companies as he could, spending his free time,
including summers, learning on the job at companies near campus
and out in Michigan, Texas, and far-flung Wyoming.
After college, John landed a job with a manufacturer in Wisconsin
and spent five years working his way up the ranks. He realized that
while the corporate life was a comfortable environment where he
could make a decent living, working for someone else wasn’t for him.
He decided to strike out on his own. Using his savings and borrowing
money from his family, John partnered with two college friends and
launched Rybat Manufacturing.
John picked a poor time to launch a manufacturing company,
though, as the economy soon headed into a downturn. As a result,
his partners went back to their corporate jobs, selling their shares to
him. With his wife and a new baby in tow, John continued to struggle
for a while, but eventually Rybat Manufacturing took off.
To make it work, John essentially lived at Rybat Manufacturing’s
offices, and the stresses took a toll on his personal life. He divorced
his college sweetheart, and she and his son moved back to her
hometown in suburban Detroit. John kept grinding away and
expanded Rybat Manufacturing at a fast clip. He augmented the
strong organic growth of the company through the acquisition of
smaller specialty manufacturers, and he stepped into the
international scene with a joint venture with a Chinese conglomerate.
Rybat Manufacturing was starting to pay off for John in terms of
his personal financial picture. He bought a nice home in Hawthorn
Woods, Illinois, and started having free time to enjoy things outside
of work. He joined a prominent national networking club for chief
executive officers (CEOs), which became a helpful source of advice
as his life became more complicated and he looked to find peers
who were in the same boat. Through the networking group, he made
friends who were hobbyist pilots and decided to get a private pilot
certificate. He bought and leased back to a local flight school a used
Cessna 172. John’s parents had instilled a love for the outdoors in
him, and he eventually started flying prospective clients to his
favorite fly-fishing spots, which turned out to be an effective business
development method. John pinched some pennies and ended up
buying a small ranch in Wyoming, which for him was a fly-
fisherman’s paradise.

Figure s1.1 The Thorne family tree

John’s mother had developed a passion for cars, having grown

up in Detroit. This love for cars prompted him to buy his mom a
gorgeous 1967 Mustang and to splurge on a 1961 Jaguar XKE for
himself during the Concours d’Elegance in Pebble Beach, California,
a beautiful part of Northern California’s coastline and a place where
he loved to play golf while visiting his family on the West Coast.
John eventually remarried and started another family. His new
wife, Sofia, was a rising-star attorney whom he helped set up in a
practice after the birth of their first child. Sofia was also active on the
Chicago charity scene, supporting the arts (including a symphony
and a small art museum) and the Children’s Hospital. John and Sofia
had three children: Olivia (age twenty-one), Isabella (seventeen),
and Emilia (twelve), bringing John’s total number of children to four
with his son, Philip (age thirty-one), from his previous marriage.
Sofia’s mother was originally from Mexico, and partially in her honor,
the couple decided to buy a nice place in Cabo San Lucas, which the
entire family could use as a getaway during the cold, harsh, and long
winters of Chicago.
 Rybat Manufacturing continued to expand successfully, and the
industry itself started to attract serious notice. A while ago, John was
featured in the Chicago Tribune as one of Chicago’s Business
Leaders. Rybat Manufacturing continued to build its brand through
community engagement through active corporate philanthropic
efforts supporting financial literacy and science, technology,
engineering, and math (STEM) curricula in the local public schools.
At this point in his life, John had accumulated a net worth of
roughly $50 million, with $15 million of that being liquid. Over the
years, he worked with his high school classmate Tadeusz, a local
trust and estate attorney, to set up the traditional tax and estate-
planning vehicles for someone with his level of net worth.
He had also acquired a disparate set of advisers to help him with
his personal and financial affairs. His personal attorney, Natalia, was
a local partner in a national law firm and had supported him with
meeting his corporate and personal needs. For example, Natalia
worked with John to put all his properties and his plane into separate
limited liability companies (LLCs). John also developed a good
relationship with a local certified public accountant (CPA), Sam, who
had been with him since before he started Rybat Manufacturing.
Sam worked closely with Janina, John’s indispensable administrative
assistant of fifteen years, to help John keep track of his personal
financial affairs, which were becoming more complex every year.
Even when John was just starting out, he had developed an
interest in investing. John’s college roommate, Charles, likely played
a part in developing this appetite. Charles had left Wall Street and
started his own hedge fund that was doing well, and John had
become one of his first limited partners. John also dabbled in some
individual stock trades with his local wire house broker, Ted. John
wasn’t Ted’s biggest client, but he enjoyed a regular phone call to
catch up on the markets and John would make an occasional trade
based on Ted’s advice. John had a relationship with a national bank
that primarily helped with his commercial banking and limited
personal lending needs. In addition, John placed some money over
the years with a local asset manager that catered to clients focused
on large cap value investing.
 Rybat Manufacturing’s growth continued to soar. John’s college
alma mater noticed the growth and hit him up for a donation, and he
gladly pledged to support engineering scholarships to encourage
talented women to join the field.
Others took notice of Rybat Manufacturing’s success as well.
John started to receive calls from investment bankers and industry
corporate development teams, pitching him potential sale options.
John hired one of the top investment bankers in Chicago, Cynthia,
who helped him prepare the company for sale, solicit bids, and
negotiate contracts. At fifty-eight years old, John wasn’t ready to give
up the reins of his baby, but a large manufacturing conglomerate
made him an offer he just couldn’t refuse: $900 million in a mix of
cash and stock in the acquiring company (80 percent cash, 20
percent stock).
After long deliberation with his wife, set of advisers, and friends at
his CEO networking group, John decided to sell Rybat
Manufacturing. As part of the deal, John signed a two-year
noncompete agreement.
For the first time in a long time, John was out of the workforce.

SUMMARY OF CASE STUDY CHARACTERS

For ease of recollection, the following is a list of characters

introduced throughout the various case studies in this book.

Companies

• Rybat Manufacturing—name of the operating company sold

• Left Seat Management—name of the family office

Family Members

• John Thorne—principal (fifty-eight);1 former business owner, active pilot, and

hobbyist direct investor
• Sofia Thorne—John’s wife (forty-eight); born in Mexico City; active in philanthropy
• Gabriella—Sofia’s mother (seventy-two); lives in Los Angeles; has medical issues
• Philip—son from John’s first marriage (thirty-one); teacher in Chicago, divorced,
with one child from the first marriage (David); remarried (Song), with a second child
(Maggie)
• Olivia—oldest daughter from John’s second marriage (twenty-one); married to
Brecken, who is the daughter of a very large and well-known family that owns a
large closely held family business; adopts two girls (Devin from Ethiopia and Katie
from Russia); equestrian; attends Columbia University and has an investment
banking career on Wall Street
• Isabella—second daughter from John’s second marriage (seventeen); attends the
Massachusetts Institute of Technology (MIT); and joins a start-up in Silicon Valley
• Emilia—third daughter from John’s second marriage (twelve); avid tennis player and
skier; attends the University of Colorado Boulder; degree in environmental studies

In-laws

• Brecken (wife of Olivia)

• Song (second wife of Philip)

Family Office Staff

• Michael—First CEO
• Tracey—Second CEO
• Jack—Chief investment officer (CIO)
• Jason—Chief financial officer (CFO)
• Chase—In-house legal counsel
• Henry—Chief pilot
• Evelina—IT specialist
• Janina—John’s executive assistant
• Ed—Tax professional
• Veronika—Estate manager and, later, operations manager
• Cara—Master of business administration (MBA)
• Katya—An accounts payable clerk who gets fired

Advisers

• Natalia—lawyer
• Sam—CPA
• Charles—Hedge fund professional; John’s former roommate
• Ted—Stockbroker
• Tadeusz—Trust and estate attorney
• Cynthia—Investment banker
 CHAPTER ONE

Types

CASE STUDY

Summary

• Six months after the sale of Rybat Manufacturing

• The challenges that come with substantial wealth
• The background and history of family offices
• Different types and attributes of family offices

Key Words/Concepts

• History of family offices

• Types of family offices
• Attributes of family offices

Challenge
His life after exiting his business turned out to be much more
complex than John could have imagined. The magnitude of this sale
hit the news wires nationally, and he was getting interview requests
left and right. The calls and uninvited suggestions of what he should
do next started to come in. Having parked some of the cash
proceeds into his bank account and some with his stockbroker, Ted,
John wanted to hit the pause button to contemplate this new chapter
in his life.
John did do one thing up front. He made a quiet, multiyear pledge
to Purdue to support a chair in the engineering department and
expansion of the internship and co-op programs that he felt had
been instrumental to his success early on. His big splurges came in
the form of real estate. He bought a large lot in Glencoe, Illinois, and
started building his dream house, which would eventually become
his primary personal residence. He also started to buy up the
properties adjacent to his ranch in Wyoming, which seemed to
become more expensive once sellers began using the Internet to
find out that John was nearly a billionaire. Furthermore, he decided
to keep his Cessna 172, but he spent some money on upgrading its
interior and technology, including high-end external cameras so he
and the kids could make flying videos to post on social media sites.
Six months after the sale of Rybat Manufacturing, John felt like
he was juggling too many balls. He realized that he was spending
too much time on things he didn’t enjoy, and far too little time on the
things he did like doing. John felt guilty that he had not yet done
anything with all the money sitting in his bank account. He was well
aware that he needed to start putting some of the sales proceeds to
work in the market, although he had never managed a portfolio of
this size before and wanted to be cautious.
He also needed to visit his ranch in Wyoming and more closely
oversee the acquisition of adjoining significant land parcels and
leasing some of the land out for cattle grazing. The house in Glencoe
was now well underway, and there was a never-ending need for him
to meet with contractors to iron out details, select building materials,
and approve change orders. And while Sofia was helpful, she was
also spending a great deal of time in Mexico overseeing the
purchase and remodeling of their new vacation home in Cabo San
Lucas. She desperately wanted him to go down there with the
children so they could enjoy the warm weather, do some activities
together, and spend more time with her side of the family.
Sofia was also increasingly drawn to other activities, including her
work with the Children’s Hospital, the art museum, and the local
symphony, including hosting a number of events to help these
charities raise money. Not surprisingly, each of these institutions also
seemed to be taking a greater interest in both her and her husband,
inviting them to fundraisers, introducing them to other prominent
supporters, and sharing ambitious plans for expansion and new
programs.
And then there was the jet he wanted to buy. Over the last couple
of years, John had become accustomed to flying privately, whether
for himself in the Cessna 172, or via charter for the occasional
business trip or family vacation. He was beginning to think that he
should just buy a private jet and hire his own pilots to avoid the
hassles of dealing with charter operators, flying in the older planes
they typically provided him, and interfacing with the mixed bag of
pilots they employed. After all, he was a pilot, knew planes, and had
the money and need to justify such an expense.
Finally, the administration, bill paying, and reporting for all these
activates was starting to outstrip what Janina was able and
comfortable to provide in her capacity as John’s executive assistant
and bookkeeper. The same could be said for all the various travel,
scheduling, event planning, and related needs with which she helped
both John and Sofia.
With whatever new free time John had, he started attending his
chief executive officer (CEO) networking group more often and
connecting with his friends, asking them what they did after their
individual liquidity events. Some of them had started single-family
offices (SFOs) or worked with multifamily offices (MFOs) to manage
their personal assets and affairs.
After getting advice from his network and weighing his options
and requirements, John decided that he wanted to start his own
SFO. However, there really wasn’t a good instruction manual to help
with that effort.
 “Where do I start?” John thought.

BACKGROUND INFORMATION

For Emperors and Kings

Family offices are attracting growing attention as the vehicle of

choice by the megawealthy to manage their assets, both in the
United States (U.S.) and elsewhere. Yet they are by no means a new
phenomenon. Family offices have been around in some form or
other since civilization began in order to provide a vehicle for wealthy
families to manage and safeguard their assets.
Before the Renaissance, only emperors, kings, and nobles had
the political power and resulting economic might to amass great
fortunes. The family office emerged to serve them, from the Roman
majordomos to the chief stewards employed by noble families
throughout the Middle Ages.
The Renaissance brought a flowering of commerce and
international trade, which in turn generated great wealth for the
leading merchant families. Their complex and far-flung business
activities—as well as dynastic ambitions for their offspring—
encouraged them to seek help managing their family affairs. They
adopted sophisticated family office functions, such as systematically
collecting, accounting for, safeguarding, and reinvesting their assets.
Those tasks remain essential services of family offices today. These
families came to understand the key qualities needed of those who
would serve them by running their family offices. Those qualities
were—and remain today—loyalty, discretion, attention to detail,
timely execution, business acumen, and faithful stewardship.
The ninenteenth century brought a surge in economic growth,
industrialization, and wealth creation that far surpassed anything in
history. Business empires sprang up and grew to enormous size.
Family fortunes, as well as the need for family offices, expanded
accordingly. Also encouraging the formation of family offices were
the increased use of tax and estate-planning vehicles and the role of
separate management companies.
 One of the first modern family offices was established by John
Jacob Astor in 1835. Astor, a German immigrant, made three
successive fortunes, as a fur trader, an international merchant, and a
Manhattan landlord, becoming one of the first multimillionaires in the
United States. Astor’s family office headquarters was built like a
bank and served as collection point, counting house, and vault for
rents generated by his real estate empire. Known by its address, 85
Prince Street, it was designed to be impregnable—burglarproof,
fireproof, and earthquake resistant. The building sported thick
masonry walls reenforced with iron bars, an iron roof, iron doors, and
iron-grated windows. It is sometimes said that family offices are
established because of the founder’s desire for privacy, control, and
continuity. That certainly seems the case with Astor, who oversaw
his empire from within a fortress.
Another high-profile family office was set up by John D.
Rockefeller in 1882. The cofounder of Standard Oil was estimated to
have been worth over $1 billion in 1937. The Rockefeller family office
continues to operate today, and indeed it established a number of
businesses and nonprofit consulting firms that serve other wealthy
families in the areas of wealth management and philanthropy.

Classifications and Attributes

There are generally nine distinct classifications of family offices

(figure 1.1): traditional family offices, virtual family offices (VFOs),
commercial MFOs, traditional MFOs, direct investment family offices,
active trader family offices, administrative family offices, embedded
family offices, and real estate family offices. These nine archetypes
are subsets of four distinct classes of family offices based on
common characteristics: breadth of offering, multifamily offices,
associated with family businesses, and institutional.
Figure 1.1 Family office archetype wheel graphic

Tables 1.1 through 1.4 summarize these classifications and

illuminate how best to understand and distinguish them.

TABLE 1.1
Breadth of offering

Classification Description Attributes

Traditional These family offices provide Newer family offices in
family office solutions over a broad range of this category exhibit
service and advisory needs, many common
historically through their own characteristics. Maybe
staff (although this is shifting the most notable is the
somewhat as families extensive involvement
increasingly look to outsource by their founding
noncore service needs). principals and its
impact on strategy and
decision-making.
Administrative This type of family office typically More established family
family office limits itself to noninvestment- offices in this category
related activities. These families often have long-
choose to outsource investment established policies
management to third parties and and procedures,
focus their efforts on managing carried out by
personal assets, administration, employees who are
wealth education, philanthropy, longtime family
and other areas. retainers who are
culturally tied to the
founding principal.

TABLE 1.2
Family offices associated with a family business

Classification Description Attributes

Embedded Embedded family offices are not separate These have a

family business entities, but rather integrated into similar range of
offices closely held family businesses. behavioral
proclivities as
SFOs. They are
categorized
together largely
because of their
association with
a closely held
family business
 (whether real
estate or not).
Real Real estate families deserve their own
estate category of family office because of the
family similarities in their investing behavior and
offices family office needs. It is only a slight
exaggeration to say that families that made
their money in real estate tend to reinvest
most of it in real estate. While these
families do accumulate and invest liquid
assets, they generally do so in a modest
and less active way than other families
relative to their real estate activities.

TABLE 1.3
Institutional family offices

Classification Description Attributes

Active These family offices take an These family offices

trader institutional approach to managing are often quite large,
family office money. They usually are larger staffed by finance or
family offices that focus on active private equity
investment strategies in liquid professionals, and
capital markets, an approach seen take an institutional
among former hedge fund approach to their jobs.
managers who convert their It is not uncommon to
operations to family offices. see these types of
families formally
separate the
investment
management business
from the personal
family office.
Direct These are institutional family offices
investments that focus their investment activities
family office almost exclusively on private
investing. The professionals who
 run these family offices often come
out of investment banking and
private equity. They focus their
considerable (and expensive)
resources on finding, evaluating,
and managing direct investments,
often in partnership with other
family offices and private equity
funds.

TABLE 1.4
Multifamily offices

Classification Description Attributes

Traditional MFOs These are, for the most part, professional

MFO provide a organizations despite the delineation as to
broad range whether they are owned by a financial
of family services firm. And while they operate under
office senior leadership and are affected by their
services and personalities, views, and preferences, the
advice to diversity in staffing and clients generally
multiple moderates the impact of this relative to SFO
wealthy principals. Further, as service providers to
families, wealthy families that can more easily choose
whether or to go elsewhere for advice and services,
not they are these businesses are held accountable in a
related to way that is not necessarily the case with
each other. SFOs.
Commercial MFOs that
MFO are created
(or acquired)
by financial
services
firms and/or
professionals
as a way to
attract and
 serve
wealthier,
more
complex
families.
Virtual Executives
family office at a
professional
or financial
services firm
coordinate
the delivery
of services
through a
combination
of in-house
staff,
typically in
their area of
expertise,
and third-
party
providers
drawn from
their
network.

Understanding the various categories of family offices and their

distinctive attributes is the first step when learning about this
industry, whether as an academic, practitioner, or vendor.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

After his large liquidity event, John is determined to start a family

office. He has decided on this course after facing the growing
complexity of his life. He is also spending time on too many things,
many of which he has no interest in and for which he knows he can
hire others to oversee. John wants to leverage his good fortune so
he can focus his time on the things that are the most important to
him in this new chapter of his life.

Case Questions

• What is a family office?

• What are the appropriate considerations for John to keep in mind while establishing
his family office?
• What types of family offices could John consider?
• What are some of the risks that John has expressed or is not anticipating?
• What should be the most time-consuming part of establishing the family office for
John?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What is a family office?

Family offices are entities set up by a single family, or by or for a

group of families, to manage their assets and affairs. They are used
to address the issues that come with substantial wealth, including
dealing with complexity and helping family members achieve their
goals (e.g., simplicity, purpose, legacy, family harmony, passing
down wealth, investment management, philanthropy, and so on). In
this context, family members are called “principals,” and the senior
staff of a family office are referred to as “family office executives.”
Principals are the primary members of the family that the family
office supports, although there are situations where multiple
generations and/or extended family members can use the services
of a family office. Family offices vary in design, operations, and
services delivered, depending on the needs of the principals.
 What are the appropriate considerations for John to keep in mind
while establishing his family office?

In John’s case, there are three major groupings of considerations

that he should think about as he is contemplating creating his own
family office: the magnitude of his wealth, the depth and breadth of
his activities, and his stated (and often unstated) desires and
aspirations.
At his new level of wealth (nearly $1 billion), he has sufficient
means to support a family office. Family offices tend to be pricey
ventures to start and maintain. Principals also tend to want to
resource the family office lightly, which can lead to issues with
budgeting, cash flows, and the ability to attract top talent for key
positions. In John’s case, he is liquid enough that a family office
makes sense.
As evidenced in the case study, John’s life was relatively complex
anyway, but it has gotten even more so after the sale of Rybat
Manufacturing. He needs a better structure to support the depth and
breadth of activities he is already coordinating among himself,
Janina, and his set of professional advisers. For example, John’s
time is being spent on managing his new property additions in
Wyoming and the new dream home he is building locally. While he
enjoys the idea of these new additions to his estate, it is hard to
imagine John being thrilled about taking calls from contractors about
construction that is past due.
The world of investments has also become more of a headache
to John than it previously had been. He used to satisfy his penchant
for investing by talking about the markets with his broker or dabbling
in private markets with friends and family. Now it feels like an
avalanche of sales calls, with no clear strategy or method to pick the
right horse—or maybe he shouldn’t even be betting on horses at all.
He’s done what many newly ultrawealthy people have done: sit in
cash for the most part. However, this is only a short-term solution,
and he will need to focus on developing a more responsible
approach to managing his money. There is also the likely expansion
into private aviation. As a pilot, with the financial wherewithal to
responsibly own and charter private planes, John is likely to increase
the amount of time he devotes to this area.
Principals in John’s position often struggle after the sale of their
business with what to do next, and how to achieve new desires and
goals. He initially thinks about going back to running an operating
company because for him, those were the “good old days,” when he
was sure of what needed to get done. However, as he becomes
accustomed to this new chapter in his life, he knows that things will
need to change and that a family office could be part of that.
Moreover, John’s passions and hobbies are evident, and they have
grown in scope and depth from his humble beginnings of building a
struggling company and ending with a very successful sale. It is
likely that flying, fishing, and direct investing “hobbies” will take more
of a precedent going forward, and any family office structure should
take these into consideration.
There is also Sofia’s and his interest in philanthropy to consider.
They now have the financial ability to be significant contributors, but
they have not spent the time to think about what they want to do, nor
have they got the experience to determine how best to do it.

What types of family offices could John consider?

While all of them generally support the same types of services and
activities, there are several major types of family offices. For John,
the types that are most relevant for his situation are the SFO, MFO,
and VFO.
An SFO (also sometimes referred to as a “traditional family
office”) is a full-service entity set up to address a wide range of
requirements and services for an individual family. This type of family
office tends to keep some functions in house and outsource others,
depending on the proclivities of the principals. Think of this type of
entity as a family office that allows a principal to be more hands-on in
areas of personal interest and importance to them. Based on John’s
situation, an SFO is the best choice for him to set up.
Of the other family office archetypes, John could possibly have
his personal and financial affairs managed by an MFO or a VFO.
MFOs are designed to support the needs of more than one family.
Sometimes they are established by a group of wealthy families that
band together to spread costs and enhance services. Other times,
they are established by professionals to serve several families. In
either case, MFOs help families who want to outsource the majority
of their family office needs, do not have the means to set up their
own SFO, or both. The outsourced nature of MFOs is in contrast to
SFOs. Because of John’s stated desire to be more hands-on with his
personal affairs and investments, the MFO would not be an effective
solution for him.
VFOs have some similarities to MFOs, in that they often are
employed to take care of more than one family. However, they are
set up by a professional adviser (usually an attorney, accountant, or
wealth manager), who acts as a coordinator for the services typically
provided by an SFO. Similar to MFOs, VFOs would potentially make
sense for John if he wanted to delegate more of his affairs to
someone else, if his life were less complex, or his requirements were
not as diverse. However, for someone who is as likely as John is to
want to be involved in his family office, a VFO would likely not be a
good solution for him to consider.

What are some of the risks that John has expressed or is not
anticipating?

John intimated that he is having trouble evaluating and

benchmarking solutions for this new chapter in his life. While he was
a skilled operator and had built an incredible business, he is
unprepared for this part of his life—he doesn’t know what he doesn’t
know. Some of the risks that he could anticipate would be executing
without a plan or context of what a family office can and should do
for him. This could lead to overspending or underspending on critical
staff, challenges around managing the increased flow of information
and requirements that he has levied on himself, or potentially getting
into a position of illiquidity because of a series of haphazard direct
investments.
 With John’s new wealth and increased public profile comes an
increased risk of liability. His new homes, ranch expansion, and
other dealings will expose him to new liabilities. Given his higher
profile, he should start to consider a number of other privacy and
security issues, such as the lack of resources dedicated to risk and
threat management in comparison to what he likely invested with his
prior company. There is also an outsized access to his personal
financial information in the hands of a small number of people who
work for him but are not properly trained or equipped to handle the
additional scope, focus, and risks.
Another issue that he faces is his inability to plan and act in a
strategic manner when his personal affairs drag him into the most
tactical and minute planning details. He is mired in the day-to-day,
and until he builds a proper team around him, he will struggle with
thinking about the long game.

What should be the most time-consuming part of establishing the

family office for John?

Even though John is an incredibly talented business operator, he

lacks the experience, context, and strong network to make effective
decisions around his family office at this point. He should focus his
time on becoming educated about family offices, the services they
provide and their various constructs, and on prioritizing solutions
around his immediate service and advisory needs. This will prompt
him to make an important first hire of someone who can help him
build out the office. This person then will help him determine the
services that it should provide, ensure that his immediate needs
around reporting and managing his personal assets are being
addressed, and identify and mitigate new risks.
 CHAPTER TWO

Services

CASE STUDY

Summary

• More than nine months after the sale of Rybat Manufacturing

• Setting up the family office
• Determining which services to provide, when, and by whom

Key Words/Concepts

• Advice and services

• In-house versus outsourced
• Priorities

Challenge

It had been over nine months since the sale of the business, and
John was feeling more comfortable with his decision to start his own
family office. However, he had lingering questions on how to start the
office, what it should look like, and what it should do. He received a
great deal of advice on this topic from both professional advisers and
his peer groups. While this advice was helpful, John often felt that
the recommendations posed more questions than they answered.
As John began to put his family office plans into action, his
lawyer, Natalia, was very helpful in describing the type of formal
corporate entity that he should create to serve as the separate
management company for the family office. This new entity would
initially employ the various family office professionals, contract for
office space, and pay all the bills. However, this still left open
questions as to what the family office should be doing, how, and by
whom. These were all questions that John needed to get answered.
His lawyer also suggested that John speak with Sam, his certified
public accountant (CPA), to determine how best to fund the family
office to ensure the greatest available tax benefits. John did reach
out to Sam, but his impression was that Sam’s experience with
clients in his situation was limited. Sam’s bread-and-butter business
did not include working with family offices. Moreover, Sam indicated
that he planned to retire in the next five years, which prompted John
to start looking for a more suitable, long-term tax adviser.
John’s various existing financial advisers were obviously ecstatic
about helping him after the liquidity event. John couldn’t recall ever
receiving so many calls, e-mails, and invitations to play golf,
including from numerous financial advisers whom he had never met.
It was becoming challenging to keep up with all this outreach, and he
knew that he needed to find a way to sort through and evaluate all
these new contacts.
John wondered how investment decisions would be made once
he created his family office. He had always managed his own
investments, relying on advice and recommendations from his
stockbroker, Ted, and hedge fund buddy, Charles. However, he
never gave anyone the complete discretion to make investment
decisions for him. While John certainly was comfortable making
investment decisions and wanted to stay involved, he now faced
handling a personal investment portfolio that was orders of
magnitude greater than he had overseen in the past. Based on his
research of similar-sized families, he was certain that investors for
this level of assets did things quite differently, and likely with a
different set and type of advisers.
Finally, John was starting to connect more frequently with his
chief executive officer (CEO) networking group, and with renewed
purpose. He was eager to understand how they structured, staffed,
and managed their offices. However, the feedback he received about
structures, governance, and approaches varied greatly.
All this advice was helpful, but John believed that he was
struggling to place the specific recommendations into context. It felt
as if that every time he learned about a new element of how to start
and run a family office, he was opening doors to even more parts of
such an office that he needed to understand.
John decided to get started by hiring someone to help him
manage this increasing level of complexity. After all, he had run a
successful and sophisticated business in the past, with lots of people
and moving parts. John thought that overseeing a family office
should be similar. Of all the people he knew and trusted who could
help him, there was no one better than Jason. Jason was the chief
financial officer (CFO) at his operating company and stayed in that
role after the sale. John had stayed in touch with Jason and sensed
that he was not happy with the new owners of the company and the
demands of being part of a public company. John asked Jason to
join him as the second employee for the family office (Janina, John’s
trusted administrative assistant, was the first hire). Jason agreed,
and he was tasked with establishing a formal family office,
overseeing the accounting, and helping manage all the various and
increasingly complex personal activities and requirements.

BACKGROUND INFORMATION

What to Do, When, and By Whom

Family offices are responsible for a wide range of advice and

services. While there are numerous ways to classify them, for the
purposes of this discussion, we have organized them into seven
primary areas (see figure 2.1). Details regarding the delivery of many
of these services are provided later in the book.

Figure 2.1 The seven service verticals of family offices

While every family office will provide different types of services,

and potentially additional specializations, figure 2.2 shows a good
checklist to review broad areas of need for wealthy families. There
are traditional needs, approaches, and prioritizations that apply
broadly to family offices. However, what services to provide, how,
and by whom will vary by family because of the differences in the
types and evolution of challenges that families of substantial wealth
face.
Figure 2.2 Determining the right advice and services to deliver to a wealthy family

Determining the right advice and services to deliver to a wealthy

family should be based on an assessment in four critical areas—
namely, why, what, how, and who. The answers to these questions
will form the foundation for important determinations regarding
details of the delivery.
Family offices often grow initially by hiring professionals to
conduct most services in house. At this stage, many do not take the
time to strategically think about what they need, want, or should do
themselves versus outsourcing to a third party. The reasons for this
behavior stem from the way in which family offices are typically
created and evolve.
Most family offices are created to address a growing level of
complexity in living, managing assets, paying bills, and providing
financial reporting. This growth in complexity usually is incremental,
and families often meet these initial needs simply by hiring
professionals to work in the family office. It should be noted,
however, that decision-making around the formation and initial
staffing is heavily influenced by the experience and interests of both
the principals and the senior professionals in the family office.
Regardless of how the service requirements arise and solutions
are provided, it is a best practice for families to evaluate what they
should, and should not, be doing internally before making significant
investments in people, processes, technology, and other resources.
Table 2.1 summarizes each of the key service areas and lists
important considerations as to whether the family should outsource
them. The table also provides some important insights into the
priority with which particular services should be provided.

TABLE 2.1
Key service areas

Key Areas Services Delivery Considerations

Finance • Accounting In-house versus outsourcing:

and bill Consideration should be given to the
paying relative level of complexity, need for direct
• Tax planning control, and privacy concerns. For
and example, bill payment and reporting
compliance require close involvement of the family and
• Consolidated timely oversight and decision-making.
reporting Taxes and information technology (IT) are
• Trust more easily outsourced and often require
administration technical expertise not available within the
• Information family office.
system Priorities: Finance is one of the primary
management functions for a family office and should be
one of the first solutions adopted. It is also
a task that should be focused on
throughout the life of the family office,
even when it expands to provide other,
more strategic services. Failure to deliver
timely and accurate reporting will hamper
the family office’s ability to provide
valuable advice in other areas.
Lifestyle • Lifestyle In-house versus outsourcing: Typically,
management these services require a combination of
 and internal staff and external vendors. The
concierge actual oversight and management of the
• Estate and activity or asset is done by third-party
residence specialty service providers on site and/or
management with technical expertise, scale, and the
• Private like. However, these services, which are
aviation and often near and dear to the family, require
watercraft coordination and oversight by internal
family office staff.
Priorities: Lifestyle needs may also be
one of the first areas of focus, depending
on the lifestyle, assets, and activities of the
principals and the family. These activities
affect the quality of life for the principals
and the family and, therefore, should be
(and remain) a priority.
Investments • Asset In-house versus outsourcing: As with
allocation and lifestyle needs and assets, albeit for
IPS different reasons, these types of
development investment usually require a combination
• Trading and of both internal and external resources.
execution For direct and socially responsible
• Direct investments, the family office is often
investing involved in developing strategy, while the
• Reporting execution is carried out by third parties
and analytics such as asset managers. Investments in
• Venture art and collectibles are very personal to
investing the family, although acquisition, appraisals,
• Art and and storage require the use of expert third
collectibles parties.
investing Priorities: Investments, while of great
• Impact importance to a wealthy family and a
investing considerable focus by many family offices,
is usually an area where the ultimate
solutions evolve over time. First, the
assets are often illiquid and therefore do
not require significant oversight, aside
from knowing about and managing around
public or private single-stock exposures,
where possible. Second, principals
 generally evolve in their thinking and
practices around investments as they
become more liquid, engage with
investment professionals, and learn about
the capital markets. As a result, while
important, the family office should address
investments in a measured way, often
following the lead of the principals, who
may dictate the approach, which advisers
to use, and other decisions.
Risk • Physical In-house versus outsourcing: With very
management security few exceptions, these services are almost
• Investigative exclusively provided by third parties that
advisory specialize in each area. While a family
• Cybersecurity office may have internal legal counsel, that
• Insurance person is usually coordinating services
• Legal across multiple external law firms.
• Heathcare Priorities: A family office should focus
advisory intently on risk management from the
beginning, whether or not the principals
express an interest in that or direct them to
do so. Wealth comes with considerable
risks, not just from publicity but from the
personal assets that wealthy families
acquire, the investments they make, and
the lifestyle they lead.
Philanthropy • Private In-house versus outsourcing:
foundations Philanthropy usually begins within the
and other family office and expands to involve third
philanthropic parties over time as the family develops its
vehicles philanthropic mission and increases the
• Engagement amount of money dedicated to charitable
and strategy causes. A private foundation, while a
separate legal entity, is often overseen and
administered by the family office itself
(until it is quite large).
Priorities: Philanthropy, as well as the
level of involvement by a family office, vary
greatly from family to family. Senior
executives in the office should be attuned
 to existing or evolving interests in
philanthropy and assist the family when
and where they can. Over time, this may
become an area of great interest to a
family, and therefore of considerable focus
to the family office.
Next • Wealth In-house versus outsourcing: Educating
Generation education children about the challenges that come
• Family with wealth must begin with the family,
meetings while assistance is often provided by the
• Family bank family office. Selectively, the family or
family office will use vehicles such as a
“family bank,” governance and educational
forms such as “family meetings,” and
outside experts for things such as meeting
facilitation, education and training, and the
drafting of governance documents.
Priorities: Wealth education delivered in
its various forms is another area where
assistance by the family office is very
dependent on, and often set by, the
principals. So much of the need is based
on whether the principals are personally
interested in and committed to providing
such education, the age of the children,
and the investment and/or philanthropic
activities of the next generation.
Regardless, it is an important area for
wealthy families for reasons that are
discussed later in this book. Senior
executives within a family office should be
aware of ways to provide the children with
wealth education, periodically raise the
issue with principals, and be mindful of
behavioral issues among children that
would warrant making this a priority.

ASSESSMENT AND ISSUES SURFACED

 What Did We Learn?

Having decided to start his own family office, John was confronted
with numerous questions about execution. He was inundated with
advice from multiple professional and personal relationships, but he
did not have the experience or context to evaluate this advice
properly. He questioned whether his needs and requirements might
be different given his new level of wealth, and therefore warrant new
approaches and solutions. John is starting to appreciate all the
things he has on his plate that are reducing his ability to do other
things he wants. He recognizes that in large part, the family office
will need to be responsible for overseeing and managing these
areas.

Case Questions

• Is John talking to the right people?

• Who else should John be talking to?
• What services should the family office focus on first?
• What services might the family office be required to provide in the near future?
• What should the family office do in house versus relying on others?
• How can John better manage his time so that he can pursue his passions?

RECOMMENDED SOLUTIONS

Responses to Case Questions

Is John talking to the right people?

Yes and no. John is talking to many of the right people, inasmuch as
they are part of his current contingent of professional advisers.
However, he is starting to appreciate that his advisers may not have
the relevant experience with larger investors or family offices. This is
not to suggest that their advice is not sound or that they should not
be considered as advisers for him going forward. Rather, it means
that John needs to be mindful of possible gaps in both his and their
knowledge as it relates to the questions currently being asked and
the answers that he is being provided.

Who else should John be talking to?

Because John understandably does not have experience managing

a family office, he should seek to learn what he can about family
offices and their various constructs, understand how they are
organized, and identify the services that they typically provide, when,
and by whom. This research will help put into context the advice that
he is receiving. He should also seek advice from individuals who
currently have family offices (as he has with the CEO networking
group), as well as consultants who advise principals on setting up a
family office.

What services should the family office focus on first?

Family offices are generally established to manage an existing, and

often growing, level of complexity in the personal and financial affairs
of a family. As such, the services that initially should be provided
largely center around mitigating these complexities. In John’s case,
they would be his various personal construction projects, including
general management and oversight. Related to these are the
accounting, bill payment paying, and reporting for the sizeable
expenditures that these projects require.
In addition, family offices should focus on ways that they can help
the principals engage in their passions. While many of these
activities may not be creating complexity right at the moment,
addressing them early can be of great value to the family. In some
cases, this support is provided by simply freeing up the principals’
time so they can engage in other activities. In other cases, the family
office can provide direct assistance to the principals. For John, this
assistance could help him with the possible acquisition of a new
plane or with his direct investing activities. For Sofia, the focus might
be her philanthropic ambitions. The combination of the two factors—
managing complexity and assisting the principals in pursuing their
passions—provides the greatest immediate impact on improving the
quality of life for them and therefore should be a main focus for the
family office.
Related to both of these points would be the legal structures, tax
planning, and managerial agreements related to establishing the
family office, owning assets, and ensuring that appropriate tax
planning is done.

What services might the family office be required to provide in the

near future?

Investment management is obviously an area of great importance for

the family office, given the long-term significance of properly
managing John’s significant investment portfolio. However,
investment management should be considered after his immediate
needs in finance, lifestyle, and risk management are addressed. This
does not mean waiting to begin a discussion regarding investment
management or considering strategies. Developing an appropriate
investment solution requires a great deal of time, and sometimes the
hiring of additional professionals. Focusing on investment
management in a manner that compromises effective execution on
the other, more immediate needs, therefore, is a risk to the family
office. Keeping that in mind, helping John with the development of an
investment management solution should be one of the family office’s
next major priorities.

What should the family office do in house versus relying on others?

John has the requisite wealth to support all the family office functions
in house if he wants. He has not expressed an overt desire for
extraordinary privacy, nor has he demonstrated that he must be in
absolute control of all services. Given this, his immediate needs
regarding managing his personal assets, improving accounting and
reporting, and allowing him to pursue a diverse range of personal
passions suggest that a mix of internal versus external service
solutions will be best for him.
 The ranch in Wyoming and the house in Cabo San Lucas cannot
be managed daily by the family office, given their locations and the
experience required to do this well. John’s family office should
expect to outsource much of the ongoing management of these
properties to third-party residence managers. Furthermore, while
they are complicated and expensive assets, they do not rise to a
level where the family office needs to hire a dedicated estate
manager to oversee these; instead, it should rely on interfacing with
local property managers. The house in Glencoe, in contrast, is both
a local project and the family’s primary residence. Families typically
want to oversee the construction and management of these projects
personally, albeit with the help of contractors, and can manage the
ongoing needs of the property personally.
However, the record keeping, bill paying, and reporting for all
these properties can and should be provided by the family office.
The vast majority of family offices of this size conduct their own bill
paying, record keeping, and reporting, largely because the family
offices are doing so for other activities, and because most principals
prefer to have greater oversight and control of their expenses.
It is too soon to determine whether the investment management
functions should be outsourced by the family office. John certainly
has the appropriate level of wealth to hire a chief investment officer
(CIO) for the family office, although his interests and needs
regarding the investment portfolio have not yet been discussed in
enough detail to explore the idea of having a dedicated person in this
position. John’s interests in private aviation will likely be handled by
him, at least initially, given his familiarity with planes. Their interest in
philanthropy is still in its early stages, so it should be a focus in the
future.

How can John better manage his time so he can pursue his
passions?

One of the reasons for setting up a family office is so that John has
more time to pursue his passions. However, he has both an interest
and a need to stay involved with the oversight and management of
his various personal assets, investment activities, and philanthropic
pursuits. To do so, John will need to staff his family office properly
and establish the appropriate reporting, communication, and
governance mechanisms. This is where his experience running an
operating company will be relevant, although there are important
nuances that come up with family offices with which both he and the
family office should be aware.
 CHAPTER THREE

Leadership and Staffing

CASE STUDY

Summary

• One year after the sale of Rybat Manufacturing

• Senior leadership positions
• Hiring considerations

Key Words/Concepts

• Leadership
• Staffing

Challenge

The first thing that Jason had to do in his new role as the chief
financial officer (CFO) for John’s family office was to learn exactly
what a family office is. He had certainly heard the term before and
knew some former public accounting colleagues who worked at
family offices. However, his background of managing the finances for
a private operating company, and most recently a public company,
did not overlap much with professionals managing the affairs of very
wealthy individuals. Nor did he personally have the high level of
wealth or complexity of affairs that would give him great insight into
the issues that John and Sofia were now facing.
Despite this, Jason was confident that he could quickly develop
an understanding of family offices and help John manage his. This
was certainly true with respect to the accounting, bill paying, and
reporting responsibilities. Jason was also confident that he could
effectively oversee the various projects around personal assets
because he had run large, complex, and expensive projects at Rybat
Manufacturing. However, Jason was concerned about being relied
upon to help John better manage his investments and buy a plane.
And then there were Sofia’s needs connected to her philanthropic
ambitions. She was starting to write much larger checks to various
charities and was spending more time volunteering at the Children’s
Hospital.
Jason also knew that he had to set the family office up properly
from a legal standpoint and ensure that all the appropriate tax-saving
strategies were being considered. As a certified public accountant
(CPA) who had spent ten years in public accounting before joining
Rybat Manufacturing, Jason was broadly familiar with management
companies, asset ownership vehicles, charitable vehicles, and tax-
planning strategies used by small businesses and their owners.
However, he had no direct experience with family offices.
Jason began his new role in learning mode. He met with John’s
various legal, tax, and financial advisers to introduce himself,
understand their current roles, and assess what they could do for the
family office. To get to know about and better understand the
managerial needs across the personal properties, Jason spent time
speaking with the various contractors and local property managers
and made plans to visit each of them.
Jason began to develop an organizational chart for the family
office and created an initial budget. He relied on Natalia and Tadeusz
to help integrate the organizational design with the various legal
entities that would need to be set up. However, the design for the
family office was going to be more challenging. He would have to
develop one that listed the personnel he needed, their roles, and the
various reporting lines. He would also need to develop an initial
budget that reflected staff costs, related overhead, external service
provider fees, and any other costs and fees that the family office
would incur.

BACKGROUND INFORMATION

Roles and Responsibilities

When creating a family office, it is critical to understand the

professional profiles and expectations for the key family office
positions. The profiles presented in table 3.1 provide insights into the
scope of responsibilities for key roles and the qualities and
experiences required to fill those roles. Larger family offices will need
people in the C-suite providing oversight over all these functions.
Smaller ones may not require them, they may not have the
resources to fill them, or executives may be able to wear multiple
hats.

TABLE 3.1
Roles and Responsibilities

Role Definition

Chief executive The most senior executive at the family office, who manages
officer (CEO) the organization and establishes the strategy for the single-
family office (SFO) to ensure that its mission and goals are
fulfilled. This person is often the primary liaison between the
SFO and the principals of the family.
Chief Designs and executes investment strategy for the SFO and
investment manages overall assets. This person manages the internal
officer (CIO) investment team and external asset managers, and may
 report to the CEO, family principals, and, occasionally, board
of directors.
Portfolio Experienced investment professional who works under the
manager direction of the CIO or senior managers. Assists in selecting,
monitoring, and managing investments and investment
managers. Completes special investment performance
research studies.
Investment Analyzes and values potential acquisition opportunities and
analyst monitors the performance of the existing portfolio; reports to
the CIO.
Chief financial The key executive responsible for financial policy and
officer (CFO) planning. Oversees budget, tax, insurance, and treasury
functions, and ensures that financial policies and procedures
meet the SFO’s objectives and regulatory requirements. This
person typically reports to the CEO and, occasionally, board of
directors.
Controller Oversees accounting, budgeting, and facilitation of
relationships with lawyers, prime brokers, and tax advisors;
typically reports to the CFO.
Tax manager Prepares and reviews complex annual returns and provides
ongoing strategic tax planning services; typically reports to the
CFO.
Accountant Maintains the ledger, manages payroll, and performs financial
statement preparation and analysis; typically reports to the
controller or CFO.
Bookkeeper Executes daily accounting and administrative tasks; typically
reports to the accountant, controller, or CFO.
General Advises on routine legal matters, reviews investment and
counsel management structures, and oversees outside counsel
regarding tax, estate planning, insurance, and other issues.
Chief operating Ensures the efficient and effective operation and business
officer (COO) administration of the SFO; oversees administrative and staff
functions such as technology and human resources; typically
reports to the CEO.
Executive Supports a senior executive in a staff capacity by handling a
assistant wide variety of situations involving the administrative functions
of the office that need not be brought to the attention of the
senior executive.
House/property Controls residential properties within the organization.
manager Oversees and coordinates property and landscape
maintenance, security plans, and issues. Attends public
meetings on behalf of the employer and secures needed
permits and approvals.
Source: Trish Botoff, “Compensation Trends, Best Practces, and Market Data,” 2020.

The C-Suite in Family Offices

Leadership matters in all organizations, including in family offices.

This is true across all senior roles, although the CEO role at a family
office is particularly hard to fill, and for many family offices, the
responsibilities cannot be successfully outsourced to a service
provider or vendor. That is why it is not uncommon to see smaller or
newly formed family offices headed by family members. They may
not want the job particularly, but no acceptable candidate can readily
be found to take it. Similarly, the looming retirement of a longtime
CEO can pose an existential threat to the sustainability of a family
office, particularly if it coincides (as it often does) with a change in
generational control of the family itself.
The position of CIO likewise poses a challenge to fill. Top
candidates all sport large salary requirements and may insist on
bringing with them well-paid staffs of analysts, strategists, and other
support people. Competition to hire CIOs comes not just from other
family offices, but from all corners of the asset management industry,
pushing up compensation levels. Faced with this kind of expense,
small and midsize family offices often decide to outsource their
investment function to one of the growing number of firms providing
external CIO services.
The remaining two positions listed here, CFO and operations
manager, tend to be easier to fill because candidates can be drawn
from a broad range of industries, not just the upper tiers of the
wealth management business.
Tables 3.2 and 3.3 list the key areas of responsibility for each of
the senior leadership positions within a family office.
TABLE 3.2
Senior Leadership Positions within a Family Office—CEO, CFO

CEO • Oversight of all family office operations

• Strategic planning for the family office enterprise
• Management and review of investment policy
• Strategic financial planning and forecasting
• Management of personnel hiring, training, and mentoring
• Responsible for family office board meetings
• Management of planned and ad hoc projects for principals
• Wealth education of the next generation of the family
• Engagement with legal counsel for family office and related matters
• Supervision of risk management and continuity of operations planning
CFO • Management of finance, accounting and tax personnel
• Overseeing of financial management operations
• Development of financial management strategy across the family office
enterprise
• Consolidated financial reporting of the family’s personal and business
affairs
• Generation of the monthly/quarterly financial package for principals,
which includes profits and losses and a consolidated report of
investment assets
• Supervision of annual and ad hoc audits of the system of controls,
assets, and finances
• Regular reviews of insurance policies and insurable assets
• Coordination with the CEO and operations manager of personal asset
forecasts and budgeting
• Preparation and filing of tax reports
• Support for bill payment capabilities for family members
• Partnering with internal and external advisors

TABLE 3.3
Senior Leadership Positions within a Family Office—CIO, Operations
Manager
CIO • Management of investment personnel, including hiring, training,
retention, and mentoring
• Oversight of family office portfolios managed in house and/or by
third-party managers, including liquid and illiquid investments
• Support for principals to achieve and express their investment
strategies and goals
• Developing, maintaining, and measuring the family office
investment policy statements (IPSs)
• Sourcing of investment opportunities in public and/or private
markets
• Coordinating with the CFO on performance reporting across all
assets and portfolios
• Coordination with in-house and external wealth management
teams on investment decision-making processes
• Supporting the next generation’s wealth education and
incorporating external advisors as necessary
Operations • Responsible for nonfinancial family assets, such as artworks,
manager personal residences, aircraft, and yachts
• Hiring, training, and mentoring of administrative and operational
staff
• Project management and reporting
• Managing select third-party relationships, including residence
managers, lifestyle and concierge service providers, pilots and
captains, and other professionals
• Overseeing personal staff, including chauffeurs, maids, chefs,
housekeepers, and others

Hiring for Both Fit and Function

A common refrain among professionals in this industry is, “Working

in a family office is different.” Family offices require employees to be
both good at their job responsibilities and able to manage the unique
dynamics that come with working for wealthy families. As with other
diverse and complex businesses, success in hiring for a family office
depends greatly on the development of, and attention to, a human
capital plan that specifically defines each position in the
organizational structure. The definition of each position includes the
following two essential components: position specifications (i.e.,
function) and cultural “fit.”1

Position Specifications

• Scope
• Reporting relationships
• Responsibilities and accountabilities
• Performance expectations
• Metrics for measuring success

Once the position specifications have been clearly defined, the

family can determine the skill, knowledge, experience, and
competency requirements, as well as the education, certifications,
and designations required for each role.

Ideal Candidate Profiles/Culture Fit

Defining the personal characteristics and attributes, values,

behavioral characteristics, decision-making and interpersonal styles,
and other motivators needed to ensure a good culture fit with the
family are also an essential part of this process. Getting the fit right is
critical for success and effectiveness.
Compensation philosophy is an important dimension of culture fit
and may differ significantly from family to family. On one end of the
spectrum, a family believes that they are hiring an employee to help
them achieve their objectives and will compensate that person only
in the form of a salary and annual bonus. On the other end of the
spectrum, a family believes that they are hiring a partner to help
them achieve their objectives and will compensate the person
accordingly. In addition to salary and bonus, they will offer
coinvestment opportunities and/or carried interest and other forms of
long-term incentive (LTI) compensation.
While it is tempting to shortcut or skip this part of the process,
investing the time to define the position and the culture fit
requirements carefully is the only way to ensure success. Making the
wrong hire costs much more than money; it also can cause wasted
time and potential derailment of the family mission and legacy. The
two primary causes for the failure of family office searches are

• Hiring an individual who is known and trusted but lacks the requisite skills and
experience to perform the job (because the position, performance expectations, and
metrics for success were not clearly defined up front and assessed before the hiring
decision was made)
• Hiring someone who has the requisite skills and experience but is not a good
culture fit (because the culture fit requirements were not clearly defined up front and
assessed before the hiring decision was made)

Two other reasons for failed searches are

• Lack of an effective search process

• Ineffective onboarding, compensation, performance management, and/or retention
strategies and processes

Assessment Process

Once the family has completed human capital planning, including the
definition of leadership roles, position descriptions, and ideal
candidate profiles, they have the information they need to develop a
comprehensive assessment process that will be used to identify and
select candidates. Each family is unique, so the criteria for culture fit
will be unique to each family. There is no industry standard for
assessment criteria.

ASSESSMENT CRITERIA The first step is to define selection criteria

consistent with the position description, ideal candidate profile, and
culture fit requirements. These criteria will also enable candidates to
be consistently assessed both in an absolute sense against the
requirements and in a relative sense, benchmarked to one another.
For consistency, and to identify the best candidate, it is important
to use the same criteria and process to evaluate all candidates—this
includes internal and external candidates as well as family and
nonfamily candidates.

ASSESSMENT TOOLS The next step is to determine which tools will be

used in the assessment process. Numerous tools are available, and
they are often used in combination. The following represents a list of
the tools we consider to be most effective:

• Structured interview: Structured interviews involve asking each candidate the

same questions in order to compare the responses afterward and assess them
consistently.
• Behavioral interview: A behavioral interview is a technique that requires
candidates to be introspective and asks them about past behaviors in order to
predict future behaviors; candidates are also asked to discuss specific experiences
and stories to clarify and explain their behaviors and motivations.
• Open-ended questions: Determining in advance what you want to learn from a
candidate and then preparing and asking open- ended questions are important in all
assessment interviews; the interviewer can then ask follow-up questions to clarify
the meaning or intent of each candidate’s responses. Open-ended questions are
important; the interviewer is not effective if they put words in a candidate’s mouth.
• Behavioral assessments: There are numerous behavioral assessment tools in the
market, and a number of these can be very helpful. However, a behavioral tool is no
substitute for comprehensive interviews in which you truly get to know candidates,
their values, and their experiences in depth to assess fit. These tools are not
intended to be a shortcut or “silver bullet.”
• Evaluation forms: Evaluation grids or matrices that indicate the specific criteria to
be assessed using a rating scale are an effective way to assess and rank
candidates consistently.
• Case studies/presentations: In instances where the family wants to gain a deeper
understanding of how a candidate approaches an analysis or problem-solving
situation and/or a client advisory interface, or they are torn between finalist
candidates, case studies or presentations can be helpful.

Proper assessment is critical to making the right long-term hire

decisions. Families who do not have an effective assessment
process have a high risk of failure. In other words, if you do not know
what you are looking for or how to assess whether you have found it,
you cannot succeed—or if you do, it is only a fluke and
unrepeatable. A family cannot rely on a miracle to occur. They need
a process that can produce a reliable, consistent, and successful
outcome.

Recruiting Process

INTERNAL SELECTION PROCESS It is important to identify and assess

internal candidates, including family members, for potential
succession to leadership roles. The assessment process outlined
here should be applied to all internal candidates. If these criteria are
deemed important for success and effectiveness, they should apply
to everyone equally, including any family members being considered
for positions.

EXTERNAL EXECUTIVE SEARCH PROCESS The family conducts an

external search in cases where a leadership role cannot be filled via
internal succession, for whatever reason. Whether the family decides
to manage the search process themselves or engage an outside
professional search consultant (i.e., an executive recruiter) to
conduct the search, it is extremely important to have a well-defined,
structured process to ensure a successful outcome. The search
process’s time line, milestones, and deliverables must be
established. The individuals involved in the process and their
accountabilities and responsibilities should also be clearly laid out.
An effective search process will include the following elements:

• Market research: Conduct market research to identify the universe of potential

candidates.
• Search and candidate target strategy: Based on the market research, create a
target pool of potential candidates to approach.
• Contact and screen the target pool: Access and engage potential candidates in
discussion about the position; through screening conversations, determine the best-
qualified candidates to interview.

INTERVIEW, ASSESSMENT, AND SELECTION PROCESS Once potential

candidates have been sufficiently screened, it is time to implement
the formal interview and selection process. As noted earlier in this
chapter, candidates should be assessed using the appropriate tools
and criteria on an absolute and relative basis. This will enable the
family to effectively select the best candidate.

NEGOTIATE AN EMPLOYMENT OFFER Once the final candidate has

been selected and compensation and other employment terms
agreed upon, an employment offer is typically made contingent upon
satisfactory professional reference and background checks. Some
families may do preliminary referencing prior to making the offer, but
it is crucial that the candidate’s current employment situation never
be compromised. If preliminary referencing is desired, it is best to
ask the candidate for the names of references with whom they would
be comfortable having the family or search consultant speak. When
conducting background checks (e.g., criminal), it is very important to
use an outside firm that specializes in doing this work.

Development Plan

In defining the ideal candidate, people often come up with a wish list
—a list of ten requirements, with the hope that the individual will
score 10 on each criterion. However, this person may not exist. The
reality is that an individual will likely score 12 in one or more areas
and 8 in one or more. The family will select the individual who
represents the best composite fit for the position. If there are any
gaps in the candidate’s technical knowledge or skills, a development
plan should be implemented to ensure the success of the new hire.
The individuals responsible for carrying out the plan and evaluating
progress toward completion should be clearly designated.
Commitment from all constituencies concerned is necessary to the
success of the new hire and the development plan.

Onboarding Plan

The onboarding plan is designed to help the new employee become

acclimated to their new role, to the family and family office culture,
and to the family’s advisers. The goal is also to help the new
employee build relationships and achieve results quickly and
effectively. Creating early wins for the new hire promotes credibility
with the family and among the other employees. It also gives the
new employee confidence that they can be successful. Commitment
to the success of the new employee and to creating an environment
that fosters success is critical.

KEY QUESTIONS AND CONSIDERATIONS

• Who will design the onboarding plan for the new employee?
• How will you prepare the new employee in advance to build relationships with key
family members, staff, and advisers?
• If issues occur with the family dynamic, how will you help resolve them?
• In the case of succession, how will you help transition relationships from the
departing executive to the new executive?

An effective performance management plan defines the expectations

and metrics to use to evaluate success; they must be objective,
results-driven, quantitative, and qualitative. Performance
expectations and metrics must be aligned with family philosophies,
values, and objectives. They must also be mutually agreed upon and
clearly communicated. Ongoing, open communication and feedback
regarding performance and achievement of goals and objectives are
also critical. Solving an issue and getting back on track quickly
constitute the best way to avoid creating a chronic issue that could
result in failure.
Compensation and reward systems also need to be designed
and structured in alignment with family values, philosophies, goals,
and objectives. Incentives absolutely drive behavior. The family
needs to be sure that compensation and incentive plans will drive
behavior that leads to desired results.

Compensation Plans

While compensation plans vary across family offices, the most

common is a traditional salary and bonuses (or annual incentives),
with recent survey data suggesting that the practice is followed by
more than 80 percent of families. Decisions regarding bonus
amounts are typically made on a discretionary basis, as opposed to
a formal incentive compensation plan that may or may not include
delineated metrics. This is not surprising, given that family offices are
just now starting to emerge as a separate industry, with benchmarks
around both compensation level and performance measurement.
However, family offices should consider using more structured
incentive plans as opposed to simply providing discretionary
bonuses. These plans provide the family with an opportunity to use
compensation to drive targeted performance and improve alignment
with strategy.2

Methods for Determining Annual Incentives

Whereas discretionary bonuses are usually determined at the end of

a performance period, more formalized or structured incentive plans
define certain criteria at the beginning of the performance period.
These can include the following:

• Participation: Establishes which positions or employees will take part in an

incentive plan.
• Incentive opportunity: Often defined as a percentage of base salary.
• Performance criteria: Outlines which performance categories will be considered
for earning an incentive.
• Performance targets: Establishes performance expectations, potentially at
threshold, target, or maximum defined performance and payout levels. Typically
incorporates key financial metrics, such as investment returns versus key
benchmarks, but may also include more qualitative measures. A mix of quantitative
versus qualitative metrics, as well as which financial metrics are used, are
established to align with the family’s strategic direction, varying substantially among
family offices.
• Performance period: Defines the work period that will be used to assess
performance (typically aligned with calendar year, but not in all cases), as well as
the expected timing of payouts, which often depends upon the timing of investment
or other year-end financial results.

Long-Term Incentive Plans

As previously mentioned, compensation arrangements and practices
for executives and other key team members at family offices are
becoming more formalized and sophisticated. The use of LTIs,
particularly based on assets under management (AUM), is one such
trend. Reasons for implementing LTI plans include the following:

• Increasing competitiveness of compensation levels with industries from which key

family office employees and executives are recruited
• Motivating employees to achieve performance levels above what would normally be
accomplished
• Increasing the office’s value to the family, encouraging an ownership mentality
• Providing a retention mechanism through the use of “golden handcuffs”
• Creating an opportunity for long-term financial security and retirement planning for
key executives
• Allowing participants to defer LTI payouts (and taxes) when implemented
concurrent with a nonqualified deferred compensation (NQDC) plan

LTI DESIGN CONSIDERATIONS Designing formalized incentive plans for

senior employees at a family office, whether they are annual or over
a longer term, is challenging due to the unique needs, issues, and
dynamics of family offices. This helps explain the higher percentage
of LTI plans used by investment-centric family offices.
However, this should not be a reason to disqualify the use of LTI
plans. Rather, it is an opportunity for family office executives to
initiate discussions with the family about requirements and
expectations, which would serve them greatly. There is an increasing
number of compensation consultants that specialize in family offices,
which can, and should, be used as a professional resource.
The following are a number of reasons why family offices are
implementing LTI plans:

• The long-term goals of the family and the family office.

• Award structures that drive performance.
• Aligning the value of annual LTI awards to current performance.
• Sequencing cash payouts to encourage retention, which results in a program that
works less like a bonus plan and more like an equity plan.
LTI PLAN PREVALENCE AND VESTING Coinvestment opportunities are
the most prevalent type of LTI plan used by family offices, followed
by deferred bonuses and incentives and carried interests.
The use of vesting provisions is a common practice and is
especially recommended to be used with LTI plans as a retention
mechanism. In family offices offering LTI compensation, most
incorporate three- to five-year vesting provisions. However, some
firms report that no vesting provisions exist. Vesting provisions are
an important tool for retaining talent and can also be seen as an
opportunity to align compensation programs with the long-term goals
of the family office.
Table 3.4 presents a list of typical LTI programs and their best
uses.

TABLE 3.4
LTI Programs

Plan Type Best Uses

Coinvestment • Allows participants to have minority participation, alongside

opportunity the family, in investments to which they would not have
access normally
• Family offices with a private equity function or similar
investment opportunities
• Participation limited to a select group of key employees
Carried interest • Provides participants with a share of investment profits in
excess of a specified return, typically in alternative
investments such as private equity or hedge funds
• Family office with a private equity function
• Participation usually limited to CEO/CIO/private equity roles
Deferred • An incentive compensation opportunity based on longer-term
bonus/incentive performance; typically vests over time and pays out in the
compensation future
• Implemented by SFOs that focus on managing the family’s
affairs and investments
• Can be offered to an array of employees depending on their
seniority and roles
Source: Trish Botoff, “Compensation Trends, Best Practces, and Market Data,” 2020.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

Jason is obviously an important first hire for the family office, and
John will rely heavily upon him to help manage the delivery of
services and advice across each of the areas of need. However,
Jason is not an expert in all these areas, so he will need significant
help from others. His initial focus is on organizational structures,
staffing, and financial management.

Case Questions

• Why was Jason the first person John hired to help him with setting up and
managing the family office?
• What resources should Jason use to learn about family offices?
• Is Jason focusing on the right things?
• How should Jason find and evaluate potential employees?
• What staffing solutions should Jason consider to obtain help with the residential
projects in Glencoe, Wyoming, and Cabo San Lucas?
• What should Jason start to do about helping John better manage his investments?
• How can Jason help John with finding and buying a new plane?
• Is there anything Jason can do to help Sofia with her charitable activities?

RECOMMENDED SOLUTIONS

Responses to Case Questions

Why was Jason the first person John hired to help him with setting
up and managing the family office?

Principals new to setting up a family office often choose initial

employees around their priority needs, familiarity, and trust. As the
CFO for John’s former company, Jason had the required background
to help manage the immediate and pressing issues that John faced
—namely, better accounting, bill paying, and reporting on the
numerous activities. Given Jason’s background at Rybat
Manufacturing, John also had confidence that he could help initially
staff the family office for its needs in other areas where project
management was a high priority, including residence management
and lifestyle/concierge.
John also knew and worked well with Jason, and he trusted him.
It is difficult for principals who are only recently coming into
significant wealth and setting up a family office to hand off important
and sensitive personal matters to outsiders, even if they are, in
theory, more qualified to help given their greater background and
experience.

What resources should Jason use to learn about family offices?

Very few technical resources are available to tell family office

professionals how to do their jobs. As a result, most family office
executives rely on advice from the professionals who serve them
and peers who play similar roles for other families. There are also a
number of family office industry trade organizations, networks, clubs,
conferences, and executive educational programs. In addition to
speaking with John’s advisers, Jason should seek out and develop a
network of peers with whom he can connect periodically, as well as
join relevant trade organizations and clubs, attend family office
conferences, and consider attending a family office–focused
executive education program.

Is Jason focusing on the right things?

Yes, because helping John gain control over the financial,

operational, and reporting issues is a critical task, and thus it should
take immediate priority. Jason is also right to start with the
organizational imperatives, including setting up the necessary legal
structures, determining required staffing, and budgeting costs.
 How should Jason find and evaluate potential employees?

The answer depends on the function for which Jason is hiring. The
finance and accounting needs of a family office are very similar to
those of small businesses, so finding professionals who can assist in
these areas is relatively easy for Jason, and likely similar to what he
did when he worked for Rybat Manufacturing. The same can be said
for information technology (IT), albeit less directly; however, hiring for
other service responsibilities such as estate management, lifestyle
and concierge, and investment management will be more difficult for
Jason. He does not yet know which of these services John and he
may decide to bring in house versus relying on external service
providers to deliver. Neither does he have connections within the
industries that employ these types of employees. As a result, John
should consider using a recruiting firm that specializes in working
with family offices, in addition to consulting his network of peers,
trade organizations, and clubs.

What staffing solutions should Jason consider to obtain help with the
residential projects in Glencoe, Wyoming, and Cabo San Lucas?

Because Jason has neither the expertise nor the time to personally
manage, on a day-to-day basis, the numerous needs related to the
various residential projects, he must rely initially on third-party
property managers. The challenge for him, as well as for many
family offices, is that large estates, particularly those under
construction or remodeling, require a unique expertise and level of
ongoing oversight that exceeds the capabilities of traditional and
local property managers. For this reason, many family offices with
substantial residential management needs often contract with
external estate managers or hire a dedicated in-house professional.
At this stage, it is likely best for Jason to engage the services of an
external estate management firm until the construction and
remodeling projects are completed. He can then assess whether he
should bring this service in house, depending on the ongoing
supervisory and managerial needs across all the properties.
What should Jason start to do about helping John better manage his
investments?

At this point, it is too early for Jason to make this a major priority,
given everything else he has on his plate. Furthermore, Jason has
little sense of how John will ultimately want to manage his
investments, whether via an in-house CIO or by leveraging some or
more of his current or future financial advisers. This subject,
however, should be a point of discussion with John only once Jason
has addressed the more immediate needs.

How can Jason help John with finding and buying a new plane?

Because John is a pilot and aircraft enthusiast, it is unlikely that he

will delegate to Jason the primary job of finding and selecting a jet
and determining the best way to employ pilots (e.g., whether by
relying on a local aircraft management company or creating a small
flight department). However, Jason should get up to speed about
private aviation because without a doubt, John will ask him for help
in such areas as comparing the financial implications of different
types of planes, ownership options, and pilot staffing. He may also
be responsible for interfacing with various aviation professionals and
attorneys regarding contracts, insurance, employment agreements,
and other issues.

Is there anything Jason can do to help Sofia with her charitable

activities?

While Sofia has not yet expressed an interest in doing something

more substantial with her philanthropy, nor has she asked for his
help, Jason should consider that this will be an important area where
the family office can eventually provide a great deal of support. It is
not uncommon for principals who are already engaged in
philanthropy to want to expand these efforts, sometimes significantly,
once they have both the resources and the time to focus on them. In
addition, because the financial magnitude of charitable gifts is
increasing, Jason should make sure to consult and involve John’s
attorney and CPA to ensure that the proper philanthropic vehicles
are being considered and that available tax planning is being
conducted.
 SECTION TWO

Services

BACKGROUND INFORMATION FOR CASE STUDIES 4

THROUGH 9

It had been eighteen months since John sold Rybat Manufacturing,

and a year after he decided to create his own family office, Left Seat
Management,1 and hired Jason, his former CFO, to help him get
started (figure s2.1). A lot has changed since then, as John’s and his
family’s needs expanded and both he and Jason became more
familiar with the needs, structures, and management of a family
office.
Figure s2.1 Updated staffing diagram for the Left Seat Management family office

At this point, the family office had eleven full-time staff members
and 5,000 square feet of office space in Evanston, Illinois, and it had
made a few important hires. This included the formal family office
chief executive officer (CEO), Michael, whom John met through one
of his CEO networking peer groups.
Michael had the relevant experience that John needed to set up
his family office. He started his career as an investment banker
before migrating to private banking, where he advised private clients
on wealth management, banking, investments, and numerous
related issues. He ultimately rose to a position running the wealth
management business for a boutique private bank. Michael was
eager to bring his broad experience working with wealthy families to
help John and Sofia, as the capstone to his career.
Because of his diverse background, Michael was also intimately
involved in helping John with his substantial investment portfolio and
served as the informal chief investment officer (CIO) for the family
office. Since the sale of his company, John had taken his time to
learn what he could about investment management options and best
practices, particularly from families that invested similar-sized
portfolios. John came to appreciate that there was a great deal of
variation in how families managed their wealth. Some family offices
hired their own CIOs to oversee and control virtually all aspects of
investment management, including elements such as strategy
development, research, and execution. Others were much more
delegatory, handing off the investment management (including
strategy and execution) to third-party investment management firms,
including private banks, brokerage firms, and investment
consultants.
In addition, direct investing in small to medium-sized private
companies was something on which John was spending a great deal
of time these days. He had a penchant for these investments
because of his background as a founder and operator. John was
starting to see an increased level of private deal flow and had
already invested in a number of companies, both individually and in
partnership with other wealthy families. The number of deals grew
significantly after his increased profile due to the well-publicized sale
of his business.
John decided to split the difference between conducting his
investment activities all in house and outsourcing them to third
parties. That’s why he decided to hire Michael. Michael was the
senior executive who could run the family office but also was familiar
with managing a diverse set of investments. Michael was well suited
for this position, given his background in investment banking and his
experience in wealth management as both adviser and manager.
Moreover, because he was a former investment banker, he could
help John with the growing number of private investments that John
was exploring. To that end, Michael hired a new master’s of business
administration (MBA) graduate, Cara, the daughter of one of his
former colleagues, to help both him and John manage the liquid
investment portfolio and private investments.
The family office also built out its accounting, bill paying, and
reporting functions under Jason’s leadership. Jason ran the finance
group in a professional manner, with defined roles and
responsibilities distributed across a five-person staff. Jason also
decided to bring in house the tax-planning and tax-compliance
services because they had become a large and expensive
responsibility of the family office. The tax needs for the family office
had become quite substantial, with numerous tax/estate planning
and asset ownership vehicles that were created. Jason hired Ed, a
senior tax manager at one of the national public accounting firms. Ed
valued this opportunity because it enabled him to better balance his
personal and professional time and avoid tracking billable hours, and
because he could help a large client beyond his usual day job, which
centered around tax compliance.
The ranch and various other residential properties continued to
be an area of major time commitment and challenge for Jason and
the family office. While each home had a local property manager
assigned to it, care and maintenance issues continued to arise.
There were also the employees at the Wyoming ranch, who needed
to be supervised. Jason was increasingly frustrated with various
property management issues and knew that he needed someone in
house to help with these assets. He hired Veronika as an estate
manager, leveraging his relationship with a family office trade
organization through which he was able to post an informal job
search.
Jason set up most of the technology and systems himself. He
decided that the family office wasn’t big enough to warrant an
internal information technology (IT) resource or an outsourced IT
provider or managed security service provider. Jason was familiar
with the basics of what the family office needed in terms of
computers, networks, and office technology. He did not believe that
the family office needed a sophisticated security system because the
family office was so far off the radar. Each family member and staff
member in the family office had a personal laptop issued by the
office and used their own mobile phones to access family office–
related e-mails and messages.
The family office used external hard drives to back up data on a
sporadic basis and augmented this with a free cloud storage provider
for storage and large document sharing. Both the family office
professionals and family members commonly used free, personal e-
mail providers instead of the e-mail addresses set up by the family
office. While at the family office itself, people accessed the Internet
via a public Wi-Fi service provided by the commercial real estate
manager for the building. There was no firewall or filtering of website
traffic. Jason permitted all the family members to use social media
on corporate laptops and their personal cell phones.
John continued his research into buying a private jet, but he had
yet to pull the trigger on it. Instead, he was using the local FBO
(fixed-base operator) at the airport where he kept his Cessna 172 to
charter planes for his and the family’s various travel needs. He was
eyeing a couple of planes, including a King Air 350 that he used
extensively for the shorter trips such as to Wyoming. He had also
grown fond of using a Challenger 350 to fly down to Cabo San
Lucas.
Car collecting also continued to be an important hobby of John’s,
although he seldom found time to enjoy this particular passion. He
would occasionally take his 1963 Jaguar XKE out for a spin when
the weather in Chicago was nice, but the car spent most of its time in
the garage. The 1969 Ford Mustang, however, was constantly being
driven by his son Philip, who had permission to drive this car only.
Sofia started to become much more active with a number of
charities, particularly those that help children and the arts. She was
starting to think about ways that she can make a difference in these
areas in addition to the substantial contributions that she made to the
Children’s Hospital and a local arts museum. Sofia raised this
question with Michael to find out how other families have gone about
starting a charity and building out programs in very specific areas.
She was also starting to ask how they could have a greater impact
with their wealth and support broader causes that exceeded what
they had allocated to their philanthropic pursuits. This seemed to be
a recurring topic at the dinner table, often brought up by his
daughters Olivia and Isabella.
John also continued to be active in his philanthropic pursuits, but
not with the same enthusiasm as Sofia. He enjoyed helping his alma
mater when he could, as well as the local public school science,
technology, engineering, and mathematics (STEM) programs. He felt
that he didn’t have the same amount of time to devote to it as Sofia.
However, he was happy to see Sofia become so engaged in her
charities and welcomed involving the family office to help both of
them with their philanthropy.
 CHAPTER FOUR

Finance

CASE STUDY

Summary

• Six months after the creation of the Left Seat Management family office
• Professionalizing the finance functions
• Improving processes and upgrading technology

Key Words/Concepts

• Accounting and bill paying

• Consolidated reporting
• Tax planning and preparation
• Information technology (IT) infrastructure

Challenge
Jason had done a great job of gaining control over the finances for
Left Seat Management. As would be expected given his background,
he had established a well-equipped finance department. John was
pleased with this development and was finding that he had both
more time and better information. Jason hired the people and put in
place the systems that he needed to make sure that bills were paid
on time and reporting on the personal assets and investments were
more clear, accurate, and timely.
Bill paying still took up a significant amount of time for the family
office and was migrated away from Janina’s daily responsibilities.
She was more than happy to give these responsibilities up because
that allowed her to spend more time helping with calendars, travel,
and numerous other personal needs for John, Sofia, and
(selectively) for the kids.
Under the new bill-paying system, the family office followed
processes and procedures that were much more in line with what
small businesses used. However, the family office did not use a
formal budgeting and procurement system to authorize, create, and
post purchase orders (POs). In practice, anyone in the family office
was authorized to make purchases as needed. However, John and
Michael were the only two people in the office with signing authority.
Payroll was handled by an established third-party vendor that
provides similar services to small businesses.
For reporting technology, the family office used a combination of
(1) a ubiquitous small business/ultra-high-net-worth (UHNW) general
ledger system, (2) a well-known asset management data
aggregation system that links directly to their various custodians, and
(3) a spreadsheet software program to combine reports from these
systems. These systems were used to create a single monthly
financial report for John and Michael.
The general ledger reporting system was effective for the family
office’s needs with respect to accounting for office costs, payroll,
bank reconciliations, and expense management and budgeting. The
consolidated reporting system was helpful for monitoring marketable
securities. However, the system did not account for nonliquid
investments or have certain functionalities that the family needed,
such as partnership accounting. In addition, because there are two
separate systems, information had to be combined and summarized
each month. This process entails (1) posting the activities from
nonmarketable securities that data aggregation software cannot
capture electronically; (2) calculating and separately reporting the
various family members’ interests in the various asset ownership
vehicles (so-called partnership accounting); and (3) preparing the
combined monthly financial report via the spreadsheet software.
Taxes were being prepared by Ed, with the occasional help of the
finance department staff, particularly during the busy season. Ed
used one of the larger online tax software and research services to
prepare and file the tax returns. He created tax files for each of the
individuals and entities and used them to maintain important
supporting documentation and work papers. Having a tax expert in
house was valued greatly by John, Michael, and Jason. They could
now easily seek advice in real time with someone who intimately
knew them, and the entire family and other entities, without having to
pay external advisers an hourly fee each and every time they had a
question.

BACKGROUND INFORMATION

Accounting and Bill Paying

Accounting and bill paying are some of the more traditional and
important responsibilities for a family office.1 These needs naturally
grow out of a wealthy family’s need to account for, report, and
manage what can be a very high volume of financial information
related to their various personal and investment activities.
As opposed to other services, accounting and bill-paying services
are provided by family offices in a manner quite similar to those for
small businesses. As a result, many of the processes, personnel,
and technologies needed are the same. For these reasons, it is
relatively straightforward for family offices to initially staff and deliver
these services. However, for reasons that are discussed at length
elsewhere in this book, not all family offices deliver these services
well. In fact, the timely and accurate delivery of financial information
for wealthy families is one of the more challenging and time-
consuming tasks for a family office.
One of the reasons for this is that, despite the similarities with
small businesses, family offices often do not initially provide
accounting and bill paying with a level of staffing or professionalism
commensurate with their needs. As a result, the finance department
within a family office often struggles to catch up with the increasing
level of activity and complexity commensurate with wealthy families.
The following practices should be considered and, where
appropriate, incorporated into the family office’s finance function.

Payment Approval

Family offices often make purchases based on immediate need, with

review and approval being applied at the time that the bill is paid and
the check is written. The family office should institute traditional
accounts payable policies such that there is a level of oversight and
control with respect to whether a product or service is needed and
ordered, the terms under which it will be delivered, and, as needed,
whether it stays within budget.
Relatively straightforward and common payment controls provide
tremendous improvements in the areas of expense management,
fraud risk, and financial privacy. They also give the principals comfort
that there is proper financial stewardship over their money being
applied by the family office. Family office professionals are often
surprised by how closely principals monitor expenditures, even
relatively small ones. This is understandable inasmuch as principals
are used to spending their own money, have their own sense of the
value of goods and services, and do not want to be financially
irresponsible (or feel irresponsible) despite the magnitude of the
wealth they control.
The following are a number of controls in the area of payment
approval and execution:
 • Determine who is authorized to sign checks and institute additional signer
requirements based on threshold payment amounts.
• Use numbered checks in a sequential order so that out-of-range checks can be
easily identified.
• Maintain all checks, signature stamps, and ledgers in a secure location.
• Separate the responsibilities for printing checks and signing them.
• If a signature plate or stamp is used to sign checks, make sure that there is a
particularly strong and independent check approval and review process.

Purchase Approval

In practice, most family offices have limited preauthorization

purchase approval processes in place, certainly compared to their
payment approval policies. Purchase orders (POs) require that
proposed expenditures be submitted, approved, and documented
before a commitment to purchase a product or service is authorized.
While it might be a best practice to establish a PO system, most
family offices do not do so until they are quite large. Making sure that
appropriate purchase approval policies and procedures are in place
is critically important to all family offices.
If POs are to be used, the finance department generates a PO
that has to be approved before the payment obligation is entered into
the system. Once the products are delivered or services provided,
the finance department matches the invoice with the PO. The
existence of both an approved PO and a vendor invoice eases and
speeds up the authorization to remit a check by appropriate
personnel.

Common Accounts Payable Group

It is a best practice to ensure that all accounts payable functions are

centralized and carried out by the same personnel on behalf of the
entire organization. While this is often done naturally by newer family
offices and small family offices (SFOs), large family offices often
have numerous departments, each of which is responsible for
ordering products and services, engaging with various vendors, and
authorizing payments. A centralized accounts payable department is
used so that common policies regarding approvals, financial
controls, and documentation are followed by all departments
initiating requests.

Using Others for Accounting and Bill Paying

Family offices are able to outsource accounting, bill-paying, and

reporting functions. However, this tends to be a solution for smaller
family offices, which do not have a level of activity or a need for
oversight and control that would warrant keeping this function in
house. For those family offices that are open to outsourcing bill
paying and the related accounting and reporting functions, there are
a number of important things that they should keep in mind:

• The family must be comfortable with sharing considerable financial information

about the family and its spending behaviors with those outside the family office.
• The family office must establish information-sharing protocols through the use of a
secure technology platform.
• Controls should be placed on any bank accounts used for bill paying (including
maximum and minimum funding amounts) to reduce their financial exposure.

If outsourcing is chosen, the family office should be cognizant of

the following issues.

BANK ACCOUNT ISSUES Over the years, many third-party bill-paying

providers have learned that sharing bank accounts with clients is a
bad idea. It is essential that the firm providing bill-paying and
bookkeeping services have an accurate picture of the account
balance in the account that they are using for payments. If the family
office shares the account, it is very likely that they are writing checks
and making other payments as well, which makes it impossible to
have an accurate balance at any given time. While most family
offices will have relationships with banks that monitor accounts and
ensure that overdrafts are corrected so that checks will not bounce,
sharing bank accounts creates constant problems.
 One solution that has been adopted with much success is to
create disbursement accounts, which are new checking accounts
based at the family office’s preferred bank for which the bill-paying
provider has limited power of attorney. In these cases, the third-party
bill-paying provider is the only one using such an account, which is
funded periodically by the family office, their banker, or another
trusted adviser.

RECURRING PAYMENTS—NO BILL Very often, recurring payments have

to be made, for which there is no bill. A good example would be
sending a monthly check or wire to a son or daughter in college for
rent, living expenses, and other monetary needs. These payments
have to be sent regularly, and they must be scheduled accurately.
Because there is no bill (usually there is only a one-time e-mail or
phone request from the family office or family member), there will be
nothing in the vendor’s in-box to trigger payment.
Calendars and schedules drive this business, and bill-paying
providers must fine-tune the process to deal with issues like this.
Often, the provider employs software that sends reminders and task
lists to the bookkeepers to assist them with scheduling payments for
which there is no current bill or invoice.

E-MAIL INVOICES Another issue related to receiving bills and invoices

has to do with the fact that more and more vendors are sending their
invoices via e-mail rather than regular mail. Typically, they would go
to the family office’s or a family member’s e-mail address in the hope
that the family office will forward them for payment. One solution to
this problem is to establish a client e-mail address at the office of the
bill-paying provider and give it to vendors so they can send a copy to
the bill-paying company or individual, with a copy to the family office.

ONE BILL—MULTIPLE PAYMENTS Quite often, bills arrive that require

multiple payments—quarterly, semiannual, or at other intervals.
These are often real estate and personal property tax bills, which are
time sensitive. Keeping track of payment due dates is important, and
future payments (and cash requirements) must be scheduled
accurately, with payment reminders available to bookkeepers and
supervisors.

MULTIPLE NAMES Bills and invoices will come in many different

names. If manual data entry is being used, this is not much of a
problem, as the bookkeepers will (or should) know that they all
belong to the same family. But if optical character recognition (OCR)
or other automated data entry is in place, this becomes a bigger
issue. Somehow, that system has to know that items addressed to
“Mr. John Smith,” “Mary and John Smith,” “Mr. and Mrs. John Smith,”
and “Lindsay Smith” (the daughter) are all for the same family and
must be paid from the same account. Getting vendors to change
names is very difficult (e.g., a mortgage is a legal document and
nearly impossible to change). Cross-reference sheets are needed in
such cases to ensure that the mailroom personnel sort the mail
properly. In the case of OCR, there must be a cross-reference
database to make the connections.

CREDIT CARDS Credit cards can create a number of problems

because of the wiggle room on credit card payment preferences
(e.g., approved purchases, whether the family office wants to make
the minimum payment versus paying the full balance, and other
options). These statements usually have to be approved by an
individual who is a family member or someone in the family office
who is familiar with and in frequent contact with the family. (Many
other bills are fixed or with very little change month to month, so they
are simply paid as they arrive.) There are several ways to deal with
the approval process to pay a credit card. The one used most often
is to have each paper billing statement go directly to the family office,
which in turn authorizes the bill-paying company to access the card
online. The bill-paying vendor then makes the payment, and at the
same time downloads and categorizes all the transactions on each
statement.
In cases where the statement comes directly to the third-party
bill-payer, they can e-mail it to the family office for approval. Care
should be taken to ensure the use of a secure messaging system so
the document is sent in encrypted form, despite the fact that this is a
more cumbersome process.
Another issue related to credit cards is that family members often
have recurring charges automatically paid by their credit cards to
earn points or miles. While this seems convenient, it creates a
problem in cases where a card is lost, stolen, or damaged and must
be replaced. Some card issuers are good about transferring those
recurring charges to the new card, but others are not. This means
that at some point, vendors will be left unpaid until the family office or
bill-paying provider connects them to the new card.

WIRE TRANSFERS Many wealthy individuals are invested in private

equity funds, and other investments. These normally require wire
transfers for capital calls. Other large purchases and commitments
also require wire transfers. Issuing these wire transfers for family
offices creates a whole new set of issues, mostly relating to security
and fraud prevention. It is imperative that steps be taken to ensure
that the originator of a wire request is actually the family office or a
family member and that the request is legitimate.
It is important for the family office and bill-paying provider to lay
out the steps under which wire transfers can be processed, and that
these include a rigorous callback process similar to what banks use.
Whatever the solution, it is important that adequate approval
processes be in place for the protection of the family office and the
bill-paying firm. International wires add an increased level of
complexity and risk, given the high rate of e-mail hacking and
regulatory issues.

OTHER ISSUES Wealthy families have complicated financial lives.

Quite often, they own assets through entities such as limited liability
companies (LLCs). These create problems insofar as they may
require separate bank accounts, have stricter reporting
requirements, separate tax IDs, and other features. At the end of the
day, however, these related entities are part of the wealthy family’s
personal financial picture, and they should be incorporated into
reports.
 Posting and tracking debit card transactions can be problematic.
This comes into play if a family office is using a full bookkeeping
service rather than simply a bill-paying entity. Debit card transactions
show up on the bank statements, and quite often, they have very
limited descriptions, making accurate categorization difficult. In many
cases, there are large numbers of debit transactions, so posting (or
downloading) them becomes an issue.
It is preferable for family offices to allow the bill-paying provider to
change the mailing address on as many bills as possible to avoid the
“round trip,” wherein bills go to the family office or a family member’s
home first and then get forwarded to the bill-paying company.

Investment Reporting

One of the principal responsibilities for any finance department is

periodic and robust reporting. In this case, reporting includes not
only financial reporting via a general ledger system, but also
investment reporting for both liquid and nonliquid investment
activities. It might also include various ancillary needs of the family,
including budgets, cash flow analysis, portfolio analytics, and project
management reports.
Delivering accurate consolidated investment reporting on a timely
basis is surprisingly difficult for most family offices. The reasons have
to do with how the needs of wealthy families differ materially from
those of small businesses and asset management firms, for which
most investment reporting solutions are developed. These
differences include the following:

• Family offices invest in a wide variety of asset classes, both personal and business,
liquid and illiquid.
• Assets owned by a wealthy family are often held through numerous planning
entities and trusts, in which each family member has a different pro rata ownership
interest.
• The way in which principals would like to see their financial information reported is
subject to idiosyncratic preferences, and therefore varies greatly.
• The process by which information is obtained, organized, and reported varies
greatly between traditional general ledger and portfolio management systems.
 • Ancillary information from a customer relationship management (CRM) system,
documents storage and retention, and project management is valuable to integrate
but very difficult to do.

As a result, there is no ubiquitously used consolidated reporting

system for family offices. The following discusses some of the
considerations when evaluating consolidated reporting systems.

Consolidated Reporting Challenges for Family Offices

While advances in technology continue to contribute to operational

success in most industries, the private wealth community has fallen
significantly behind in effectively deploying advanced technologies
and corresponding best practices in the management and support of
core family office business functions.2 The same enterprisewide
accounting and finance platforms that other industries employ have
not historically satisfied the unique information and reporting
requirements of complex families.
In addition to the limitations of these large platforms, which have
inhibited their adoption, there are several other factors that have
contributed to the lack of technological growth, including the
following:

• The complex, lengthy, and resource-intensive solution assessment and decision-

making process
• The high degree of variability in operations, information needs, and reporting
conventions, which makes technology standardization difficult for potential vendors
• The hesitation of technology firms to invest in research and development for
smaller, niche markets

As a result of the need for highly customized, specialized

products and the limited technological solutions available to meet
these needs, it is common to see family offices that have adopted
the practice of using a unique combination of nonindustry-focused
tools. These solutions—invariably a mix of spreadsheets, small
business accounting platforms, and portfolio management tools—
while disparate, are readily available and have provided a critical
flexibility that family offices need and want in order to solve very
specific information challenges. They are as follows:

• Spreadsheets are the tool of choice because they are cost effective, have a wide
base of users, require little direct overhead to support, and include embedded
functionality to facilitate complex equations and requisite customizations.
• In addition to spreadsheets, other systems such as general ledger and portfolio
management applications are utilized heavily by the industry, often as data sources
in the compilation and preparation of the spreadsheets.

The challenge of using these various tools is that their inherent

structural limitations and lack of integration not only create significant
operational inefficiencies, but result in poor data quality.
The end product of endeavoring to operate a business using a
combination of systems designed and intended to do something
different than how they are ultimately used is invariably an ever-
growing maze of spreadsheets that grows exponentially with each
passing year and each changing of the guard. Auditors, accountants,
and advisers will often find significant gaps in the resulting reports
and statements, which frequently do not reconcile with other
spreadsheets and/or across the disparate systems.

Three Phases of Technology Evolution

Family offices tend to solve their IT needs via an evolutionary

process (table 4.1) moving from getting the job done, to using best-
in-class discrete technologies, to adopting truly world-class,
enterprisewide solutions. However, for legitimate reasons discussed
next that have to do with needs, costs, required sophistication, and
other factors, many family offices remain at different phases by
design.

TABLE 4.1
Tech evolutionary process
 Family Office and Information Reporting Challenges

The family office vertical within the private wealth management

market has had a heightened interest in technology solutions for a
protracted period of time. When considering technology solutions,
however, family offices tend to independently consider the needs of
the various business units found in the office itself until they arrive at
the topic of reporting, where there is not only an expectation, but
also a real need for information that spans multiple reporting
concepts, functions, and business units. Examples include, but are
certainly not limited to, the following:

• Performance attribution on an “exposure” basis, which requires both investment and

partnership data
• Performance evaluation across multiple custodians leveraging a custom grouping
schema
• Risk evaluation of a family branch and/or an individual
• Liquidity analysis across the office to understand the ability to raise cash for a call
without having to liquidate positions
• A generally accepted accounting principles (GAAP) system of accounting, with the
ability to understand the tax basis of investments

However, because business unit needs are generally evaluated

independently, the solutions that family offices implement often can
report only within the domain limitations of their respective
functionalities. The private wealth management industry, and family
offices specifically, appear to be largely stuck in the best-in-class
phase of its technology life cycle.
Because of the paradox created by simultaneously looking for
function-specific solutions that are capable of meeting cross-
functional reporting requirements, solving the family wealth
information-reporting problem requires reexamination of the family
office structure itself. Families should continually assess how they do
things, similar to how all complex operating businesses innovate and
grow, and ensure that the technology follows.

CHALLENGES IN VENDOR SELECTION Despite the availability of

consolidated financial reporting technology platforms for family
offices ranging from best-in-class, function-specific solutions to
cross-functional, world-class enterprisewide applications, finding and
evaluating the right software vendor can be a challenge. As the
industry that supports family offices has grown, so has the number of
companies who purport to provide consolidated reporting systems to
address the unique challenges faced by family offices. While many
of these vendors are indeed well suited to provide function-specific
solutions, such as in general ledger accounting, portfolio reporting,
and CRM, very few are capable of addressing the needs of family
offices on a cross-functional basis.
The reasons for this are understandable, inasmuch as the family
office industry remains relatively new, and many companies that now
market to family offices build solutions for discrete functional
reporting needs, such as small business accounting, portfolio
management, and sales management. As a result, many of these
technologies are well suited for those functional aspects of a family
office and indeed make up the best-in-class solutions mentioned
here. But while these companies have endeavored to serve family
offices on an enterprise basis by providing solutions in new and
different areas, many have struggled to do so with the level of cross-
divisional functionality that is required.
There are, however, a number of new and existing technology
companies that have successfully developed or integrated
capabilities that allow them to offer enterprisewide financial reporting
solutions. Many of these companies grew up providing financial
reporting software to industries that have needs similar to those of
family offices, such as portfolio management or fund accounting.
Others are newer businesses established by wealthy families
themselves, or multifamily offices (MFOs), built from inception with
an eye toward meeting the diverse, cross-functional financial
reporting needs of family offices. These companies have the benefit
of not being burdened by legacy businesses, or they have
successfully evolved their technologies around serving the complex
needs of wealthy families.

FAMILY OFFICE CONSULTANTS The challenge for principals and family

office executives is to determine which solution is best suited for
their office given their needs, sophistication, level of complexity, and
budget. A number of dedicated family office consultancies have
emerged that specialize in financial reporting needs assessment and
technology vendor selection. Regardless of whether a family office is
looking for assistance in finding a best-in-class, functional-specific
technology or a cross-functional enterprise solution, they should
consider hiring one of these consultants to assist them. The value of
finding the right solution for the family, given the challenges and
complexities faced, cannot be overstated. As mentioned previously,
providing timely and accurate financial information is mission critical
for family offices, their professionals, and their principals. Getting
these important responsibilities right can help the office evolve to
provide other higher-level services and advice, improve decision-
making around investments and expenditures, and greatly assist
with risk management.

Tax Reporting

Income tax planning and preparation constitute an area of significant

focus for wealthy families, and therefore the family offices that serve
them. What follows is a discussion of the best approaches to
delivering and receiving tax advice.3 Tax planning and tax strategies
are beyond the scope of this book.
Wealthy families spend a significant amount of time with their
advisers developing, implementing, and administering complex
income and estate tax-planning strategies. There are obvious
reasons for this, inasmuch as taxes (income, sales, estate, and
others) can be significant expenditures, and ones that can be
mitigated through prudent planning. It should be noted, however, that
much of this planning is not designed specifically to reduce or avoid
income taxation. Rather, some of the most widely used tax mitigation
strategies are legitimate components of broader philanthropic,
multigenerational, and asset ownership/governance plans.
The administrative complexity that robust tax planning imposes
upon a family office can be overwhelming. Wealthy families can have
dozens of entities set up to oversee every facet of their personal and
financial affairs. The majority of these entities require a combination
of federal and possibly state income tax returns, estimated tax
payments, and periodic annual disclosures. They also require
ongoing professional attention and planning with respect to each and
every transaction so as to respect the formalities of the structures
and to avoid unanticipated tax consequences.
Family offices are heavily involved in the tax function for wealthy
families, and it is not uncommon for the first few hires in the family
office to have deep finance and/or tax experience. Indeed, the
ongoing oversight and compliance complexity created through tax
planning is one of the reasons why family offices are set up.

Outsourcing Tax Services

Initially, wealthy families outsource the tax planning and compliance

function, largely because this is how they addressed this need in the
past, long before their complexity grew to a level where they had the
means and motivations to oversee them themselves through a family
office. Family offices, even large and complex ones, continue to
outsource their tax planning and preparation needs to tax firms,
despite the fact that they could bring those services in house. This
approach is not inconsistent with addressing these challenges,
although it does raise a number of considerations, which are
discussed next.

PROACTIVE INVOLVEMENT OF ADVISERS When the tax preparation and

compliance functions for a complex family are outsourced, it is
critical that the various tax and legal advisers be kept abreast of
transactions and activities within the family in as close to a real-time
basis as possible. This responsibility should be shared by both the
family office and their outside advisers. However, ensuring that it
gets done should be a priority of the family office. Top tax and legal
advisers are very busy and, despite a legitimate interest in staying
involved with families, are often unable to do this.
Some family offices address these needs by hiring senior
executives who have a tax background. These professionals can
help spot issues that warrant the involvement of outside specialists,
respond to questions more easily from these advisers, and translate
technical information for the principals and family members.

ADVISERS MUST EVOLVE WITH THE FAMILY It is not uncommon for

wealthy families to use the same tax advisers that they employed for
the past twenty years. One challenge that this presents, however, is
that the issues, complexity, and planning opportunities for the family
today are very different from those with which that adviser had been
familiar. As a result, many wealthy families will need to upgrade their
tax advisers at some point. This is understandable, and normally not
too much of a surprise, for legacy advisers, who may often stay
involved given their ability to cost-effectively address more traditional
and less complicated compliance needs.

RELATIVE COSTS Outsourcing the tax compliance and planning

function can seem expensive to family offices relative to what it
would cost them to deliver the services in house. While this is not an
unreasonable view, the decision of whether to bring tax services in
house should be informed by a number of other important
considerations, as discussed next.

MAINTAINING PROFESSIONAL STANDARDS One of the issues that family

offices need to address if they decide to staff their own tax
departments is how many professionals they need. Proper tax
preparation involves more than just putting the correct numbers on a
tax form and filing it. Tax departments must have sufficient personnel
to provide a level of quality control, including ensuring that multiple
professionals are involved in preparing and reviewing the returns
and that appropriate work paper documentation is maintained.
Related to this issue is the ongoing training that is required of all
tax professionals. Large firms devote a significant amount of time
and money to ensuring that their professionals are kept abreast of
the latest tax legislation and planning concepts. These firms also
have the benefit of multiple wealthy clients, with whom they both
learn and share experiences. Family offices will struggle to provide
these elements for their professionals and thus should go out of their
way to ensure ongoing professional education and access to peer
networks.

ADDRESSING MANAGERIAL ISSUES Family offices will also have to

handle the traditional managerial issues that come with overseeing
multiple staff members. This would include ensuring that the staff is
properly supervised and supported. Related to this issue is “key
man” risk, especially in tax departments where only a few highly
technical professionals are employed. These professionals have a
tremendous impact on the family office if they were to leave because
of the detailed legacy information they possess.

Information System Management

Trends Shaping the It Landscape for Family Offices

Making IT-related decisions for a family office is markedly different

than it was in the early 2010s.4 Without understanding the dramatic
changes that have taken place in technology, it is easy for family
office executives to make decisions that are costly and ineffective
and can needlessly burden the family office enterprise for years to
come. Family offices struggle with finding IT talent and solutions that
can help satisfy their desire to have someone with both large-
enterprise experience and strategic thinking, as well as the ability to
roll up their sleeves and solve acute problems.
Historically, the IT industry was built around hardware and
software sales, proprietary protocols, and long-term service and
support commitments. Over the last handful of years, this paradigm
has shifted dramatically as a result of significant advances in
software, hardware, and cloud computing that moves the server
rooms off site and enables remote operations and shared resources.
 A robust industry of IT companies has sprung up to provide
support services for small and medium-sized enterprises (SMEs)
and large, multinational corporations. These firms, known as
“managed service providers (MSPs),” have benefited from the trend
toward outsourced IT functions. The value proposition includes lower
and more predictable costs from shared economics and a
preemptive as opposed to reactive position for managing issues as
they arise.
Family offices, however, are not SMEs, nor are they large,
multinational companies. Family offices are rarely started as de novo
entities built with a robust strategic planning process. They are often
put together in an ad hoc fashion or are simply the outgrowth of
management companies formed informally over time to manage the
personal and financial affairs of the principals and their families.
Therefore, the following challenges and questions tend to arise as
family offices look at building and maintaining their IT capabilities:

• Do we use the IT assets of the operating company (if one exists related to the
family office principals)?
• Do we hire an IT professional in house to develop and maintain our systems?
• How do we hire the right IT consultants and firms to design, build, maintain, and/or
review our IT services?
• How do we determine what IT services and devices we actually need, and how
much should we realistically spend to obtain them?
• How can we build a flexible model that can adapt to future needs?
• How can we build security into these systems?
• How will we handle mobile devices?
• How can we communicate electronically in a secure and efficient manner?
• How do we store and protect our digital “crown jewels”?

Unfortunately, many third-party IT service and support providers

are not familiar with the vicissitudes and characteristics of a family
office. They view family offices as an emerging client type and often
confuse significant wealth with significant resources to spend on IT.
The reality is that family offices rarely have significant IT budgets,
but they do have to cater to the specific needs of principals who
value efficiency and convenience.
 Furthermore, most IT service providers have not adapted as
quickly as digital technology has advanced. In many cases, the
providers’ business model is “break-fix,” a term used to describe a
typical business transaction in which the customer breaks something
and calls the IT services company for support, a technician is
dispatched to the job, more hardware and software are sold, and the
enterprise receives a bill for labor and other expenses.
The prevailing break-fix model supports the antiquated structure
of the IT services provider. In many cases under this scenario, family
offices are left not just with unexpected expenses, but also
overengineered solutions that leave executives and principals
confused, frustrated, and struggling to realize value from the
expenditure. As a result, the interests of all family office constituents
are compromised.
Technological progress is disrupting the traditional IT service and
support industry for the benefit of consumers. Software is
increasingly replacing the need for local hardware. Cloud computing
is providing the ability to monitor and manage IT operations
remotely, with resources and expenses shared across multiple
customers for increased service levels and cost benefits. This “as-a-
service” approach provides preemptive service to reduce unforeseen
operational interruptions and unpredictable IT expenses.
Another important consideration for the family office when making
IT-related decisions concerns technological protocols. Protocols are
set rules for technology operations and the coordination and
communication across various components. Many entrepreneurs
and technology companies have made a fortune by developing and
enforcing proprietary protocols for their products and services. Once
again, advancements in technology are challenging the legacy
model by shortening product cycles and opening standards. As a
consumer, the family office gains by having access to increased
options, lower prices, and greater compatibility across components.
However, this access is not always easily understood, given the
amount of jargon and orientation of current IT service companies.
When making IT-related decisions, family office management should
consider and weigh alternatives carefully with a view toward these
changes in technology, and remain open to benefiting from advances
in innovation and increasing value from products and services.

Developing an It Infrastructure Strategy

While some aspects of IT infrastructure will vary by the family office

and its particular circumstances and needs, the most important
elements to consider are held in common by all. The best place to
start to look at IT infrastructure is at a macro level, where family
offices can view the overall topology. Once this is well understood,
executives will be better positioned to consider the various
components and their relationships within their domain of operation.
For the family office, when including the logistics of member-families
and remote offices in the purview, it is clear when complexities are
compounded and risks are increased.
See figure 4.1 for a framework that family offices can use to
design, establish, and support their IT infrastructure strategy. This
framework can be used with external consultants, internal IT experts
in an operating company, dedicated family office IT staff
professionals, or a mixture of all of these.
Figure 4.1 IT flowchart

The Topology

Grasping the physical and virtual nature of IT infrastructure requires

an element of visualization that sorts and arranges the various
components. An end-to-end module approach is increasingly
effective for planning and plug-and-play provisioning of components.
The strategy is consistent with technological trends and extracting
maximum value from IT-related expenditures, including service and
support.
Office management should solicit input from family members
when defining the scope of IT-related responsibilities. The possible
scenarios range from full centralization and integration into the core
functions of the family office, including service and support, to a hard
line between office professionals and family members, where each
population is served separately. Anywhere on the scale, it is
increasingly effective and affordable to provide digital autonomy
without compromise while reducing risk.
While illustrating a modular view of a family office’s IT
infrastructure is helpful, it is important to remember that the
landscape is constantly shifting and the future will continue to
present tremendous change and new challenges. Exponential
increases in Internet-connected devices, such as the Internet of
Things (IoT), is propelling the expansion of the surface of IT-related
concerns and requirements. The role of family offices in providing a
technology infrastructure that serves their constituents is increasing,
as is their role in managing the associated rising risks. As a result, all
IT should be considered infrastructure for cybersecurity and risk
mitigation.

Software-Defined Wide Area Networks

A technology trend that family offices should be aware of and

consider is the software-defined wide area network (SD-WAN). This
technology uses the public Internet to provide a private Internet
experience. The results are bandwidth improvements and better
network performance with significantly increased security over
traditional networks.
SD-WAN solutions provide comprehensive protection across the
network and devices, including:

• Next-generation firewalls
• Secure and intelligent direction of traffic
• Real-time antivirus protection
• Intrusion prevention system (IPS)
• Application control
• Secure Sockets Layer (SSL) deep-packet encryption inspection
• Web filtering to block browser risks and threats
• Data loss protection (DLP)
• Bot and distributed denial of service (DDoS) attack protection
• Phishing prevention
• A virtual private network (VPN) with end-to-end security
• Automatic Internet service provider (ISP) failover

SD-WAN technology can potentially assist family offices to

manage the proliferation of personal information on the Internet and
the increased number of Internet-connected devices, and to protect
dynamically against threats across the IT network.

Leverage Specialization for Planning and Implementing

Resources to manage the challenges of IT infrastructure for a family

office today should include some kind of a specialist, whether in
house, outsourced, or a hybrid model. The value of good advice will
skyrocket, while uninformed decisions can be damaging on multiple
levels.
The specialist should be instrumental in the mapping of the
macro view; consider IT infrastructure, physical security, and
cybersecurity as one; and have advanced knowledge and
experience in both aspects. The specialist should be intellectually
and conversationally proficient and current with all subcomponents
and be able to identify best-in-class providers for each. Depending
on the family office size and budget and the level of expertise in
house, the specialist can be an internal or external individual or
team. Typically, for most family offices except for the largest, an
outside specialist is recommended. Finally, IT specialists who focus
on cybersecurity are rarely completely conversant on developing and
maintaining an IT infrastructure. The skill sets for these two roles are
very different, and family offices should be cognizant of these while
leveraging internal resources or seeking outside consulting.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

John initially sought out Jason to help him because he was familiar
with the issues around bill paying, reporting, and taxes. Jason is well
suited to help him given his background as the chief financial officer
(CFO) for an operating company. The challenges are that the needs,
technologies, and personnel resources available to a family office
are both similar to and different from businesses. Finance
professionals new to the family office often struggle to find the right
solutions and invariably go through a learning process as they try to
adapt technologies and use vendors that were not designed for the
unique needs of wealthy families. Jason must also learn how best to
conduct services in house as opposed to outsourcing, while
balancing cost efficiency and quality control.

Case Questions

• What are some items that Jason should consider to improve the family office’s bill-
paying policies and procedures?
• Should the family office consider a different general ledger accounting system?
• Should the family office consider a different consolidated reporting solution?
• Should the family office use a technology system that automatically integrates the
general ledger system with the consolidated reporting system?
• How can the family office improve their tax preparation and planning?
• How should a family office establish and maintain their IT infrastructure?
 RECOMMENDED SOLUTIONS

Responses to Case Questions

What are some items that Jason should consider to improve the
family office’s bill-paying policies and procedures?

As would be expected given Jason’s background, the bill-paying

procedures for the family office are professional. He has adequately
staffed the office for what is a necessary, important, and very time-
consuming responsibility for all family offices. This size of a team
allows him to assign specific roles and responsibilities and to
segregate duties, which provides an important level of fraud control.
One area for improvement to consider would be a more formal
expense procurement, documentation, and approval process. This
would help ensure a greater level of budgetary controls because new
purchases could not be authorized before orders are placed. Further,
while it is convenient for Michael to be able to sign checks, the family
office should consider setting a limit to the expenditures that he can
approve before requiring John’s authorization.

Should the family office consider a different general ledger

accounting system?

There is an important balancing act with family offices between ease

of operations and breadth of general ledger capabilities. Many family
offices should err on the side of ensuring the former in light of their
primary needs because there are legitimate costs (staffing,
complexity, and other issues) of using general ledger systems that
are more complex than what a family really needs. In this case, the
general ledger system is meeting the needs of the family office for
reporting on office costs, bank reconciliations, expense management
and budgeting, and other items. Issues tend to arise when the
general ledger system isn’t integrated with the consolidating
reporting system. Many times, the integration takes place by
manually using a spreadsheet to combine key elements from each
reporting system. For now, the system that the family office has in
place seems to be working for them. However, the inclusion of a
manual process for combining the two reports is less optimal and
introduces both inefficiency and the risk of human error.

Should the family office consider a different consolidated reporting

solution?

The current consolidated reporting technology used by the family

office is more limited than the general ledger system in meeting their
needs. This situation exists because the consolidated reporting
solution was designed to report on a liquid portfolio. In this case, the
family has significant nonmarketable investments and an additional
need for partnership accounting. For these reasons, the family office
should consider using a different consolidated reporting system that
is built more specifically to meet their unique needs. This system
would allow them to better report on nonmarketable securities,
across all entities, where the pro rata interest of each of the
constituent owners is accurately represented without requiring
manual intervention via the spreadsheet summary report.

Should the family office use a technology system that automatically

integrates the general ledger system with the consolidated reporting
system?

A significant issue with the family office’s current reporting

technology and procedures is that the general ledger system is not
integrated with the consolidated performance reporting system. As
discussed previously, this requires a manual interface each month
that not only is time consuming, but also introduces the risk of
human error. There are integrated general ledger–consolidated
reporting technology solutions built specifically for these types of
family offices. The trade-offs when using integrated versus stand-
alone technology are depth of functionality and complexity of use.
One consideration for the family office would be to change its
consolidated reporting technology to one that addresses broader,
more family office–specific needs but does not integrate with the
general ledger. If they did so, they would have satisfactory solutions
for both reporting needs. They might also review whether they really
need to summarize the general ledger and investment reporting for
the monthly financial reports because this is a time-consuming
process that is prone to human error. Many family offices are fine
with reporting the two separately and welcome the efficiencies and
data safeguards that doing this provides.

How can the family office improve its tax preparation and planning?

Professional tax planning and compliance can become quite

expensive for family offices, given the number of entities they use,
the level of activities, and the need to integrate tax planning into
most of their significant financial decisions. For these reasons, many
family offices bring tax preparation and planning in house to reduce
costs and more easily integrate tax expertise into their decision-
making. However, there are downsides to preparing tax returns
internally including key person risks, ensuring quality control,
providing ongoing training, and having access to a diverse set of
experiences and expertise. This is particularly true if the tax
department is small, as is the case with Left Seat Management.
Jason should consider augmenting his tax team at Left Seat
Management by hiring a junior tax preparer and/or having an
independent tax firm review their tax returns and be available for
consulting and planning. Under this approach, it will be important for
Ed to keep the external advisers abreast of transactions and
planning within the family office so that they can stay current and
add to his expertise.

How should a family office establish and maintain their it

infrastructure?

Few professionals who work for family offices have a deep

background in IT. As discussed previously, traditional professional
backgrounds for family office employees are finance and accounting,
investments, legal, and tax. Furthermore, because family offices are
established to meet the needs of principals and their family, they are
generally structured to make interactions as efficient as possible. IT
strategies are no different. These characteristics influence the
development of IT infrastructure greatly and introduce potential risks
as a result. Security is often sacrificed over convenience, IT budgets
are light despite the fact that the data that needs protecting is
extremely sensitive, and the family office rarely grows to a size
where they can hire an internal IT expert. However, just because an
internal resource is rare, family offices have plenty of excellent
outsourced and managed IT solutions available to them to support
their activities. The key is to find an IT vendor or consultant who has
experience working with family office clients.
Jason should focus on IT infrastructure, policies, and training to a
much greater extent than he would in a traditional corporate
environment since he no longer has the luxury of having an
operating company’s IT department to rely on. As with numerous
other areas where he has needed specialized guidance, he should
use his network of other family offices and professional advisers to
find technology solutions and a risk management consultant who
specializes in working with family offices and SMEs.
 CHAPTER FIVE

Lifestyle

CASE STUDY

Summary

• One year after the creation of the Left Seat Management family office
• Complexity of overseeing properties and lifestyle needs
• Considerations when flying privately

Key Words/Concepts

• Lifestyle management and concierge

• Estate and residence management
• Private aviation

Challenge

With the creation of the family office a year ago, daily life for both
John and Sofia became quite enjoyable. They were still just as busy
as they had always been, but now they were spending more time on
things they wanted to do and enjoying the finer things in life. The
family was living in their dream house in Glencoe and had a beautiful
ranch in Wyoming to visit in the summer and a luxury estate in Cabo
San Lucas in the winter. Getting to each property was also much
easier, as the family started to fly privately for almost all their trips,
albeit in chartered aircraft as opposed to in their own personal plane.
John and Sofia were also becoming much more engaged in the
Northshore social scene, attending and hosting numerous dinners
and parties, holding charity fundraisers, and taking weekend
getaways with friends.
What came as a surprise to them, however, was the amount of
time they still needed to devote to the planning for each event or trip,
including managing invitations and guest lists, making reservations,
securing venues, and preparing their homes before the visits. There
always seemed to be something that needed to get done, was
overlooked, or could have been done better.
Despite the great help that Janina provided, she was still mostly
John’s executive assistant; she did not have the time, experience, or
resources needed to take over these responsibilities for the entire
family. The family office’s finance staff also tried to help, but their
availability varied based on whether they were in the midst of
preparing monthly financial reports or helping Ed with the family
office’s taxes. It was becoming clear to both John and Sofia that they
needed dedicated help in these particular areas.
John was also getting ready to buy two private planes at last. He
had done all his research and knew what he wanted—a King Air 350
and a Challenger 350. The King Air was perfect for the relatively
short trip to Wyoming, while the Challenger could take the whole
family to Cabo San Lucas. While John was a pilot and owned a small
plane, these were significant investments that required management
and staffing beyond his means. He knew, though, that the
Challenger was more plane than he needed for the trip to Mexico
and that there were certainly less expensive options given the
number of hours he flew each year.
 Michael and Jason were asked to look into hiring someone who
could help with the scheduling and perhaps the residences. John
was comfortable taking the lead on acquiring the new planes,
although he mentioned to both Michael and Jason that they would
have to help him get up to speed on all the various ownership, tax,
insurance, and related issues.

BACKGROUND INFORMATION

Managing Lifestyle

Wealthy families typically travel a great deal; own multiple homes;

enjoy going to premier sporting, social, and artistic events; and often
collect wine, artwork, and automobiles. When the responsibility for
ensuring that these activities are executed effectively falls on the
shoulders of the family office, it is incumbent on the office to hire staff
properly to meet these needs. The family office must also become
expert in these areas, or at least know where to go to obtain this
expertise and these services. With few exceptions, it is typically best
to outsource these responsibilities to qualified service providers in
each of the areas. However, outsourcing the duties does not absolve
the family office of their responsibility to oversee, coordinate, and
periodically reassess how services are being used and delivered.1
As with consolidated financial reporting, an industry has
developed around helping wealthy families with these needs, and a
number of specialty service providers have emerged. Despite this,
providing concierge services to wealthy families is still very
challenging, so it warrants a great deal of attention by both staff and
senior management. Problems will always surface in the delivery of
these services, and because they affect the principals and their
families directly and are very important to them, they become
important to the family office. Family offices often will dedicate a
number of staff members to managing these functions and the chief
executive officer (CEO) will oversee the service delivery personally.
For the purposes of this discussion, services include the
following:
 • Event planning
• Travel advising
• Special events and extraordinary experiences
• Dining reservations
• Errands
• Household services
• Personal assistants
• Personal chefs
• Personal shoppers
• Professional organizers

The challenges that family offices face when providing these

services generally fall into one of the following categories: how to
find and hire the right staff, knowing about and working with the right
third-party service providers, and managing expectations and the
delivery of services. They are discussed in the next sections.

Finding and Hiring Qualified Staff

When making hiring decisions, the most important things to look for
in a concierge and lifestyle management professional is a genuinely
warm personality and a desire to be of service. This is a challenging
job for the reasons described herein, and it requires a particular type
of person in addition to job experience. Key qualities include the
following:

• In-depth knowledge
• Attention to detail
• Responsiveness
• Sense of ownership
• Flexible and able to multitask
• Resourceful
• Ability to stay on top of lifestyle trends via reading blogs, magazines, and other
lifestyle resources
• Ability to juggle multiple family priorities and interests when planning
• Discretion
• Ability to negotiate contracts and manage outsourced vendors when required
• Ability to budget and account for expenses accurately
• Sense of taste and style that aligns with the hiring family’s sensibilities
Typically, the world of hospitality management (e.g., hotels,
corporate or residential buildings, and sports arenas), event
planning, and public relations are great places to start to find this
individual.

Needs Assessment

To ensure the right solution, it is helpful for the family office to first
understand the family’s needs—the frequency, the complexity, the
type of access and dedicated attention required, and modes of
communication. After the needs assessment has been completed,
the family office will be in a better position to search for, reach out to,
and begin evaluating providers.

Finding and Evaluating Third-Party Service Providers

The same qualities stated previously that apply to in-house staff are
true for evaluating and engaging a third-party provider. While many
providers say that they do many things and/or provide services
across all industries, most providers have an expertise that may or
may not dovetail with what the family office requires. Some
companies handle real estate, some professional athletes, some
celebrities, some hedge fund principals, and others deal with wealthy
families. Each has different approaches and areas of expertise. It’s a
good idea to inquire about their core base of customers because the
needs of the audiences vary greatly.
The industry is comprised of everything from small boutique
purveyors with niche specialties to vast multinational call centers
with global reach and capabilities. There has been a great deal of
consolidation in this space over the last ten years to achieve better
access and economies of scale. One of the challenges as the
industry evolves and the players grow in size is maintaining an
appropriate level of client engagement and intimacy, particularly with
multicity call center companies.
 Types of Service Providers

One of the first considerations is to understand the kinds of services

and transactions that are required. Some firms are geared more
toward everyday, transactional types of work, while others have deep
reach in creating extraordinary experiences (although rarely do the
two coincide at a fundamental level). It is also important to try to
match the personalities of the service providers to the family. Some
lifestyle concierges have a flashy style of interaction and delivery,
while others are more behind the scenes and private. The service
delivery will be more seamless if the company and its
representatives match the desired style and approach of the family.
Another critical element of needs assessment is to determine
how the majority of services are delivered and how they stack up
against the family’s wants and expectations. Answer the following
questions:

• Does the family want to be able to call a professional and have a lengthy discussion
and weigh alternatives when they have a request?
• Would they prefer to e-mail their requests and get an answer back?
• Do they prefer a mobile app that would allow them to select from a range of
services and perhaps even see real-time availability for selected options?
• Once the company is engaged, will tasks be managed by a team or by one
individual?

In all cases, it is important to ensure that there is good chemistry

and communication between the provider and the family office
manager.

Fees

One important area to consider is fees. Should the family office

engage service providers on a project-by-project basis or on a
monthly or annual retainer? If a retainer, how is that bounded by the
scope of work so there is a fair expectation of service delivery on
both sides? Concierge service providers typically make money both
from fees from their clients (which could be annual memberships,
monthly retainers, or a guaranteed number of requests, with a cost
associated with each type) and from referral fees or commissions
from the vendors that they refer. It is important to understand the
economic model of the proposed provider. The family office will want
to have some insight and transparency into the economics that the
concierge provider relies upon so they can accurately assess their
recommendations and identify where there might be biases or
conflicts of interest.

Extended Service Providers

Another challenge in managing experiences is when service delivery

is done by extended third parties, often in other states or countries.
For this reason, using and relying on trusted partners that have
experience with the unique needs and demands of wealthy families
are very important. It is also critical to have a written scope of work
detailing expectations, communication frequency, and type and
budget/accounting requirements. Having a clear delineation of the
engagement up front will give both parties a road map for how best
to manage service delivery.

Credit Card Concierge Services

If the family is just beginning to evaluate their lifestyle needs and

wants to minimize costs and try the service benefits, one area that
may be effective is using their credit card provider’s concierge
solution. There are many benefits—it is typically staffed around the
clock, has access to a vast database of content, is knowledgeable
about past requests, and has access to top managers at the property
or venue to help expedite requests. In addition, these companies will
have negotiated relationships with all sorts of desirable partners that
may provide great access, value, and a first look at many types of
lifestyle activities, including restaurant reservations, travel upgrades,
and premier experiences.
The downside to using this type of service is that depending on
the level of card, the family may not have a dedicated provider and
may have to engage with different employees each time they have a
request. The service can also vary widely, and while the service
representatives are helpful and service oriented, they typically sit in a
call center, occasionally in other countries, far from the areas where
the family lives, works, and plays. They also understandably will not
have intimate knowledge about the family and their proclivities.
Credit card concierge services are a great solution if the family
knows exactly what they want (and when) and simply needs
someone to help them get it. But it is not a great resource for
meeting highly curated desires based on personal experience and
expectations.

Managing Expectations around the Delivery of Services

For lifestyle and concierge staff, managing service providers,

delivery of services, and expectations of the principals and/or family
members is a critical part of the job. It is also the reason that these
services should often be overseen in house and delivered by the
most qualified and experienced third parties. Senior management of
the family office, including the CEO, must stay involved and be
aware of what is being requested by the family, how it is to be
accomplished, and what issues may come up in the delivery of the
services.
A recurring challenge when delivering concierge services is that
expectations regarding services are often set based on prior
experiences. This can be challenging for family office professionals
because both poor service and exceptional service can cause
challenges. Poor experiences obviously reflect negatively on the
family office regardless of whether the office could have anticipated
or better managed the delivery. No matter how well a family office is
prepared, one small thing will come up and could derail the
experience and lead to dissatisfaction of a principal or family
member. Family office executives and staff must be prepared for
these inevitable occurrences and be able to handle the issue
graciously. It is a good idea when evaluating a company to ask about
instances where things have gone awry and how they have handled
and rectified the situation.
Somewhat counterintuitively, great experiences by the family can
also have a negative effect, in that prior experiences often set an
expectation, or high-water mark, for what can and should be
achievable each and every time. Sometimes lifestyle management
and concierge professionals are able to accomplish the impossible
(e.g., get backstage passes to a sold-out concert, obtain impossible-
to-get dinner reservations on short notice). However, these
achievements are not always possible for every request. Therefore,
setting expectations about what can be accomplished should be part
of ongoing discussions with the principals and their family. It is
important to note that at times, the issue is not lack of access or
expertise by the concierge, but rather circumstances outside their
control (e.g., not being able to secure a reservation at the French
Laundry because the restaurant is full for the evening).
One key point is to let the service provider know when the family
has flexibility and can accept alternatives so that they can be
provided with choices—room type, dates, theater seating, choice of
cuisine, time of reservation, and so on. It is always helpful for the
concierge to be provided with guidelines so that, in the moment, they
can make decisions on the family’s behalf. This is critical when
rooms, tickets, or reservations are in high demand and are selling
out fast.

Managing Estates

Wealthy families rely on a circle of trusted advisers, both inside and

outside the family office, to oversee their financial assets. However,
much of their wealth is often invested in multiple residences, art,
aircraft and watercraft, and other luxuries whose value often exceeds
their other investments taken in the aggregate. Given the unique
nature of these assets and the ecosystem of services they require, a
family’s personal service organization—the other side of the family
office—is frequently run separately or in parallel to the family office.
The sheer scope of the responsibilities involved in running a
significant estate, if misunderstood or underestimated, can present a
serious risk to the family and their property. Understanding the
ecosystem and the pressures and risks that it accrues is key to
building an organizationally coherent and skilled estate management
and private services team.2 An equally important benefit of this
understanding is being able to quickly assess risks and identify when
to bring in additional or outside resources.

Understanding the Ecosystem of Physical Assets and Personal

Service

Estate management and personal service organizations that support

wealthy individuals and families can be understood to form an
interactive, interconnected network of parts that together create the
framework for their lifestyle. The strength of this network can be
evaluated based on the health of nine core components and their
related areas of focus, as illustrated in figure 5.1.
Figure 5.1 Nine core components of estate management Source: Anne Lyons and Judy
Boerner-Rule, Tapestry Associates, LLC, 2019.

Performing a situational assessment of each of these areas

regularly can identify strengths, opportunities for improvement, and
most important, risks to the family, their property, or both. An
unaddressed weakness in one area will ultimately affect others. For
example:

• A poorly integrated technology system can undermine communications,

compromise security, and put the physical safety of the family and property at risk.
• Deferred maintenance can lead to erosion in asset value, insurance claims arising
from safety issues, and inconvenience to the family.
• Careless or inadequate staffing can result in costly turnover, personal theft, and
endangerment of family privacy and security.

The family, their personal staff, or the family office can use the
assessment findings to develop and implement solution strategies,
either internally or with the assistance of outside experts. Next, we
discuss three of the more challenging aspects of the estate
management ecosystem: (1) property and facilities management; (2)
operations: staffing and personal services; and (3) special projects:
capital projects and new construction. Tools are provided in each
section to help illustrate and assess some of the risks associated
with each one and to help families and staff know when to engage
outside resources.

Property and Facilities Management

Property acquisition happens organically. Over time, a property

portfolio will often become geographically dispersed or, by virtue of
their asset class, will literally span land, sea, and air. By the time a
third home or a yacht or private jet is added, personal enjoyment can
be overwhelmed by the unforeseen time, investment, and staffing
infrastructure that managing these assets demands.
 Estate properties at this level are “commercidential”; that is, a
hybrid of highly finished, personalized architecture combined with an
infrastructure of commercial size and complexity. These residences
and estates are frequently custom built, occupying significant square
footage, associated acreage, or both. In addition, it is not uncommon
for at least one property in a family portfolio to have a commercial
aspect, such as a ranch, farm, or vineyard. Privacy and recreation
interests frequently equate to homes in remote locations subject to
extreme climates—the tropics, for example. If a property is not a
primary residence, a family’s use pattern can vary considerably,
affecting the property’s security profile and vulnerability.
Without a mechanism for strategically analyzing and organizing
the management of these properties when they come into the
portfolio, families risk staffing and operating redundancies and an
exponential increase in the risk to the physical asset itself. The
following questions will help a family understand the impact of a
property acquisition to the portfolio and themselves personally:

• Has there been sufficient due diligence prior to acquisition to determine whether
local resources can support and service the property?
• What will it require to meet the family’s needs?
• What are the anticipated operating costs at one, two, and five years after purchase
relative to the expected time that the asset will be used annually, its projected long-
term hold, and its expected return on investment? Inevitably, the answers to these
questions will affect how much a family is willing to invest in staffing, maintenance,
and capital improvements.
• Will the property be staffed full time or part time?
• Will staff be shared or relocated from another property? If new, will they be hired in
house or outsourced?
• Will the property be available for guests as well as family members?

Operations: Staffing and Personal Services

The delivery of personal services is the product of staff and

operations. No two families are the same. There is no boilerplate
model for how a family may choose to live in and operate their
residential assets. When evaluating the operations of a property and
its associated staffing requirements, a balance needs to be struck
between the physical requirements of a property and a family’s
specific expectations regarding their privacy, cost tolerance, and
personal services.
Many families have strong, well-functioning staffing models in
place to support their property and personal living requirements.
However, when families add to their portfolios and move into
substantially larger and/or more complex residences, the models that
worked previously can quickly become strained. This tension may be
evidenced in a variety of ways:

• Reduction in personal privacy and security due to increased staff or vendor

presence, access, and opportunity
• Failure to consistently maintain physical assets at levels required to protect their
value
• Increase in costs related to the repair and triage of insufficiently maintained assets
• Strain on previously well performing staff members or vendors due to expanded
responsibilities
• Service quality reductions or inconsistencies due to inherited service assumptions
incompatible with new requirements
• Steep learning curve and communication requirements for both family and staff
• Lack of resource expertise and surge support in specific operational areas,
including security, collection management, event management, specialty
housekeeping, and storage management

Staffing Considerations

Private family staffing is a delicate and expensive process. Families

of significant wealth, along with the advisers who serve them, face
unique challenges and high stakes when recruiting a crucial member
of private family staff. With confidentiality concerns, personal and
financial risks, and highly specific or broad skills requirements, the
process and final candidate selection can be precarious if handled
improperly. When hiring senior or executive-level staff, an objective
placement adviser, in addition to a recruiter, can help ensure a
placement’s success. The layer of cost that this adds should be
viewed as an investment in ensuring successful, long-term
placement.
When embarking on a staffing search, families should always
inquire how their safety, security, and confidentiality will be handled
throughout the process and how they will factor into recruiting
candidates. A solid placement process should be initiated with a
presearch interview and needs assessment with the family to craft a
job description to target desirable candidates most effectively.
Ideally, the process should also include a postsearch position
integration and performance measurement plan that lays the
foundation for a new hire’s success and a family’s long-term
satisfaction. All candidates should undergo and pass a thorough
background investigation prior to the final interview with the family or
family office.
As a standard practice, or with the addition or sale of a property,
a family and their personal service organization should consider
engaging an estate management consultant to undertake periodic
organizational and operational assessments to identify new staff
subject matter or skills requirements, or to realign current staff
responsibilities with service expectations and property needs.
For example, such an assessment can highlight the skill-
leveraging that evolves when staff members assume responsibilities
beyond their core expertise for fear of dismissal if they decline such
duties. Over time, if the performance of an otherwise functionally
effective employee is compromised, families can end up receiving
mediocre results or services. This circumstance increases the
likelihood that the employee will leave or be terminated. The
resulting staffing gap increases the risks to both the family and their
property and generates costs in both the time and expense required
to find and train a replacement.
These assessments also support the design or update of staff
retention and development strategies and compensation and
benefits packages, and serve to identify and underscore best
practices to improve operating efficiencies without sacrificing
personal asset values.
 Special Projects: Capital Projects and New Construction

Estate managers are often required to have project management

experience, which is put to the test when they are tasked with
overseeing capital improvement projects, renovations, or new
construction. Subject to serious financial risk and combining the
complexity of a commercial building with the personal nature of a
home, estate construction projects present a significant commitment
of time, money, and emotion. As such, they can strain even the most
accomplished staff and personal service organizations.
Depending on the size, a typical estate construction project can
involve multiple contractors and consultants. Monthly billings can
quickly escalate to six or more figures. Those metrics alone are
equivalent to establishing a stand-alone company for the duration of
a project, but without the benefit of a dedicated CEO or chief
financial officer (CFO).
Communicating the workload required to oversee and manage
such projects is crucial to executing the family’s overall vision. Given
these realities, the family, their family office, or their personal service
organization should consider engaging an owner’s representative or
construction manager to oversee their project. These professionals
generally have many years of experience working in design and
construction and can provide the family with the necessary guidance
for them to define and balance their scope, cost, time, and quality
expectations.
The following questions and principles can help in determining
whether outside professional assistance for a project is necessary:

• Is there a strategic project plan? Families should take the time to assess their
scope, cost, schedule, and quality goals before starting a project. Developing a
strategic project plan will help the family understand their project priorities and save
time and money.
• How has the project been budgeted? Knowing the difference between a
construction budget and a project budget, an owner’s representative or construction
manager can accurately budget the project’s hard (building) and soft (consultants,
legal, insurance) costs so that the family is sparred unforeseen budget surprises.
 • Does the staff have the time and skills necessary to devote to the project?
Identify knowledge or experience gaps that can pose a risk to the family and a well-
executed project.
• Understand that every project is unique. Project support should be scaled to the
individual needs of a family and their project. A family may have the internal
resources to support some projects but not others.
• Understand the purpose of a project schedule. A sound project schedule allows
a project to evolve, while reducing impact to the family’s budget, minimizing
compromises to quality, and providing adequate time for operational turnover.
• Keep a lid on surprises, but know that they happen. Surprises and bad news
happen with projects of this level of complexity. Bad news delivered early allows a
family to exercise their full capacity in decision-making and saves them the added
aggravation of surprise if the news is delivered too late.

Special Projects: Event Planning and Management

Families of substantial wealth and their personal service

organizations often have the opportunity and challenge of executing
significant and complex events at their personal properties and/or
unique destinations, both domestic and foreign. These events can
range from social milestone celebrations to corporate, philanthropic,
or political gatherings, where the personal and financial stakes are
quite high.

Understand That It’s Never “Just a Big Party”

The project management requirements of significant events are

frequently underestimated by both the family and their personal
services organization. Given the nature of milestone events and
celebrations, whose costs can run into the millions, the assumption
that an event is anything other than a complex project can create
avoidable pitfalls. Household staff, regardless of their relevant
experience, can be tasked to lead this planning. Having the staff do
more in house may appear to make economic sense, as they are
already intimately familiar with personal family entertaining
preferences and their household management protocols. However,
such assignments can tax their skills, compromising their ability to
perform their normal daily responsibilities. The risks here are
threefold: (1) failing to meet the family’s expectations for the event,
(2) causing strains on the staff’s day-to-day service to the family, and
(3) incurring budget overruns.
As with the delivery of all personal services, working with the
family to define and balance event scope, cost, time, and quality
expectations is crucial to successful delivery of a complex event. An
experienced estate manager would not hesitate to bring in an
outside caterer or valet-parking service to support a large, complex
event. The same consideration should be given to outsourcing event
project management and coordination, especially in the case of high-
profile political fundraisers, business gatherings, or multiday social
milestone celebrations.

Event Management Components

Strategic partnerships with an event manager or event management

firm can be highly beneficial to a family, their family office, and
personal staff. The following is an overview of the key event project
components required to successfully manage a significant event. A
careful review of these components will help guide the determination
if outside professional assistance is needed:

• Event branding and creative concept design, including invitation design

• Guest RSVP and personal service support
• Complex event production services, including thematic set design, stage build-out,
lighting, sound, creative media content production, livestreaming, and photo and
video services
• Lodging and transportation management (over air, land, and sea)
• Premier entertainer sourcing and contract negotiations
• International protocol considerations
• Physical and personal security logistics: guest and venue, event staff background
screening, and press and social media monitoring and control
• Complex reporting and communication matrices between interrelated entities (i.e.,
key corporations or philanthropic organizations, governmental agencies, etc.)
• Rigorous financial budgeting, forecasting, and reporting
• Culinary menu design and catering services
• Family communication mechanisms
 • Current personal staff workload, projects, and priorities and what will be affected if
attentions are turned toward them

Engaging a Third-Party Specialty Business Provider

Wealthy families and their family offices surround themselves with a

variety of trusted advisers for counsel on their legal, financial,
investment, and other related matters. While risks to their property
and personal experience are arguably as serious as risks to their
nontangible assets, families and staff can discount these challenges.
The family may view third-party advisers as an unnecessary
expense, or the staff may see them as a threat to their employment
or comfortable status quo. Instead, families and staff should be
encouraged to regard these providers as invaluable resources that
can ensure that properties are overseen with the same rigor as their
business assets and who can allow personal staff to remain focused
and successful in their core areas of responsibility.
When advocating for a third-party provider, it’s advisable to
assess the need and perform a cost-benefit analysis—essentially
develop a business case that supports the request. Proper due
diligence in sourcing a third-party adviser mandates speaking to
multiple providers to compare their skills and experience, confirming
that nondisclosure agreements (NDAs) are in place before such
discussions, and verifying each provider’s references and insurance
coverage before requesting proposals and presenting them for
consideration.

Situations That Warrant Third-Party Service Providers

In addition to the areas of risk already noted, engaging a third-party

provider in the event of any of the following circumstances will return
meaningful benefits to the family and their staff:

• The scale or complexity of a personal property portfolio has become overwhelming

in both size and service requirements.
 • A family feels that their lifestyle needs are being subjected to wealth stereotyping or
no longer feel that their priorities are understood.
• The property portfolio contains five or more homes in unique destinations, changing
the relationship between a family and their real property from enjoyment to work. A
third-party adviser can help a family rediscover the enjoyment of owning these
special assets.
• Service requests and property maintenance are falling behind, rendering properties
unavailable for use or disappointing the family when they are in residence. A third
party can help triage property issues, develop a plan for getting caught up, identify
ongoing staff needs, or surge support to avoid recurrence of problems.
• Greater accountability is desired in contracting, budgeting, and managing estate
expenses. A seasoned estate management expert can create a valuable bridge
between the family office and the family’s personal organization.
• The family office is charged with requests outside their fiduciary charter due to the
limitations of a family’s personal service organization, whether staff size or
experience. Third-party advisers can be a strategic partner in this instance,
enhancing the family office understanding of the family and enabling them to
provide insightful, effective service.
• The family needs diagnostic assistance to address and solve operational issues
related to staffing, maintenance, or special projects, or to partner on alternative
uses and divestment strategies for underutilized properties.
• There are desired acquisitions and planned or unforeseen divestments that change
the property portfolio and family lifestyle needs. Third-party advisers such as real
estate consultants, due-diligence experts, and estate sale managers can help
families and their staff uncover potential operational challenges, avoid unnecessary
costs, and offer valuable objectivity, especially if the change is precipitated by a
personal loss.

Managing Planes

One of the perks of having substantial wealth is the ability to fly

privately. Of all the luxuries that come with wealth, this is one of the
greatest. Private aviation not only allows greater scheduling
flexibility, it also provides families with privacy and security.3

Options for Accessing “Lift”

Families who wish to fly privately face a fairly steep learning curve in
terms of options to access aircraft, costs, appropriate plane types,
managing pilots and staff, tax considerations, and other issues.
Generally, families enter this market over time, choosing first to
charter aircraft and then to consider purchase options, whether
through a fractional ownership program or outright.
While there are many considerations as to the best approach,
families generally find that outsourcing to charter or fractional
ownership companies makes the most sense unless they fly a
considerable number of hours each year (e.g., more than 100), have
unique service needs in terms of the types of aircraft they need or
airports they fly into, or have developed a hobbyist interest in the
industry.
The same approach is often taken with respect to hiring and
managing flight departments. Numerous service providers can
provide pilots to owners of private planes without the family having to
include them as part of the family office. Considerations for whether
to formally employ or simply access the pilots and support staff with
the plane include the number of aircraft owned, aircraft operations
oversight capabilities, budgetary analysis, and the personal
preferences of the principals.

Alternatives Available to Access Private Aviation

The following are the most common arrangements for accessing

private air transportation:

• Full ownership: A family purchases an aircraft and either directly or indirectly

(through a third-party service provider) employs a crew to manage all aspects of
aircraft operation. Unlimited use of the aircraft is available within the constraints of
the aircraft, operating budget, and availability of flight department personnel.
• Shared ownership: Two or more families jointly purchase an aircraft to lower the
effective costs; in all other ways, this option resembles full ownership.
• Fractional ownership: A family purchases a fraction of a plane that is managed as
part of a fleet overseen by an aircraft management company offering what is known
as a “fractional program,” typically starting with a minimum purchase of fifty hours of
equivalent annual flight time, and thereafter in twenty-five-hour increments. The
aircraft is fully managed by the fractional program, with the family having flexible
privileges to use other (larger and smaller) makes and models offered by the
 fractional program. It is worth noting that fractional programs offer the unique perk
of one-way flights from any origination city. Fractional providers usually offer both
purchase and lease options.
• Jet card/bulk charter: A family purchases flight time in twenty-five-hour increments
from a fractional program to be used within an annual time frame. In addition,
numerous traditional charter companies offer comparable block charter products
designed to compete with the jet card programs.
• On-demand charter: A family contracts with a Part 135 air carrier (i.e., a charter
operator) to conduct a flight or series of flights on an ad hoc basis, where costs are
quoted by the charter operator specific to a proposed flight itinerary and type of
aircraft requested.

Analysis of any business aviation alternative requires a basic

understanding of the fixed and variable/direct costs of owning and
operating a business jet. An overall operating budget should be
prepared for each method of air transportation services discussed
here. However, with respect to full or shared ownership, assumptions
are necessary to varying degrees, resulting in some level of financial
risk relative to the other methods of accessing air transportation
services.

FIXED COSTS Fixed costs are those that the family office is committed
to paying regardless of the number of hours the aircraft will be flown.
Fixed costs are typically determined as annual costs and allocated to
the aircraft on an hourly basis according to the number of hours the
aircraft is flown. Generally, the four largest fixed costs are (1) aircraft
financing (direct or implied), (2) crew labor expenses (salaries and
benefits for the pilots and flight attendants), (3) calendar-based
maintenance and maintenance service contracts with minimums,
and (4) connectivity services.
In addition to these costs, the following fixed costs are those
associated with aircraft overhead and ongoing investment in
personnel:

• Hangar and office expenses

• Aircraft insurance
• Crew training
• Flight planning services and other subscription services
 • Management fees, if applicable

VARIABLE COSTS Variable costs are those directly attributed to the

operation of an aircraft and are incurred only as a result of flying the
aircraft. Fuel costs represent the majority of the variable operating
costs, typically accounting for 50 to 75 percent of the total.
The other key component of variable costs is associated with
hourly and cycle-based maintenance, unexpected maintenance
events, and routine maintenance of the aircraft. The most expensive
maintenance costs are typically jet engine overhauls and inspections
required on a periodic interval mandated by the engine
manufacturer. Because both aircraft and engine maintenance costs
are typically billed and calculated according to hours of aircraft
operation, these can be calculated as hourly variable costs as well.
Other variable costs include per diem–based backup pilot support,
crew overnight and per diem food costs, landing fees, catering,
cleaning, aircraft modernization, modification and refurbishment, and
numerous other smaller costs.
When utilizing product type options such as fractional programs,
jet cards, block charter, and on-demand charter, additional charges
may be levied, such as fuel surcharges, meaning that the quoted
price includes a base cost of fuel per gallon and a surcharge levied
to reflect the differential between the actual fuel cost and the base
number. Be aware of the fact that the base number varies among
industry providers. Other costs include repositioning costs (i.e., when
the plane must be relocated as a result of a flight), minimum flight
time costs, overnight charges, and federal taxes.

Comparing the Costs of Flying Privately

The choice of form of accessing air transportation services depends

in large part on two factors: annual aircraft usage and budgeting. If
usage is fewer than 100 hours per year, it is uneconomical to
consider full ownership, but all other options are available. Note that
shared ownership is not a market product; it is generally a unique set
of circumstances whereby a family identifies another family to share
in the purchase of the aircraft. With respect to all options, a general
rule of thumb is that the per-hour cost or shared ownership will be
the least costly per flight hour, followed by full ownership (provided
that sufficient hours are being flown), closely followed by on-demand
charter, block charter, fractional ownership, and jet cards, in
descending order. Results may deviate based on actual market
depreciation and financing costs combined with ultimate annual
usage with respect to any of the ownership options. Of course,
convenience of use is always an important nonmonetary
consideration.
Table 5.1 presents a matrix showing the conversion of anticipated
fixed annual costs to hourly fixed costs for a six-passenger seat,
midsize jet.

TABLE 5.1
Costs to fly private aircraft
 Acquiring Aircraft

Regardless of the method of accessing air transportation services, it

is advisable to engage experts such as aviation lawyers or other
consultants who can advise on the various options and provide
industry referrals. An aviation lawyer or consultant should be
objective and unbiased. Keep in mind that business aviation is
generally practiced by boutique law and consulting firms (as
opposed to airline-type work, which is handled by larger firms). The
National Business Aviation Association (NBAA) provides many
resources about prospective aviation advisers, and attendance at an
NBAA conference or virtual event will allow the family office manager
to connect directly to the best of the best advisers.
Certainly, there are numerous other “advisers” who have deep
knowledge of and a range of diverse opinions within private aviation.
A team approach is recommended for a successful decision and
acquisition.
The following information will provide a time line to the acquisition
of a whole or shared aircraft. The time line associated with the
acquisition of a jet card, a block charter product, or a fractional
program ownership or lease product is vastly shortened and can be
accomplished in a week or so if necessary. However, despite the
shortened time frame to accomplish the acquisition, tax and
organizational planning, discussed next, may still be relevant and
should be factored into the time line.

Steps in Acquiring Business Aircraft

The decision to purchase a business aircraft may evolve over time

for a first-time buyer, or it may be made rather quickly for those
trading up from an existing aircraft. Either way, once the
determination to purchase an aircraft is made, the most common
next step is to contact an aircraft broker. The aircraft broker then
works to identify the most suitable aircraft and generate a letter of
intent. Next, an aviation attorney is hired to prepare a purchase
agreement. Either concurrent with the negotiation of the purchase
agreement or after execution thereof, additional parties are
contacted, such as prospective lenders and management
companies.
While the foregoing approach will work, it is not ideal. The best
practice approach to acquiring a business aircraft is discussed next.
When financing is a component of an aircraft acquisition
transaction, the financing will generally be the longest lead-time item.
In the typical transaction, working with the lender becomes a fire drill
because the process begins late in the game. Ideally, contact with
prospective lenders should be initiated as soon as the decision is
made to finance the aircraft purchase. It is common for several
lenders to submit financing proposals, and it typically takes two to
four weeks to select the lender and refine the chosen proposal.
While some lenders require specific make, model, and serial number
of the aircraft to submit a proposal, it is possible to provide the lender
with a close approximation of the desired aircraft type and cost and
then to proceed on a nonbinding basis. Once a lender is selected, it
can take a week or longer for the borrower to submit complete
financial and other data, thereby allowing the lender to obtain credit
committee approval and commit to financing the transaction.
Thereafter, it can take a week or two to obtain draft loan
documentation. Clearly, the entire process is lengthy, so getting an
early start is ideal.
Concurrent with initiating contact with a lender, it is generally
preferable to contact an aviation tax attorney. If the attorney is
contacted prior to the lender, they can provide referrals to lenders
that will fit the client profile. If the attorney is contacted later, they can
still provide referrals to aircraft brokers, management companies,
escrow companies, and any other party transaction participants. In
addition, many aviation attorneys are skilled at both Federal Aviation
Administration (FAA) and tax matters, as well as mainstream
transactional and commercial issues, allowing the completion of all
state and federal tax planning and the formation of a special-purpose
entity to take title, if appropriate. With the planning completed early
in the process, the transaction will proceed more smoothly from the
perspective of having a coordinated letter of intent and purchase
agreement, forming the acquiring entity, identifying states where the
aircraft can be delivered, and other important matters.
Once ownership structuring has been conducted and the loan
process initiated, it is time to contact an aircraft broker. Commonly,
an aircraft broker will expeditiously select an aircraft make and
model that meets the client’s mission and other requirements and
recommend available aircraft in the marketplace.
Most aircraft brokers will also have a template letter of intent
available from prior transactions. While using a template may be
tempting from the perspective of timeliness and cost, a good aviation
tax attorney should be able to prepare the letter of intent on the day
needed, and for minimal cost. Unequivocally, a letter of intent
prepared by an aviation tax attorney will be comprehensive and
unambiguous, and it will dovetail with the definitive purchase
agreement.
 On average, negotiations of the letter of intent should take one
week, factoring in reaching agreement on the purchase price. Once
executed, the attorney will prepare and negotiate the purchase
agreement over a period of roughly two weeks. Of course, these are
simply approximations. The time line may move more slowly or
quickly.
Concurrent with completing the purchase agreement
negotiations, all financial and other due diligence matters should be
completed with the lender. After contract execution, it is normal for
the aircraft to immediately undergo a prepurchase inspection, which,
depending on the size of the aircraft, can take anywhere from one to
three weeks. During the inspection, the lender should be preparing
loan documents and circulating them for review and negotiation,
which should take one week (or possibly longer).
In the event that external aircraft management is desirable, the
selection of an aircraft management company should commence
while the purchase agreement is being negotiated. Once selected, it
is customary to allow one or two weeks for the preparation and
negotiation of management documentation. In some transactions, it
is necessary to execute such documentation prior to closing. For
example, in some states, sales tax planning will rely on a common
carrier exemption, which requires the aircraft to be leased to a
common carrier (aka a “charter company”) at the time of title transfer.
While it is not always part of an aircraft transaction, it is advisable to
have one or two preclosing conference calls, time permitting, to
ensure that all items on the closing checklist are timely completed.
Implicit in the steps given here is the requirement for several
phone calls to complete all acquisition structuring and tax planning;
to work through preclosing requirements, including registration of the
acquiring entity as a sales tax vendor, if appropriate; to complete
sales tax exemption and other relevant forms; to obtain board
approval; and to complete various other items identified on the
closing checklist.

Importance of a Team Approach

When acquiring an aircraft, it is important that the principals of the
family or the family office ensures that the team of tax and legal
advisers, brokers, and/or consultants work together seamlessly. With
respect to each of these professionals, it is also important to ensure
that (1) the tax and legal advisers are experts at private aviation; (2)
if brokers are used, that there is clarity about conflicts of interest; and
(3) any consultants employed are experienced at acquiring the class
of aircraft being sought.

Tax Issues

While tax issues are relevant to all forms of accessing air

transportation services, more complex issues arise where there is
more flexibility on structuring (i.e., whole or shared ownership).
Because the other forms of accessing air transportation services are
products, the structure is somewhat rigid. Nonetheless, as
mentioned next, certain tax issues are germane to all forms.
Tax planning is essentially a melting pot of issues. Compromises
may have to be made, as optimal planning in one area may lead to
less optimal planning in another. The starting place for any tax
planning is state sales and use tax. State sales and use tax is
typically a onetime tax, and failure to plan properly can result in the
tax being due. Optimal planning can result in deferral or elimination
of the tax. Because state sales and use tax planning is “form over
substance,” the planning needs to be done first in order to identify
the structure that is needed to meet the state law requirements.
Despite normal expectations, because aircraft is moveable
personal property, it is very possible to create a connection to more
than one state with the aircraft, thereby creating liability for taxes in
more than one state. This is particularly problematic if the planning
produces a result of zero liability in the primary state, inasmuch as
there won’t be any opportunity to gain a credit in another state. As a
general rule of thumb, it is very difficult, if not impossible, to escape a
connection with the state where the aircraft is principally hangered.
This is true regardless of where the aircraft is located at the time that
title transfers, and regardless of the state of formation of the entity
that takes title (e.g., Delaware).
After state sales and use tax planning is completed, federal
income and excise tax planning should be conducted. While this
planning is “substance over form,” the taxpayer is generally held to
the form of the structure, so it is necessary to structure correctly.
There are numerous tax code sections that are unique to aircraft, or
have special interpretation as they relate to aircraft. It is absolutely
advisable to have an aviation tax lawyer or accountant conduct this
research and advise on the ideal structuring. Keep in mind that the
structuring needs to be reconciled with the state sales and use tax
structuring.
In addition, the FAA has a variety of rules under Part 91 (private
aviation) that pertain to structuring and cash flow. The tax advisers
should be fully familiar with FAA regulations or else they may easily
make mistakes. Also, all structuring should factor in cash flow
objectives, liability protection planning objectives, shareholder
concerns, and public filings (e.g., securities law) issues. The melting
pot will be evident once the planning is discussed and completed.

Management, Operations, and Staffing

In addition to numerous other issues that wealthy families must

address when acquiring private aircraft, determining how best to
manage, operate, and staff (i.e., pilots and support) these expensive
and complex assets is critical. There are typically two ways to do
this: hire an aircraft management company to manage the aircraft,
provide maintenance, and staff the pilots and related support
personnel; or create a flight department that employs pilots and any
required support professionals such as schedulers and flight
attendants. In either case, there is a role for a regional airport to
hanger the aircraft and provide needed fueling, maintenance, and
related services at the direction of either the fixed-base operator
(FBO) or dedicated flight department.
For most owners who are just starting to acquire private aircraft,
or those who do not have multiple planes or extensive needs in
terms of flight hours, using a management company is typically the
best choice. This is also typically the case when the owner would like
to charter the plane out to third parties.

FIXED-BASE OPERATORS At most major regional, national, and

international airports, there are one or more FBOs, whose business
it is to assist aircraft owners with fueling, hangaring, maintenance,
and similar services. Families who own planes invariably work with
FBOs, either directly or through aircraft management companies.

AIRCRAFT MANAGEMENT COMPANIES Aircraft management companies

help owners oversee some of or all the management of their private
aircraft. With charter aircraft management, the management
company simply provides opportunities for the owner to charter the
aircraft out to others for a fee. In these cases, the owner maintains
responsibility and control over the operations of the aircraft.
Management companies can also provide what is known as
“turnkey aircraft management,” in which they take care of
maintenance and repairs, hiring and paying crews, training, handling
security, ensuring compliance with FAA rules and regulations, and
other duties. With turnkey management, the owner transfers
operational responsibility to the management company.
Hiring an aircraft management company is usually one of the first
things that new owners do to ensure that all the operational, staffing,
maintenance, and FAA requirements are being met. This approach
will help get the family, and often its family office, up to speed on all
these issues. Over time, the family may decide to take over some of
or all these responsibilities, including creating a flight department.

FLIGHT DEPARTMENTS Families with substantial wealth, significant

private travel needs, or both have the option to establish their own
flight departments, where they formally employ pilots and support
staff. In these cases, the pilots handle many of the responsibilities
otherwise conducted by the aircraft management company or FBO,
although there is typically some role for a local airport in terms of
hangering the plane, providing light maintenance that does not
require sending the aircraft to a dedicated maintenance company,
installing upgrades, and other tasks.
As with other services conducted in house by a family office,
overseeing a flight department introduces numerous responsibilities
and challenges. These include finding, hiring, and managing pilots;
being responsible for related needs, such as scheduling and flight
attendants (whether done in house or with external vendors);
providing proper training and licensing; and ensuring strict
compliance with FAA rules and documentation.
It is worth mentioning that finding, hiring, and managing pilots can
be a distinct challenge for family offices (not because they are family
offices, but because of industry challenges). Pilots are professionals
who have aligned their passion with their vocation and are not
necessarily motivated by many of the same things as other
employees within a family office. As a result, managing a flight
department requires the family office to be attuned to these nuances.
Further, pilots may not be experienced in many of the business
management needs that come with overseeing staff, preparing and
maintaining budgets, and other responsibilities. If this is the case, the
family office will need to work with the flight departments to provide
support and training in these areas.

OTHER CONSIDERATIONS Similar to concierge service providers within

a family office, pilots tend to interact with the principals and their
family members in a direct and recurring manner. This can introduce
certain challenges in the management of the family, particularly by
senior managers who normally manage communication between
principals and the various service providers. While this is not
necessarily a bad thing, it does mean that principals will experience
directly the quality of people and services being provided by the flight
departments in a way that might not exist with other functions.4

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

Solving the complexity challenges that come with substantial wealth
is one of the primary roles of a family office. In the case of John’s
family, the complexity has to do with their daily lifestyle needs, the
numerous residences that John and Sofia own, and the planes that
John would like to purchase. The challenge for wealthy families is
not just the breadth of these needs, but that, for many of them, they
are new challenges, and they do not know how or from whom to get
help. The family office must be able to anticipate when investing to
solve incremental needs is warranted and how to go about doing
this, either internally or externally.

Case Questions

• What are the key new service or advisory areas where John and Sofia need help?
• What are the specific job responsibilities across each of the areas, and what should
be conducted in house versus outsourced?
• How does the family office identify new personnel and/or external resources, and
what should they look for?
• How can Michael help John with his decision to buy the two planes?
• What questions should Michael be asking both John and external advisers
regarding the planes?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What are the key new service or advisory areas where John and
Sofia need help?

John and Sofia have expressed a need for more help in what would
be considered concierge services (e.g., lifestyle, travel, or events);
estate management (overseeing the ranch and numerous
residences); and private aviation. These are all niche service areas,
with dedicated professionals and third-party vendors increasingly
available to fill them. For family offices that outsource both the
oversight and delivery of these services, the responsibility for finding
the right external provider and ensuring the proper delivery of
services falls on the CFO and their staff. For larger family offices with
more expansive needs, they might create separate roles for a chief
of staff, concierge, estate manager, or chief pilot.

What are the specific job responsibilities across each of the areas,
and what should be conducted in house versus outsourced?

It is important to note that the roles that Jason is looking to fill are
professionals who can coordinate the delivery of services by mostly
third-party providers (as opposed to providing the services with
internal family office staff). The reasons for outsourcing these
activities focus on the geographic dispersion of the assets (e.g.,
estate management), the specialized nature of the advice and
services needed (e.g., pilots), and the need for external information
and capabilities not available to the family office (e.g., travel and
concierge).
A key responsibility for Jason and professionals in his position is
knowing the vendors in each of the various service areas and being
able to assess which ones will be the best fit for the family. In the
area of estate management, there are a limited number of providers
with experience dealing with family offices. However, for lifestyle,
concierge, and event assistance, there are numerous types of
providers and vendors ranging from credit card concierge services,
to small boutiques and individual providers, to large, multinational
travel and related services. For the aircraft, considerations should
include the extent of dedicated flight support needed (i.e., how many
hours a year John and his family will be flying) and whether John
wants to manage a dedicated flight department, and economics (i.e.,
does he want to make his planes available to others for charter,
thereby reducing the costs of ownership and achieving certain tax
benefits).

How does the family office identify new personnel and/or external
resources, and what should they look for?
This is an important role, and one that requires particular attention to
staff. Despite the fact that in this particular case, the role is largely to
ensure the coordination of services delivered by third parties, Jason
will have to find someone who is knowledgeable about the various
areas and has an understanding of the unique issues and dynamics
of working for a wealthy family. Many families rely on existing staff to
perform these functions, such as the CFO or a personal assistant.
For smaller, less complex family offices, this arrangement can be
functional because these professionals have a familiarity with the
family and the needs of the job are neither too specialized nor time
consuming. However, for a family office the size of Left Seat
Management, and given the breadth of the family’s needs across
multiple areas, hiring a dedicated operations manager is likely the
right solution for John and Sofia. Fortunately, as the number of
wealthy families has increased, an industry that supports family
offices has developed, with both experienced professionals and
specialty service providers in each of these areas. Jason should look
for assistance in conducting this search by consulting his peers at
other family offices, using a recruiting firm, or both.

How can Michael help John with his decision to buy the two planes?

Michael should speak with an aviation attorney about the options,

issues, and process for buying and operating private aircraft. It will
be important for him to become familiar with many of the legal, tax,
regulatory, operational, and budgetary issues that apply to private
planes. For this particular assignment, it will also be important for
Michael to remember that John is very knowledgeable about the
space and will play a more active role than he normally does in many
other things that he asks of the family office.

What questions should Michael be asking both John and external

advisers regarding the planes?

Having gotten up to speed on the options, issues, and process,

Michael should meet with John to discuss what he has in mind,
particularly with respect to the management of the aircraft. Questions
that are relevant are:

• Will John want to employ his own pilots?

• Does John want to allow one or both of his planes to be chartered?
• How much is he willing to spend on the planes and their ongoing operational costs
(for both acquisition and annual maintenance)?

Moreover, Michael should make sure that both he and John are
aware of the various tax implications of John’s choices around
owning and managing the aircraft.
 CHAPTER SIX

Investments

CASE STUDY

Summary

• Eighteen months after the creation of the Left Seat Management family office
• Regulatory issues
• Approaches to managing investments
• Specific investment areas

Key Words/Concepts

• Regulatory issues
• Investment management
• Direct investing
• Venture investing
• Social impact investing
• Art and collectibles
 Challenge

It was Sunday morning, and John finally had time to get away and
find some peace and quiet in his personal library and home office.
This was his sanctuary from calls and meetings, where he could
spend time reading books that he never had time to get to when he
was building his business. This was also the place that John could
be alone and focus on matters that he wanted to catch up on.
One of the things that he was looking forward to reading was the
financial package he received monthly from his family office team.
These financials covered his entire family enterprise, and the team
knew that he was meticulous in his review of the materials, often
sending detailed questions back to them for clarification. John really
liked finding “mistakes” in the financials, partially to keep his team on
their toes and partially to show that he wanted to run the family office
with the same level of detail with which he ran his operating
company.
John fondly remembered what his financial reviews had been like
before the sale of Rybat Manufacturing. He got buried in the day-to-
day details of running the company and had very little time to sit
down to pore over the scattered statements and disorganized
investor updates that made up his investment portfolio. He would
make regular attempts to catch up on his financials, but these
sessions were often done by phone or on a golf course with his
broker and bankers. For John, investment proposals were often
discussed at the clubhouse in an unstructured manner, with him
taking ad hoc meetings based on whoever could get his attention
that week.
Investing changed dramatically for John after his liquidity event.
At first, he was a bit apprehensive to make any dramatic changes to
his investment strategy. He didn’t really think that he had a strategy
at that point in his life anyway. After some vanity and long-delayed
purchases (e.g., a new house, a classic car, a luxury family vacation
in the Seychelles), he knew that he needed to put more thought into
what to do with his new level of wealth.
 John initially spent a couple of months learning as much as he
could from peers who had gone through similar company sales, as
well as from his current lineup of financial advisers. These meetings
led to interesting new connections and even more new ideas of how
wealthy families approached their own investing strategies. The
problem for John was that there were so many types of approaches
that it became impossible for him to get a sense of the best solution
for him. During this period, he felt that he was spending too much
time hearing about niche investment strategies and too little about
big picture approaches to managing his wealth. He also made a few
angel investments during this period, which he thought he
understood well because they were in his sphere of industry
experience. However, most of those investments did poorly in the
end. John was quickly realizing that it was very different being a
business investor than his previous vast experience as a business
operator.
Luckily, John was able to turn to Michael, his trusted adviser and
the head of his family office, to develop a comprehensive investment
strategy for his liquid investments and, increasingly, his private ones
as well. John and Michael used a number of banks, brokerage firms,
and asset managers to execute the investment strategy for the
family. Michael also helped John upgrade his investment advisers
while still maintaining long-term relationships that he valued strongly.
However, John was noticing that these outside experts didn’t
always agree on the best approaches to investing. Some advocated
taking or increasing exposure to certain asset classes or strategies,
while others advised against it. This was frustrating to John and
delayed his decision-making, as it invariably required him to evaluate
the different investment views by comparing notes across both the
outside advisers and his network.
At John’s request, the family office also started to dabble in
impact investing. Michael advised John that he had worked with
many wealthy families to incorporate this type of investing as a way
to not only assist John and Sofia in their desire to contribute to
society beyond their philanthropy, but also to engage the children in
investing, promote family unity, and involve them in general family
office matters. At some point, John wanted to expand the family’s
impact investing, but he was wary about it because he didn’t know
much about the space and did not know when and how best to get
the children more deeply involved.
In addition, there was the increasing amount of time and money
Sofia and he were “investing” on finding and acquiring art and
collectibles related to their involvement with museums; purchases of
artwork, sculptures, and antique furniture for their new homes; and
John’s classic car collection. It was becoming clear to John that he
needed to develop a better way for both Sofia and him to manage
and engage in these various pursuits.
John also found that he was particularly interested in direct
investing. To date, he had made a number of small investments on
the advice of his friends, peers, and other wealthy families, although
he did so largely without a formal strategy. Typically, he made
decisions based on the relationship he had with the person who
brought the deal to him, as well as whether the investment thesis
and expected returns made logical sense to him.
Despite not having a background in private investing, John found
that he enjoyed seeing and evaluating deal flow, employing his
experience and network to assess deals, and having the opportunity
to engage with other families. These activities reminded him of his
days building Rybat Manufacturing. He believed that his insights into
the manufacturing industry could be of great value to him, and
potentially to other families who were less well connected or
knowledgeable in the space. John was also attracted to the
investment returns that private deals offered and the ability to access
unique opportunities in a host of other areas not otherwise available
to traditional investors. He committed to making direct investing a
more significant part of the overall investment portfolio and enlisting
Michael and the family office to assist him.

BACKGROUND INFORMATION

Regulatory Issues
In the course of managing the finances and investments of a family,
a family office frequently provides advice related to the family’s
investments in securities.1 This activity would ordinarily subject the
family office to regulation under the Investment Advisers Act of 1940
(Advisers Act). The Act defines an “investment adviser” as anyone
who provides advice regarding securities, is engaged in the business
of providing such services, and does so for compensation. As it
clearly falls within this particularly broad definition of “investment
adviser,” the family office would be required to register with the
Securities and Exchange Commission (SEC) unless it can find an
exemption.
In 2011, pursuant to a directive in the Dodd-Frank Act, the SEC
adopted a rule in the Advisers Act codified as Rule 202(a)(11)(G)-1,
more commonly referred to as the “Family Office Rule,” which
effectively excludes family offices from the broad definition of
“investment adviser.” The adoption of the Family Office Rule was
largely driven by the fact that families who have set up family offices
to manage their wealth are financially sophisticated and less in need
of the protections that the Advisers Act was intended to provide to
typical investors.
Satisfying the requirements of the Family Office Rule allows a
family office not only to escape the burdens associated with
registration under the Advisers Act, but also to completely avoid the
Act’s other numerous provisions, as well as any additional state or
licensing requirements applicable to investment advisers. In contrast,
an investment adviser who is able to meet an exemption from
registration (but not an exclusion from the “investment adviser”
definition, such as the Family Office Rule) still remains subject to the
other provisions. As a result, understanding the requirements and
intricacies of the Family Office Rule is critical to successful family
office compliance.

The Family Office Rule

The Family Office Rule sets forth three requirements that the family
office must meet to qualify for exclusion from regulation under the
Advisers Act. In addition, the rule supplements these requirements
with complex definitions that further limit the availability of the
exclusion.
Fundamentally, a family office is a company, and it includes its
directors, partners, members, managers, trustees, and employees
acting within the scope of their employment. To be considered a
family office that qualifies for the exclusion, it must (1) provide
investment advice only to “family clients”; (2) be wholly owned by
family clients and exclusively controlled by family members and
other family entities; and (3) not hold itself out to the public as an
investment adviser.
Also, the SEC has explicitly indicated that the Family Office Rule
exclusion does not extend to family offices serving multiple families
such as multi-family offices (MFOs)—it is available only for single-
family offices (SFOs). For instance, family offices should be aware
that the Family Office Rule does not provide any exclusion in a
situation in which several families have established separate family
offices but have staffed their family offices with the same (or
substantially the same) employees.

FAMILY CLIENTS While the last two elements of the Family Office Rule
are relatively straightforward, the first requirement, that the family
office is limited to only “family clients,” is far more complex. It
encompasses a multifaceted definition that is further broken into the
following subcategories of defined terms: current and former family
members, current and former key employees, the estates of such
persons, a company owned and controlled by such persons, and
affiliated trusts and nonprofit organizations meeting certain
requirements.

FAMILY MEMBERS The first subcategory included in the definition of

“family client” is “family members,” which generally includes all lineal
descendants up to ten generations removed from a common
ancestor. The definition is relatively expansive, as it recognizes
adopted children, stepchildren, and foster children, as well as
spouses and spousal equivalents of such family members. In
addition, the “family client” definition covers individuals designated
as former family members, meaning a spouse, spousal equivalent,
or stepchild who was a family member at one time, but is no longer
part of the family due to divorce or another similar event. With regard
to such former family members, the rule does not place any limitation
as to the time frame after such an event in which the former family
member can continue to take part in the family office, nor does it
restrict the person’s ability to make new investments, as it does with
former key employees, as discussed in the next section.
It is important to note, however, that because the basis of the
definition is linked to a common ancestor, the term “family member”
does not extend to the in-laws of family members. Thus, any
investment by in-laws made through the family office may cause the
family office to no longer be eligible for the Family Office Rule
exclusion.
In addition, the “family member” definition is rather flexible in
several other respects because the designated common ancestor
can be either living or deceased, and such a designation is not
permanent; rather, it can be changed as the family office evolves
over time.

KEY EMPLOYEES “Key employees” of the family office, their estates,

and certain entities through which they may invest are also included
in the definition of “family clients.” This allows the family office to
attract talent by offering investment opportunities provided by the
family office, while at the same time aligning key employees’
interests with the family without disqualifying the office from the
Family Office Rule exclusion.
As with the definition of “family members,” the definition of “key
employees” is also quite complex. The term encompasses an
employee of the family office or its affiliated family office who (1) is
an executive officer, director, trustee, or general partner, or is serving
in a similar capacity; or (2) in connection with their regular duties,
participates in the investment activities of the family office (excluding
those who are solely clerical, secretarial, or administrative
employees and those who have participated for less than twelve
months).
 The complexity of the “key employees” definition is offset by its
flexibility. First, it recognizes that some families may have more than
one family office due to any number of structuring preferences or for
business or tax reasons. The rule, therefore, extends the definition to
cover the key employees of an “affiliated family office,” which is
defined as a separate family office that (1) is wholly owned by family
clients of the other family office; (2) is controlled by family members
and family entities of the other family office; and (3) has no clients
other than family clients of the other family office. Second, the
definition further includes trusts where a key employee is the sole
contributor and decision-maker. Third, it also includes such key
employees’ spouses or spousal equivalents, but only to the extent
that they hold a joint, community interest in the investment property.
That being said, it is important to note that this flexibility does not
extend to key employees of family companies other than the family
office or its affiliated family office. Therefore, investment by such
other key employees may cause the family office not to qualify for
the Family Office Rule exclusion.
Finally, just as with former family members, the rule recognizes
former key employees—defined as individuals who were key
employees at one time, but are no longer—and it allows them to
keep their preexisting investments under the family office’s
management. However, in contrast to former family members, the
rule limits former key employees from making additional investments
after their employment has ended.

ESTATES AND TRUSTS To accommodate common estate-planning

activities for testamentary and charitable giving purposes, the Family
Office Rule’s definition of “family client” also includes any estates of
current and former family members, as well as those of current and
former key employees. This has the effect of allowing the family
office to advise the executor of such an estate, even if the estate
ultimately will be distributed to nonfamily members.
Furthermore, trusts are included in the definition, but the rule
places certain limitations that are particularly dependent on the
circumstances. Any revocable trusts that have one or more family
clients as their grantors are included as family clients (their
beneficiaries can be nonfamily clients and still qualify under the rule).
In contrast, irrevocable trusts are also included, but only if the
current beneficiaries are also family clients.

NONPROFIT ORGANIZATIONS The definition of “family client” further

includes any nonprofit organization, charitable foundation, charitable
trust, or other charitable organization that is funded exclusively by
one or more other family clients. While such charitable organizations
are permitted to be originally established by nonfamily members, all
the funds that they currently hold must have come solely from family
members, and any funding received from persons other than family
members will disqualify such organizations from the Family Office
Rule exclusion.

OTHER FAMILY ENTITIES To facilitate the family office’s ability to

conduct their activities through the use of typical investment
structures, including pooled investment vehicles, the rule also
extends the definition of “family client” to include “any company,
wholly owned (directly or indirectly) exclusively by, and operated for
the sole benefit of, one or more other family clients.” This means that
any investment in the company by a nonfamily client disqualifies it
from receiving investment advisory services through the family office.

Wholly Owned by Family Clients and Controlled by Family Members

The second element of the Family Office Rule requires that a family
office be (1) wholly owned by family clients and (2) exclusively
controlled by family members and family entities. This means that
while any family client (including key employees) may hold an
ownership interest in the family office, control must remain
exclusively with family members and family entities, not with its key
employees or their affiliated entities or trusts. “Control” is defined as
“the power to exercise a controlling influence over the management
or policies of a company, unless such power is solely the result of
being an officer of such company.”
 No Holding out of the Family Office as an Investment Adviser

The final requirement of the Family Office Rule is that the family
office must not hold itself out to the public as an investment adviser.
This restriction has been interpreted broadly and prohibits any
behavior suggesting that the family office is attempting to enter into a
traditional investment adviser relationship with nonfamily clients.
Unsurprisingly, if a family office engages in this type of behavior, it
must register as an investment adviser under the Advisers Act.
Family offices may not be aware that, as a result of giving
investment advice, they fall within the purview of the Advisers Act
and thus must fit their ownership and investment processes within
the parameters of the Family Office Rule to avoid the registration
requirements of the Advisers Act. Family offices that do not satisfy
the requirements of the Family Office Rule may need to restructure
themselves to qualify for the exclusion, analyze whether they qualify
under an applicable exemption, apply for a specific exemptive order
from the SEC, or register as an investment adviser. Family offices
that are currently in compliance with the Family Office Rule must
remain vigilant and have policies in place to ensure that there is no
inadvertent disqualification from the exclusion.

Investing Generally

The range of investment activities for which a family office is

responsible is extensive and varied. They include overseeing liquid
assets, alternative assets (e.g., real estate, hedge funds, and private
equity funds), single-stock positions, direct investments in private
companies, and impact investing such as in environmental, social,
and governance (ESG) and socially responsible investment (SRI)
funds. There are also considerable differences in how wealthy
families go about overseeing investments. Some families will
manage all their investments in house, while others are more
delegatory, choosing to outsource some of or all the investment
functions.
For these reasons, sharing universal best practices for
investment management across family offices is not within the
purview of this chapter. However, there are broadly distinctive ways
in which family offices structure the management of their
investments, which overlap somewhat with both the organizational
and behavioral types of family offices that were described earlier. In
addition, there are specific investment activities that warrant
discussion because of similarities, challenges, and best practices
within them, including direct investing, venture investing, social
impact investing, and art and collectibles investing. Each of these is
discussed in detail later in this chapter.

Different Ways That Family Offices Invest

DELEGATORY Many family offices, regardless of the magnitude of

their wealth, choose to outsource the management of their portfolio
entirely to third parties. This outsourcing tends to stem from the
fundamental view or preference by the principals, the family office
senior executives, or both. Interestingly, the decision to outsource
does not necessarily depend on the family’s level of sophistication or
resources. Families that choose to outsource some of or all their
investment activities are comfortable relying on others for investment
advice and strategy execution and farm out these responsibilities to
banks, brokerage firms, asset managers, or investment consultants
(or often a combination of the four).
One common variation on this approach is when the family office
is responsible for asset allocation, which is usually conducted by the
chief investment officer, who develops the overall strategy around
the asset classes that the family should own, the relative allocation
for each, and when and by how much to rebalance periodically.
These duties are often done in conjunction with one or more of the
outside providers who have the resources, technology, and
experience with other significant investors to help them.

ACTIVE-CONTROLLING With the tremendous growth in wealth

accumulated by financial services firms and the founders and other
professionals involved with them, it is not uncommon to see family
offices being created by former hedge fund managers, private equity
principals, and finance executives. These principals are very familiar
with investing, the markets, and the various execution partners and
platforms (both internal and external) available to assist them. Family
offices overseen by these types of principals often establish their
own investing businesses within the office and actively trade their
portfolios, particularly in those markets or asset classes in which
they have expertise.
While less common, there are also those principals who, despite
not having grown up professionally as an investor or finance
professional, decide to bring in house the lion’s share of investing
responsibilities. In these cases, the family office is staffed similar to
an investment management firm or hedge fund with a senior and
experienced chief investment officer, active traders, and portfolio
managers. These types of investors may still delegate the execution
of some of their strategies to third parties. However, it is the
controlling nature over a significant portion of their investable assets
that distinguishes these family offices from others.

THE HYBRID APPROACH Some family offices take a hybrid approach to

how they invest money on behalf of their principals and family
members. These family offices may be active-controlling with respect
to a particular strategy or asset class, and outsource other
investment management needs to banks, brokerage firms, asset
managers, or investment consultants. Many principals, as well as the
senior executives they hire, have a penchant for certain types of
investing and therefore decide to conduct these activities
themselves. Investing directly in private companies, often called
“direct investing,” is a primary example of an investment type that
principals choose to get involved with based on a specific interest.
Moreover, family offices, often dictated by their size, may also
internally manage the cash and short-duration, fixed-income portions
of their portfolio, believing that they can do so as well, and at less
cost, than outsourcing to a third party.
Finally, there are those family offices that prefer to actively trade
a particular asset class or strategy. In some cases, they do so to
develop a performance track record that they, or the team they hire,
can market to other investors down the road as a separate asset
management business.

Why Is This Important?

It is important for principals, family office executives, and those who

provide advice and services to these various types of investors to
understand these distinctions. For principals, it helps them better
understand whom they should hire and appreciate that there are
numerous ways that their portfolio can be overseen—all done in a
way that satisfies their desire for control or ability to be more actively
involved in certain investment activities. For family office executives,
this understanding can help them better assess how to staff for the
investment function and where to focus their time, often in those
areas where the principal has expressed a desire to be actively
involved, whether individually or via the family office’s investment
team. Finally, for service providers, understanding both what the
family is doing with their investment capital and how they are doing
it, can help them better assess the advice and services they should
be providing. For more delegatory families, this may mean broad
support in areas such as asset allocation, manager search and
selection, and reporting. For more active-controlling family offices, it
means serving as an execution partner in one or more asset classes
or for select strategies.

Investing in Private Companies

Private investing, also referred to as “direct investing” (figure 6.1), is

where a wealthy family makes an investment into a company directly
instead of through an intermediary such as a private equity fund.
Direct investments are almost invariably illiquid, and the investment
focus in this chapter is on such illiquid assets: real estate,
infrastructure equity, private equity, and emerging alternatives
(including infrastructure debt). Illiquid assets are the largest portion
of assets commonly referred to as “alternative investments.” Hedge
funds are ignored because investments in these funds are generally
more liquid.
Figure 6.1 Private investing–direct investing Source: World Economic Forum, “Direct
Investing by Institutional Investors: Implications for Investors and Policy-Makers,” 2014.

Many family offices reduced their exposure to traditional

investment strategies after the financial crisis of 2007–2009.2 Such
strategies often rely heavily on portfolio allocations to public
securities such as stocks and bonds. Instead, they turned
increasingly to nonpublic (i.e., private) investment markets, and as a
group, family offices have since become major players in the
financing of private companies. They are now an important source of
capital for start-ups, middle-stage financings, and other private deals
of all sorts, including the high-flying financing market for private
companies with $1 billion-plus valuations known as “unicorns.”
At the same time, family offices also turned away from traditional
private equity funds in favor of making direct private equity
investments on their own. These direct investments avoid the fees,
absence of control, and limited transparency that go with investing in
a private equity fund. True, direct investments also lack liquidity, but
they may be no worse in that regard than private equity funds with
long-term lock-up requirements for investors. Indeed, despite the
lack of liquidity, many families are comfortable buying and operating
businesses, whether on their own or with other families as partners.
Direct investing may be ingrained in their DNA. For those who
became wealthy by successfully building and monetizing a business,
this level of concentration and “all hands on deck” approach to
investing is natural, and often preferred.
To be sure, direct investing is not a new phenomenon. Family
offices have always done it to some extent or other. For example,
direct investment in commercial real estate is a longtime favorite and
can be found in many family office portfolios. What’s new is the
willingness of family offices to become active investors and repeat
dealmakers, sometimes with high visibility in the marketplace, in
order to take advantage of the often-greater returns in the
burgeoning private capital marketplace.
Family offices that invest directly in private companies do so for a
number of reasons, including the following:

• Comfort and familiarity with private investing by the principals, given their prior
investing experience or because it is how they made their money
• An effort by the family (or the family office) to garner greater returns than in public
markets
• A desire for greater control over investments, relative to investing through private
equity funds, in terms of which investments to make and when and how to enter
and exit
• A belief that they can invest at a lower cost by avoiding the standard 2 percent
management and 20 percent carried interest fees charged by private equity firms

Approaches to Direct Investing

Direct investments by family offices typically follow one of these

three approaches: by partnering with other family offices or a private
equity firm, through coinvestments with other family offices or private
equity firms, and/or by investing on their own. Table 6.1 gives a brief
summary of each option and its perceived benefits.

TABLE 6.1
Direct investing approaches

Method Description Potential benefits

Partnering The family joins with other It permits families to
with others families or private equity firms leverage the expertise, deal
in select investments. flow, talent, and/or financial
resources of another
investment partner.
Coinvesting The family coinvests directly It enables a family to use its
with others in specific deals brought to investment in a fund
them as part of a fund in sponsored by another family
which they are an investor. In or private equity firm (see
these cases, the family’s the benefits of the
coinvestment usually is not “partnering with others”
charged a management or option) to increase its
carried interest fee. exposure to select deals
only.
Investing The family sources, evaluates, It provides a family with the
directly on invests, and manages a greatest amount of control
their own private company investment over all aspects of direct
on their own (outside of investing.
investing in a private equity
fund, in partnership with
others, or as a coinvestment).

Investment Resources and Capabilities

There are a number of constraints faced by family offices interested

in direct investing, including scale, skills, management, and talent. A
family office needs to have sufficient resources to afford the required
staffing and related infrastructure needed to make direct investments
(i.e., scale and skills). And it must have a governance framework that
is robust enough to manage the downside risks and operational
potholes of running acquired businesses (i.e., management and
talent). Also required are family buy-in to the direct investing strategy
and a structure of institutional processes to make investment
decisions.
What follows is a list of important questions that each family
should ask themselves before embarking on a robust direct investing
program or deciding which of the abovementioned models makes
the most sense for them (figure 6.2).

Figure 6.2 Important questions that each family should ask before embarking on a robust
direct investing program

Alternatives to Investing in Private Equity Firms

While family offices are inundated with opportunities to invest, and

selectively coinvest, with private equity firms, many families are
biased against these types of financial sponsors. The reasons have
to do with the perception by family offices (rightly or wrongly) that
many of these funds are structured and priced for ultra-high-net-
worth (UHNW) investors that otherwise cannot gain access to direct
deal flow or focus on the needs of institutional investors that do not
have many of the same investment objectives, cash-flow
considerations, or tax considerations, with embedded conflicts of
interest and shorter time horizons than most family offices would like.
Consequently, family offices that desire to invest in private
markets and are comfortable (and able) to do so themselves, and
would like to invite other families to invest with them for the reasons
mentioned here, are developing partnership and coinvestment
approaches themselves. These solutions provide the investment
benefits listed in table 6.1, while at the same time avoiding or
mitigating the challenges of more traditional private equity funds.

How Families Invest and Partner with Each Other

Family offices have been partnering and coinvesting with others as

long as they have been private investors.3 Over the years, these
experiences have taught them how best to conduct this form of direct
investing, in which they can enjoy the advantages while mitigating
the challenges. While family offices also partner and coinvest with
private equity managers, it tends to be rare and often limited to only
the largest family offices.
There are a number of benefits to partnering and coinvesting with
other significant pools of capital, including family offices and private
equity funds. These include access to more deals; using the skills,
insights, and deal flow of another family; and more available capital
for doing larger deals.
However, as with any partnership, there can be inequalities with
respect to the relative contribution by each partner. These issues
tend to manifest themselves the most with family office investment
partnerships in which the families expect to participate with equal
economics despite significant differences in relative contribution. Of
course, family offices can be great partners despite their significant
differences and what they contribute. This tends to be true when
each partner understands what is expected of them and economics
are tied to what each has or can provide.
 The most effective partnerships between wealthy families occur
when both sides have a willingness to partner and a capacity to
contribute (see figure 6.3).4 Instances where this is not the case
include the following:

• When families want the opportunity to partner but do not have other important
attributes to contribute (e.g., deal flow, expertise) and do not want to pay
management fees or carry to the other partner
• Families that have experience, capital, access to deal flow, and other important
elements but are not particularly looking for partners other than for a unilateral
benefit, such as to enhance returns or to reduce portfolio risk

Figure 6.3 A matrix illustrating the elements of effective partnership in direct investing
Source: H. E. “Bud” Scruggs, the Cynosure Group, 2020.

As a result of these experiences, family offices have started to

evolve their approach to partnering with others such that the relative
relationship and contributions are more explicitly balanced
economically. In many respects, this is a natural professionalization
of the family office partnership model. These evolutions include
allowing families to participate on a deal-by-deal basis (so-called
club deals) coupled with a minimum amount of capital contributed via
a committed fund structure. In club deals, families are part of a
preexisting and defined group that agrees to review and contribute
capital to select investment opportunities made available to them by
the sponsor family or private equity firm.

Committed Club Structures

A number of sponsoring family offices are modifying their partnership

and coinvestment structures to reduce the limitations of pure
partnership or coinvestment models, while retaining many of the
advantages.5 These are increasingly being called “committed club
structures.” Under these structures, many of the attractive attributes
of traditional private equity funds and club deals are combined.
Specifically, a sponsoring family office (usually one with a successful
track record in private investing) establishes a “fund” and obtains
capital commitments from both institutional and family offices.
However, the fund is structured in a manner that provides investors
with many of the attributes that come with partnering and
coinvesting, such as the following:

• A level of committed capital such that the sponsoring family office has enough “dry
powder” to do deals and compete against both financial sponsor firms and strategic
buyers
• Much longer fund terms, which allow investors to indirectly own portfolio
investments via the fund for a longer period of time than with traditional private
equity funds
• The right for investors to coinvest in deals done by the fund based on their own
additional underwriting (usually with no additional management fee or carry)
• Reduced administrative and oversight fees because fund investments are made as
part of a pooled vehicle
• Flexibility around the timing and taxation of exits because certain investors own a
portion of the underlying portfolio companies directly
• The ability to attract sellers that are interested in family office investors

Committed club structures formally combine the characteristics of

private investing among family offices (i.e., a comingled single fund
structure, with clublike coinvestment opportunities, predominantly for
family office investors). In addition, the term of the fund is much
longer than typical private equity funds thereby tapping into the
desire by family offices to be more permanent investors (so-called
patient capital).

Regulatory Issues Specific to Direct Investing

While coinvestments with other family offices or private equity funds

may make financial and business sense, family offices and private
equity funds that partake in those activities should be mindful of the
risks associated with pooling capital with others.6 The first set of
issues to consider are the regulatory issues related to wheeling and
dealing in the private capital space. Any person or entity that is in the
business of raising capital generally needs to be registered as a
“broker-dealer” with the SEC or applicable state agency or else be
exempted from those registration requirements. While private equity
funds can raise capital for their own funds by relying upon Rule
506(b) of Regulation D of the Securities Act of 1933, that exemption
doesn’t necessarily allow them to help raise money for other
companies. To the extent that a private equity fund manager
regularly solicits others to coinvest along with their fund, they may be
required to register as broker-dealers. The same is true for a family
office that regularly solicits other family offices to make
coinvestments.
The rules that require registration as a broker-dealer are broad
and encompass anything that is “engaged in the business of
effecting transactions in securities.” Unfortunately, there is not a lot of
clear-cut guidance on what it means to be engaged in the business
of effecting transactions in securities. Registration issues for private
equity funds, however, have continued to surface over the last
decade as a result of the SEC’s enforcement against private equity
firms.
In addition to the broker-dealer registration issues, family offices
need to be concerned about maintaining their family office exemption
if they want to remain exempt from the SEC’s Investment Adviser
registration requirements. If a family office engages in a transaction
where they pool money with other families and further take the lead
on managing that money, they might lose their exemption as a family
office because they are now managing other people’s money. While
family offices may like to control their underlying coinvestments, they
need to assess whether that control would destroy their family office
exemption.
In addition to the regulatory issues, family offices need to be
concerned about the antifraud provisions of federal securities laws.
All securities transactions, even exempt private ones between
families and private equity funds, are subject to the antifraud
provisions. Any false or misleading statement in connection with the
sale of a security is subject to civil and criminal liability. That liability
is typically assessed on the one promoting or selling the security if
the deal should go south. If a family office promoted a proposition
and solicited other family offices to join it by making false or
misleading statements, they could be the one held liable. In general,
people go after the entity that sold them the security or lured them
into the deal.
For these reasons, family offices engaged in direct investing,
particularly when it involves partnerships or coinvestments with other
wealthy families, should consult with appropriate legal counsel with
experience in securities laws and registration rules and regulations
for broker-dealers and registered investment advisers.

Investing in Venture Capital

The fundamental model of venture capital is based on investors

financially backing, supporting, and adding unique value to
businesses in the early and late stages of growth.7 Financial backing
is provided with capital by investors so that the business that is
receiving funding can accelerate to deliver on expected milestones,
revenue multiples, and increases in valuation.
Supporting businesses and adding value are achieved in a
number of ways, including the following:

• Introduction to additional capital

• Strategic relationships
• Subject matter expertise in a certain industry
• Hands-on support in technology development
 • Candid feedback
• Dedicated mentoring and education

Venture capital has evolved to provide support during various

stages in the funding life cycle and food chain. Some general
examples of the venture capital stages are early stage, growth stage,
and late stage.

EARLY STAGE Early-stage opportunities are usually broken into two

categories, called preseed and seed. Preseed investments typically
offer an opportunity for a team that has developed a very initial
concept or low-fidelity tech solution. Preseed companies can usually
use “friends and family” funding or an incubator to help validate an
idea by using lean start-up approaches and customer insights to
achieve a viable technology solution. An “incubator” is an
organization that will mentor very early-stage ideas and concepts
and help them grow into more defined businesses. Some incubators
are also available at college tech transfer offices, where
groundbreaking technologies are developed in labs. These initial
concepts still need to be commercialized with the support of the
incubator.
Seed-stage investments are normally consistent with teams that
have developed a more advanced prototype and solution, ideally
with revenue or validated customers in the pipeline. Accelerators
help seed-stage start-ups get traction as fast as possible. There is
normally a selection process of premier start-ups that are part of a
cohort of start-ups during a fixed time, which provide resources,
capital, and introductions to investors to prepare for the next round of
funding. The earlier the investment stage, the higher the potential to
achieve a large multiple in returns. Along with the return potential
opportunities of the early stage comes the risk of the company
failing. In addition, early investors’ shares could be diluted by other
investors in future rounds.
Early-stage investors are able to mitigate the impact of dilution by
exercising pro rata rights, which provide the right to reinvest during
the next round for a certain amount that will allow the investor to
maintain the same percentage of ownership. When due diligence is
performed for investments in companies at this stage, little financial
or market data is publicly available to support these decisions. This
is a significant difference when comparing investment research to
public markets that are readily available in research terminals, news,
and filings. It is also difficult to determine the level of parity between
projections and future realities in the early stage. As a result,
investors are making a large bet on the abilities of the founding
team, their conviction on how big the market will be, how big the exit
will be, and how the liquidity event will come to fruition, whether it is
through a strategic acquisition, a mergers and acquisitions (M&A)
deal, or an initial public offering (IPO).

GROWTH STAGE The growth stage, also known to be allocated to

companies as “growth capital,” is considered to be the more mature
stage of a company, in which capital can be deployed to accelerate
the company further to advance technology, expand to new sectors
and regions, and increase revenue quickly. Often, two contending
factors when a company matures are growth versus profitability.
Founders of companies need to decide whether it is more important
to be profitable now or grow quickly at the cost of getting further from
being profitable. There are pros and cons to both. The benefit of
growing quickly without being profitable is taking over market share,
which could give the company an advantage over competitors and
allow it to be more profitable later.

LATE STAGE A late-stage venture usually has the lowest multiple in

returns, but it also offers more favorable terms for downside
protection, the lowest risk, and the least amount of time to an exit.
Senior debt issued in the late stage has a higher priority to be paid
first during a liquidity event, should one occur. Most important, this
capital generally has a larger magnitude, which often justifies the
lower multiple.

Ways to Invest in Venture Capital

VENTURE CAPITAL FUNDS When it comes to allocating to venture

capital, family offices have a few options. One method is to follow the
selection process used by institutional investors, where they
research potential managers and funds for investment. Through this
similar approach, family offices can assess the quality of the
manager and understand their investment thesis, investment
strategy, unique edge, and track record. This initial approach also
assists in generating an early assessment in preparation for the
more robust phase of diligence.
Venture capital fund structures include a number of innovations,
including dedicated angel networks, which write larger checks; seed
investors, which focus on being “lead only”; and family office
networks, which make special syndicated deals available. The
traditional seven- to ten-year venture capital fund, with a 2 percent
management fee and 20 percent carried interest, has also evolved
into new structures, including those that simply issue venture debt or
use special-purpose vehicles (SPVs) to invest directly in deals with
more favorable terms regarding carry and management fees. In
addition, a rolling fund structure has offered innovations in asset
allocation, where new emerging funds can acquire capital that
renews every quarter from a network of investors.

INVESTING DIRECTLY INTO A COMPANY’S CAPITALIZATION TABLE Another

method of getting access to venture deals is to invest directly in a
company through its capitalization table (cap table). Many family
offices build their own venture investment teams, which are tasked
with getting access to, and investing in, the best deals. This
approach gives the family more control over their portfolio, including
being able to choose the companies included in it and how it is
constructed. Venture capital managed internally as an asset class is
attractive to family offices because their capital can be handled with
a patient approach and is not constrained as to the terms, deals, and
time horizon of venture funds.
Another benefit with direct investing in venture companies is the
ability to avoid paying carry and management fees. However, there
are times where the fees and carry charges levied by venture funds
are justified, given their access to highly exclusive deals that are
limited to a small pool of select investors. In these instances,
syndicated investments among a network of qualified investors and
family offices are valuable. A significant benefit of participating in
syndicated deals is the opportunity for a wealthy family or the family
office to build a community among like-minded and connected
investors that have greater access to exclusive deal flow.

Best Practices for Family Offices That Invest in Venture Capital

ATTEND THE RIGHT INDUSTRY EVENTS AND NETWORKS Close-knit

events, as well as the networks they can span, provide family offices
with a way to develop a community and foster collaboration,
although it is important to curate groups continuously. It is prudent to
understand the reputation of the event organizer and the quality of
both the attendees and the deal flow before spending time on
attending. Many of the larger events consist of service providers that
are primarily using the platform to sell services and products.
Regardless, family offices should constantly build their community
and have frequent touchpoints with respect to potential deals on
which they can collaborate.

CONDUCT DUE DILIGENCE SPECIFIC TO THE ASSET CLASS When

performing due diligence, it is important for family offices to develop
a thorough checklist of items to consider for various types of asset
classes. The type of due diligence required for a real estate deal
might be very different than that needed for a venture deal. It is also
a great idea to share deals with peers and get additional data points
from other family offices. This will help the family office synthesize
data and make better-informed investment decisions. Reference
checks from various levels of customers, investors, partners,
vendors, and channel partners are also important.

DEVELOP IMPORTANT RELATIONSHIPS The venture capital business

relies heavily on investing in friendships and relationships before
business is done. This is invaluable because of information
asymmetry in the industry, in which a small group of investors can
have unique and exclusive knowledge that gives them access to
better deal flow.
 A frequent mistake occurs when an investor heavily focuses on
transactions rather than on building meaningful connections. When
this happens, the potential for valuable long-term relationships and
partnership diminishes. However, when this is done effectively and
genuinely, a wealth of opportunities come to fruition in the form of
lifelong bonds, trust, and world-class deal flow.
For example, one best practice is to attract the interest of both
parties before sharing deal flow or introductions. When introductions
are not done appropriately, confidence among important potential
partners might be lost because the introduction might be viewed as
an imposition or a waste of time.

FOCUS ON EMOTIONAL INTELLIGENCE A skill that is constantly being

exercised is emotional intelligence. Venture investing involves a
close-knit community with varying levels of experience, reputation,
and skills across its many participants. It is, therefore, important for
industry professionals to be aware of their own strengths,
weaknesses, and development. Doing so will help tailor their
collaboration style to work best with strategic partners, as well as
build empathy for others that might be less experienced in the space.

ENGAGE THE NEXT GENERATION Often, the next generation of a

wealthy family struggles with maintaining the family legacy, while
embracing change and modern investment opportunities. Venture
capital provides the next generation, and by extension the family,
with access to new technologies and founders who will innovate.
Millennials and Gen-Zs, who often have access to new and
emerging technologies, will eventually mature into the older
generation, which will accumulate wealth that amounts to much more
than what the currently wealthy generation possesses.

PARTNER TO FIND GREAT EMERGING MANAGERS Another form of

manager selection, which is seen more frequently in Silicon Valley
than in other sectors, is where successful tech entrepreneurs have
formed family offices that invest in new fund managers who have a
certain belief, theme, or tech focus. Employing the family’s network,
including the interest and access provided by the next generation, to
invest in these tech entrepreneurs can prove to be very
advantageous. Furthermore, there are wealthy individuals who
altruistically want to support and mentor new managers, which can
also result in early-seed funding of these emerging managers via a
“fund of funds” model or a traditional limited-partnership structure.

Investing for Impact

What Is Impact Investing?

Family offices around the world have been increasingly moving

toward impact investing as a way to steward their wealth and deploy
capital aligned with their values.8 “Impact investing” involves
investments that are intended to have an impact as well as gaining a
financial return, with the definition of what counts as “impact” based
on the perspective of the investor. Impact investments range across
a spectrum of social and environmental outcomes and financial
targets and take on traditional investment forms and vehicles. In line
with a philosophy of “doing well by doing good,” impact investors
intend to create a benefit to society by making investment decisions
that take into consideration factors beyond financial gain. Through
impact investing, family offices have the ability to manage their
wealth in a way that aligns with their values and beliefs and leads to
long-term growth.
The evolution toward ethical and responsible investing and the
eventual formalization of the practice of impact investing have led to
the growth of an industry. There are many examples throughout
history of families, religious institutions, and governments investing
capital to promote social good. Around 2007, the term “impact
investing” was coined to capture the surge of investors,
philanthropists, government institutions, and entrepreneurs
intentionally shifting their perspective on why and how they deploy
capital, and the rise of impact products and strategies that followed.
As an industry, impact investing and the opportunities that exist
within it are growing. This growth is driven both by an increasing
number of family offices incorporating impact investing into asset
management and the larger portion of capital committed for those
already engaged. With a substantial amount of intergenerational
wealth transfer expected to occur over the next few decades, there is
great potential for significant changes in the dynamics of wealth
ownership, decision-making, and investment power. Women and
Millennials are expected to reap much of the benefits of this wealth
transfer. As a group, these investors are generally more inclined to
invest their capital in financial opportunities that align with their
values (as opposed to focusing strictly on returns).

Why Is Impact Investing Relevant for Family Offices?

There are numerous motivations behind family offices opting for

what is known as “double bottom line” or “triple bottom line”
investments, seeking to unlock the impact of their capital and find
value over and above the financial dollar. One factor is that impact
investing allows family offices to create a legacy derived from their
investments in addition to their philanthropic or business efforts.
When done with intention, capital investments across the portfolio
spectrum have the potential to influence the environment, change
social policy, and affect global change. Family offices seeking to
promote a positive legacy focused on a particular societal issue or
core value can use impact investing as a means to do so.
The process of developing an impact investing strategy and
executing it is empowering in itself. It provides the opportunity to
build cohesion and engage family members in the leadership and
management of the family office. Given the autonomy and flexibility
that family offices possess, they are in a unique position to reflect on
the purpose of their capital and either seek out or build investments
that they find meaningful. Many investors find that the practice of
reflecting on their relationships to money is empowering and inspires
family members to become more active in taking control of their
wealth. Focusing and catalyzing capital toward a societal or global
issue provide the family with a shared sense of purpose and
renewed identity.
 What Does Impact Investing for Family Offices Look Like?

There is no standard picture of what impact investing looks like. This

provides a unique opportunity for family offices to design and craft
customized impact portfolios that cater to their own individual needs
and interests. That being said, there are several frameworks and
organizations that provide guidelines and models for incorporating
impact across asset classes.
The Global Impact Investing Network (GIIN), for example, is a
nonprofit organization that focuses on reducing barriers to impact
investment so that more investors can allocate capital to fund
solutions to the world’s most intractable challenges. The United
Nations Sustainable Development Goals provide a blueprint of
seventeen goals to help promote global peace and prosperity. These
frameworks provide investors with impactful themes, such as
empowering women, fighting climate change, and reducing poverty,
to consider when making their investment decisions. It is a best
practice for family offices to consider the range of models for impact
that currently exist and adapt the elements that fit with what they are
trying to do.
Some family offices have chosen to move all their investable
assets to impact investing, while others carve out a specific subset of
their portfolio for the purpose. Whether a family decides to take a
total portfolio approach or is experimenting with only a small portion
of their wealth, distinct techniques and tools can be applied to
manage for impact in each asset class.
Within public markets, positive and negative screens can be
applied to rule out bad actors while investing in companies that align
with the family’s impact goals. These strategies are often referred to
as “ESG investing” or “responsible investing.” For private equity and
debt investments, a number of organizations have emerged to
provide resources for validating and certifying impact funds. Within
real estate, some impact investors focus on particular geographies
and developments, including “opportunity zones,” which are areas
designed to spur economic development and job creation in
distressed communities while providing tax benefits to investors.
Others have looked at investing in affordable housing opportunities
that lead to positive impacts and financial returns.
Family offices that consider impact investing from the
philanthropic angle may deploy mission-related investments (MRIs)
and program-related investments (PRIs) from their charitable
foundations or endowments. Both MRIs and PRIs can take the form
of equity, debt, or a guarantee, differing only in their expectations of
return. MRIs are evaluated to be at market rate, while PRIs have
below-market expectations and are treated like grants. From zero
and low-interest loans to equity investments in high-risk venture
deals, charitable foundations can catalyze their capital, thereby
creating incentives for businesses and other enterprises besides the
traditional nonprofits to meet certain impact goals and missions.

How Can a Family Office Start Integrating Impact Investing Practices

into Its Portfolio?

It is one thing to talk about impact, and quite another to start moving
capital toward it. For many families, the uncharted territory can be
intimidating, although those who have embarked on the process tend
to find it extremely rewarding. It is important to engage with trusted
professionals and advisers who can provide objective support for
and guidance on developing the appropriate strategy for
incorporating impact into asset management.
Some of the first steps in building an impact portfolio begin with
taking the time to articulate family values and understand the family’s
shared vision about what impact means. It is often helpful to create
or update an investment policy statement, which includes impact
themes and goals. Once all this has been done, the family office can
begin to consider and select impact metrics that they find relevant, in
addition to frameworks and systems for measuring and evaluating
impact performance. Joining networks, researching, and attending
industry events can help families better understand the current
resources and opportunities that exist. Through practice and
discussion, family offices can uncover the ways in which impact has
and will be a driving force behind their wealth management strategy.
 Challenges in Implementing an Impact Investing Framework

Many family offices face a number of common challenges and

barriers when implementing an impact-investing strategy. One issue
that often arises is difficulty getting family buy-in and encouraging
family members to become engaged in the impact-investing process.
Furthermore, not all financial advisers and asset managers have the
necessary knowledge or awareness of the impact-investing products
available on the market. Myths and other misconceptions (e.g., that
socially responsible investing will always cause a trade-off in
financial terms) prevent many from engaging in the viable
opportunities that can come from impact investing.
Disagreement on how impact can be properly attributed and
measured also often arises as a source of conflict. As a result, third-
party organizations have arisen to help provide guidelines and
certifications for how to select metrics and measure for impact.
Working with advisers that can help craft a methodology for impact
investing that aligns with the goals of the family office can help
resolve many of these issues.
Despite these challenges, incorporating an impact investing
strategy can both reap financial reward and empower the family
office with a deep sense of purpose. With an impact-investing
strategy, family assets can be deployed with meaning, creating long
lasting value and a distinctive legacy.

Investing in Art and Collectibles

With substantially wealthy individuals, what begins as a passion and

a personal connection to artworks and collectibles often turns into an
important investment.9 As such, it needs to be monitored and
continuously evaluated along with other significant asset classes,
such as real estate holdings. When doing so, family office executives
should focus on the following key elements:

• Determining family goals (i.e., whether to hold art for aesthetic or investment value
—or both)
 • Starting strategic and tax planning early once a decision is made to invest in art as
a collector or investor
• Managing art holdings as an investment

Any item in this genre can be classified as fine art, a collectible,

or an antique. Here are some general guidelines for these
categories:

• Fine art: Flat or three-dimensional visual art, comprising paintings, prints, posters,
photographs, drawings, other artworks on paper, and sculpture. The category may
also include conceptual art, to the extent that there is a tangible component. Some
increasingly use the term “fine art” to include three-dimensional, tangible personal
property such as twentieth-century furniture and other objects, but these are
normally considered “decorative art.” The word “fine” does not denote a greater
value than “decorative”; these are just terms that differentiate between the two
areas of collecting.
• Collectibles: This includes decorative art such as Hollywood and sports
memorabilia, stamps, coins, books, pens, classic cars, wine, whiskey, couture and
accessories, minerals, fossils, and other categories. A collectible does not
necessarily have to be valuable or antique.
• Antiques: This classification includes decorative art such as furniture, objects, and
other mostly three-dimensional items that were created at least 100 years ago,
although exact dating is flexible.

The Art Market

Global sales of artworks and antiques reached an estimated $64.1

billion in 2019. Less liquid than the traditional equities market, the art
market has nonetheless solidified as a distinct asset class, with
major auctions traditionally occurring in the spring and winter of each
year, therefore determining changes in levels of pricing every six
months. The market is divided between dealer/private transactions
and auction transactions, with over 50 percent of sales occurring in
the dealer/private platform, and the remainder at auction.
Transactions in contemporary and modern fine art currently drive the
art market in overall turnover, and because auction results are
publicly recorded, it is those prices that are used most often to gauge
the vibrancy of various sectors of the market, with art fair results
adding to the data points.
With auctions, online sales, as opposed to live auctions, are
becoming increasingly prevalent and accepted in the art market, with
an unprecedented $70+ million online bids being recorded in July
2020, exponentially above the approximately $1.3 million online sale
record that was recorded earlier that spring. Given that the art
market remains the least regulated of the major asset classes in
transactional matters and appraisers of tangible personal property
are not required to be licensed in the United States, the art market is
an opaque economy, and whether buying or selling, extra due
diligence must be undertaken in this area.
Art has a tendency to transcend generations. According to a
survey of art collectors, over three-quarters indicated plans to leave
their collections to heirs rather than sell them. Notwithstanding this
intention, a little more than half had educated their heirs on how to
manage their collections, including having appraisals performed.
Given the market opaqueness, lack of regulation, and complexity,
family office executives with financial responsibilities should become
knowledgeable about art investment concepts and take part in the
process of making decisions about family office art transactions.
Family office executives need to focus on the following key
elements when art is included in the investment portfolio:

• Determining family goals (i.e., holding art for aesthetic reasons as opposed to
investment value)
• Starting strategic and tax planning early once a decision is made to invest in art as
a collection or investment
• Managing art as an investment

Artworks and Collectibles as an Investment

As in managing other asset classes, family office executives should

consider undertaking specific actions in the following areas: art
valuation, risk management, legal and art stewardship, art lending,
and strategies for wealth preservation and estate planning. (Tax
considerations are as important in art as in other asset classes, but
they are beyond the scope of this book and will not be included in
this discussion.)

Art Valuation

Family offices should use the expertise of internal and external

teams to assess economic conditions, financial and art market
dynamics, and other variables that may influence the price, activity,
availability of supply, and future attractiveness of opportunities for
investment. These opportunities are generated by the underlying
dynamic of the art market, which is inefficient and illiquid, lacks price
transparency, and has highly differentiated products. Similar to
private equity, a family office not only must engage in the right
transaction at the right time and at the right price, but also must
enhance the value of each artwork through a variety of curatorial and
marketing practices commonly practiced by successful collectors.
Because the art market is ever-changing and unexpected life
events such as death or divorce can occur, it is best to be prepared
and thereby avert any additional stress being placed on the family.
Such trigger events cause valuation to be examined for the
following reasons:

• Income tax purposes if the art is transferred during life to a charitable beneficiary
• Gift tax purposes if the art is transferred during life to a noncharitable beneficiary
• Estate tax purposes if the art is owned at death
• Insurance purposes if the art is maintained during life

Risk Management

Families may not be ready to make decisions on art due to other

business or personal priorities. At a minimum, a general disposition
in the will provides flexibility and direction from the collector as to
where and with whom the collection would reside. It is highly
recommended that a succession plan be developed, which involves
establishing legal structures to own and retain the art.
 Taking an annual physical inventory of art and keeping insurance
records current are best practices that are highly recommended. Fair
market valuations are required for tax purposes, whereas
replacement value (or retail value) is required for insurance
purposes. Therefore, independent art appraisers should be involved
with the valuation process. An appraisal should be performed and
certified by a qualified appraiser. It is important to note that an
appraisal for purposes such as transfer to a limited liability company
(LLC), estate tax filings, or making charitable donations must be
performed and certified by a qualified appraiser, which is defined as
a vetted member, in good standing, of one of the three major
appraisal organizations; being compliant with up-to-date Uniform
Standards of Professional Appraisal Practice (USPAP) standards
and methodology, a set of congressionally sanctioned standards for
professional appraisal practice; and has not been disqualified by the
Internal Revenue Service (IRS) from preparing appraisals for federal
tax purposes. The Appraisers Association of America (AAA) is a
nonprofit association exclusively of personal-property appraisers and
is a reliable source for selecting appraisers with appropriate
expertise in specific categories of art, antiques, and collectibles and
can confirm the credentials of an appraiser. Members of the AAA
must adhere to a strict code of ethics and be current with USPAP,
which includes standards for competency, ethics, objectivity, report
writing, and record keeping. Members are also required to keep up
to date with connoisseurship, art market trends, and legal issues
pertaining to the field.
Family office finance and administrative staff should keep
thorough records of recipients, invoices, and other details in their
inventory records, such as

• Name of artist
• Description of artwork
• Location
• Cost basis
• Insurance value
• Fair market value
• Name of purchaser
• Name of seller
 This type of documentation also supports provenance, which is
important to confirm the authenticity of artworks. Provenance is
proved by documentation on ownership beginning with the creator to
current seller; it includes the involvement of art experts to protect
against fraud.

Legal and Art Stewardship

Owning art well is important both for practical reasons and to prevent
emotional distress within the family upon the collector’s death.
Establishing a succession plan requires advisers to determine
appropriate legal structures to own the art and devise a mechanism
for funding taxes upon death.
Use of an art LLC is a common legal strategy that allows the
collector to simply transfer ownership of a collection to the LLC. The
LLC owns the art, and the collector owns the LLC. Family members
may receive an interest in the LLC to alleviate any concerns about
the exact designation of pieces of art to the various family members.
Benefits include the ability to do the following:

• Legally safeguard the asset and collector, especially in transporting pieces globally
• Move value in a collection through shares in an LLC
• Maintain ownership privacy

Trust structures may be established for significant gifts of art or

LLC interests. There can be trade-offs for the financial and tax
benefits received because owning art in a trust differs from owning
art outright. Art held in trust may be required to be stored away and
not be available to be enjoyed personally by the collector or trust
beneficiaries, or even be loaned to museums. Obtaining competent
tax and legal advice in this area is important.

Art Lending

Loans on secured art may provide flexibility and liquidity to satisfy

unexpected cash needs, make other investments, avoid significant
transaction costs and taxes associated with the sale of art, or pay gift
or estate taxes.
Using art as collateral for borrowing rather than selling it outright
allows the collector to retain ownership of the art for enjoyment
purposes, as well as retaining the potential future appreciation of
value. Borrowing also helps avoid a potential public sale, thus
preserving confidentiality.

Strategies for Wealth Preservation/Estate Planning

Strategies for managing and protecting the value of an art

investment portfolio may include engaging in art financial
transactions or seeking tax benefits. From a charitable perspective,
this can be accomplished by donating the art to a charitable
beneficiary or creating a private museum. Family offices should
consider transparency with family members when developing these
strategies with their advisers.
Family offices should consider art as more than a personal
interest; rather, they should treat it as an investment. Candid
conversations about whether family members share the same
passion for any art pieces acquired by the collector are beneficial for
effective planning and cohesion. Prioritizing this discussion will help
families make the right strategic planning decisions to protect or
maximize valuation and minimize the tax consequences.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

The family office is starting to take form in terms of overseeing their

finances and managing personal assets. These were priorities, given
that they were all things that had to be done, and indeed had been
done or overseen, by John, Sofia, and/or Janina. Hiring for these
duties initially was easier for them to do, therefore, because they had
some familiarity with what was required and the solutions, in terms of
who to hire and what they needed to do, were similar to John’s
business.
Investments, however, was a different animal. While John
certainly was familiar with investing, his experience was limited by
the amounts, the opportunities, and, candidly, the time that he spent
on it. He also suspected that his current providers might not be the
right ones for him going forward. John hired Michael, in part,
because of his background in financial services and his experience
with how wealthier clients managed their portfolios. Working with
Michael, John now had an investment strategy in place.

Case Questions

• What are the pros and cons of the investment strategy developed by John and
Michael relative to other potential approaches?
• Working with outside investment advisers can present a number of challenges.
What are these and how can Michael help mitigate them?
• How can Michael help the family promote their interests in various social and
environmental causes?
• Are there specific things the family office can do to help John and Sofia with their
expanding portfolio of art and collectibles?
• What challenges does John face with respect to his direct investing activities?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What are the pros and cons of the investment strategy developed by
John and Michael relative to other potential approaches?

While wealthy families can oversee their investments in numerous

ways, one of the primary drivers of this decision is the level of control
they want to exercise over strategy, execution, or both. Strategy, in
the context of investments, is the development of an asset allocation
and the ranges within which they would like to permit their portfolio to
be exposed to various asset classes. Execution of that investment
strategy involves how the family should gain access to the various
asset class exposures, with whom, and/or with which strategies to
engage. The manner in which families do so ranges from active-
controlling to delegatory, as discussed in this chapter.
In John’s case, he has made a conscious decision to take a
hybrid approach by hiring Michael, who also has a background in
investments, as his CEO. He also could have hired a formal chief
investment officer. This approach has the benefits of allowing him to
develop and control the strategy, with or without the help of outside
advisers, but to rely on others for implementing this strategy. As
previously discussed, this is a hybrid approach between doing it all
himself through the family office and outsourcing it completely.
Bringing the vast majority of investment strategy and execution
plans into the family office provides greater control and flexibility, but
it also would require finding, hiring, and managing a large investment
team. This is something that neither John nor Michael has expressed
any interest in. As an alternative, John could have outsourced both
the strategy and execution to a third party such as an investment
consulting firm. This requires less involvement by the family office,
but it also distances John and Michael from those aspects of
investing in which they are interested: strategy and portfolio design.

Working with outside investment advisers can present a number of

challenges. What are these and how can Michael help mitigate
them?

This is a common challenge faced by families who use third parties

to develop an executive investment strategy. While having multiple
investment execution partners provides the family with access to a
broader array of investment ideas and execution strengths, this
arrangement must be managed to avoid a number of understandable
and predictable issues. These include (1) having “too many cooks in
the kitchen,” as each adviser provides advice and opinions about
how best to allocate and invest; and (2) creating a “horse race” of
sorts among the advisers as they jockey past each other for position
in the hopes of gaining a greater share of John’s investment
business for themselves (thereby creating an incentive for them to
take more risks with the portfolio).
Michael can help mitigate these issues by adopting formal
governance procedures for overseeing the investment portfolio,
including establishing an investment committee and developing an
investment policy statement. An investment committee provides a
formal process by which asset allocation and strategy execution
recommendations can be received, assessed, and decided upon.
The investment policy statement would also clearly delineate the
roles and responsibilities of the various managers and establish the
mechanisms by which they are evaluated. It also allows John and
Michael to receive advice from industry professionals and trusted
colleagues that are not connected with the recommendations.

How can Michael help the family promote their interests in various
social and environmental causes?

Developing an impact investing program requires a significant

commitment of time to develop the family’s strategy, identify causes,
select partners, choose investment vehicles, and establish ways to
measure success. As a result, Michael can help John and Sofia by
first engaging with other family offices and established impact
investing programs to help him better understand the space. This will
allow Michael to learn best practices that can help the family build
their own impact-investing vision. He should also consider hiring a
consultant that can help the family develop their areas of interest and
consider how their investment activities can promote or support
these areas.

Are there specific things the family office can do to help John and
Sofia with their expanding portfolio of art and collectibles?

Specialized fields like art and collectibles require the involvement of

experts in numerous areas, including procurement, valuation,
acquisition, ownership, storage, and insurance. It is therefore
important for the family office to locate and hire these specialists and
to involve them early in the process. This not only helps John and
Sofia appropriately find, acquire, own, and protect their collections, it
educates and engages them with their various passions. As with
many other responsibilities, professionals within the family office can
locate appropriate specialists by networking with their peers and
asking their advisers who work with other wealthy families.

What challenges does John face with respect to his direct investing
activities?

John is already somewhat active in direct investing. However, his

level of involvement has been modest, which presents a number of
challenges. A significant potential pitfall is lack of a formal process
for evaluating deals and a lack of network to help locate high-quality
deals. Adverse selection around the quality deal flow is a common
problem for family offices, especially those new to direct investing.
John should consider developing an overall strategy for his direct
investing, including (1) determining the relative percentage of his
portfolio that he will commit to it, (2) identifying the industries that he
would like to gain exposure to, (3) assessing what he is looking for in
an investment partner, and (4) considering what he can offer in
return. John should also discuss with Michael his various
commitments to private equity funds to see if there are coinvestment
opportunities available to him. This would be a way for him to use
the investments that he is already making with selective financial
sponsors to access incremental private investing opportunities, often
in areas and industries in which he would not otherwise have access
or expertise.
 CHAPTER SEVEN

Risk Management

CASE STUDY

Summary

• Two years after the creation of the Left Seat Management family office
• Personal and digital security
• Healthcare-related issues
• Mitigating financial risks
• Obtaining legal advice

Key Words/Concepts

• Security
• Healthcare
• Insurance
• Legal

Challenge
Just after Memorial Day, the Thorne family’s highly anticipated
Russian visas arrived in the mail. They were excited to receive them,
as this was one of the final items on their checklist for their upcoming
summer vacation, a fifteen-day trip on the Trans-Siberian Railroad.
John had dreamed of doing such a trip for a long time, as his mother
grew up in Poland under communist rule and this sparked a strong
interest in Cold War history in him. While he had visited many
countries in Eastern Europe, he had never traveled to Russia. What
better way to finally see Russia than on a luxury train trip with his
family?
John’s wife, Sofia, was also excited about this trip because of her
work on the board of a boutique art gallery with locations in
Minneapolis and New York that focused on art from central Asia and
Russia. Sofia also enjoyed an entertaining and expensive hobby:
buying art for her personal collection from local artists on their family
vacations. Her personal art collection was impressive and had
received public acclaim. For instance, she was recently featured in
the style section of a widely distributed Chicago newspaper, and
some rare pieces of her collection were recently loaned out to a
prominent art museum in the Midwest. John collected memorabilia
from World War I’s American Expeditionary Force (in North Russia
and Siberia), and he hoped that he could see some local artifacts
related to the Polar Bear Expedition on this trip.
Their daughters were already bragging to their friends about the
upcoming trip, with the exception of the youngest, Emilia. She wasn’t
excited about being off the grid, with only sporadic Internet access
available to keep in touch with her friends. Sofia had assured her
that according to the tour company, they would have sufficient
reliable Internet access for texting and sometimes for video calls.
Their oldest, Olivia, had picked up photography as a hobby during
her frequent travels to participate in horse shows over the years, and
she was excited to post new pictures to her many social media
channels.
Summer was here. John was more than ready for a vacation. He
was exhausted from having to deal with a recent staffing problem at
his family office. Jason, the family office’s chief financial officer
(CFO), had hired an analyst named Katya to help lighten some of his
workload, but it turned out that this employee had a checkered past
with the family office she had previously worked at. John was
approached by the principal of that family office and learned that she
left under negative circumstances due to difficulties working with
others in a small office. In light of this news, John decided to let the
analyst go, and he spent the last two weeks with his lawyer and
Jason to create a smooth transition of this new employee out of the
family office.
There were also other issues with the family. Sofia’s mother,
Gabriella, who lived in Los Angeles, had been having health
problems and couldn’t seem to get the medical attention she needed
through her current healthcare providers. This was starting to take a
toll on Sofia, who reasoned that with their resources and
connections, including at the Children’s Hospital, they should be able
to find someone who could provide Gabriella with better care.
The Thornes flew their Challenger 350 to Vladivostok, stopping in
Anchorage for two days on the way over. After a day of touring
around Vladivostok, the family began their fifteen-day journey to
Moscow.
Reliable cell phone coverage turned out to be more challenging
than originally described, and Internet coverage was poor unless the
train was near one of the major cities and towns on the route. Irkutsk
was one of those places, and the family arrived there early that
morning. Given the town’s reputation as the “Siberian Paris,” Sofia
had booked a custom tour of some local art galleries and studios
before their arrival and was off on the hunt to add to her growing
personal collection as the first thing she did that day.
Her tour guide brought Sofia and her daughter Isabella to a
charming art gallery located just off of Karl Marx Street. Sofia found
some pieces that she just had to have, including a relatively rare
piece from an artist she was particularly fond of. The total bill came
to around $150,000—too much for her to put on her credit card.
Sofia put down a cash deposit and then e-mailed and texted the
family office to set up the wire transaction so that they could have
the art shipped back home the next day. She received a call from
Janina, the family office administrative assistant, a few minutes later.
 Janina congratulated her on the order and said that she must be
having a great time—this was the second day in a row she was
wiring the office money for art purchases. Sofia was puzzled by the
comment because this was her first big purchase on the entire trip.
Janina explained that she had received a similar e-mail from her
yesterday, in which she asked for money to be transferred urgently
to buy some art pieces, and Jason had wired $72,000 to a different
art gallery in Irkutsk. Sofia knew there was a problem and asked
Jason to call her immediately. John and Sofia had just become
victims of wire fraud, and some panic set in at the family office.
Jason indicated to John and Sofia that he had processed a wire
transfer based on an e-mail request, similar to what Sofia had often
done in the past. Jason knew that the family was traveling in Russia
at the time and that Sofia regularly made these kinds of requests
while on vacation, so he didn’t view this as out of the ordinary. The
Thorne family’s commercial bank had an established callback
verification procedure for any wire over $50,000. Because Jason had
power of attorney on their accounts, he received the callback and
verified the accuracy and legitimacy of the $72,000 request. Jason
then processed the wire transfer and sent Sofia an e-mail confirming
that the wire had been processed to “SA Capital Bank.” However,
Sofia didn’t get the e-mail because of the poor Internet connection
while in transit to Irkutsk overnight. Moreover, upon further
investigation, the e-mail requesting the fraudulent wire came from a
different e-mail address than Sofia’s true e-mail. Sofia’s real e-mail
address was [email protected], while the
fraudsters reached out to Jason using
[email protected].
John, Sofia, and the family office were at a loss of what to do
about this situation. They contacted their commercial bank and let
them know that the wire request was fraudulent, which started an
internal investigation at the bank. However, they learned that nothing
could be done at this point to stop the transfer because the money
had likely moved between several locations. Jason contacted their
local police, who indicated that there was little they could do beyond
filing an official report of the crime, although they ultimately
determined that the fraud was perpetrated by hackers located on a
farm outside of Seattle. John reached out to his professional adviser
network to see if he could find a resource to help with this situation.
John and Jason grew frustrated and felt increasingly helpless as
they tried to find someone to help them with this major problem. The
cybersecurity landscape was confusing and loaded with buzzwords
and point solutions. John was finally referred to a security consultant
who specialized in dealing with risk management for small and
medium-sized enterprises (SMEs) and family offices. The family
hired the consultant to examine this particular case and their overall
risk exposure.
Just after this incident, Sofia contacted the family office attorney
to determine what, if anything, could be done to recover the funds
from this wire fraud. Given Sofia’s legal background, and because
the family office’s legal requirements didn’t warrant the expense to
have full-time legal counsel, legal services remained outsourced to
Natalia, a senior corporate lawyer at a global law firm.
The only major legal risk-planning the family office had done prior
to the wire fraud was around family office employment agreements
and nondisclosure agreements (NDAs) related to investments. The
cybercrime incident and subsequent wire fraud opened John’s and
Sofia’s eyes to looking at their legal exposure in a more strategic
manner. When Sofia discussed the wire fraud, Natalia suggested a
review of their current insurance policies as a way to mitigate future
exposures. Up to that point, the family had done insurance planning
on an ad hoc basis with an insurance agent with whom they had
worked since Rybat Manufacturing was started.
Shortly after the incident, Michael received an irate call from
John. John asked Michael to see what could be recovered for the
wire fraud from the family office’s insurance policies. Michael wasn’t
sure whether any of the policies covered a business e-mail
compromise (BEC) wire fraud like what had occurred. John was
upset to hear that news and asked Michael to do a complete review
of all the office’s insurance policies to see what else might not be
covered.

BACKGROUND INFORMATION
 Introduction to Risk Management

The risk and threat landscape for family offices continues to evolve
and present new challenges. In particular, COVID-19 created new
risk issues for families to consider and manage, but a pandemic is
only one dimension of the increasingly complex threats that family
offices face.
While some family offices were more prepared to deal with this
health crisis, no family was completely immune from the shock to the
global economic system and the operational problems that soon
followed. Many family offices were forced to go all or partially virtual
in short order, which led to numerous types of disruptions.
Risks to wealthy families are nothing new. John D. Rockefeller
and other magnates of his era used family offices to oversee their
vast fortunes. However, the Rockefeller family office never had to
deal with ransomware attacks or privacy breaches stemming from
the social media accounts of his children.
The evolving landscape of how family office risk and threat
management systems can be breached has made the task so much
harder. Executives continue to struggle to find effective ways to deal
with these multifaceted threats (physical, financial, health, cyber, and
privacy-related).
Moreover, the understandable desire by family office
professionals to be accommodating of, and responsive to, any and
all requests by principals and family members, coupled with the
broad access they have to sensitive information, opens this group up
to specialized problems. Vendors and families alike have seen this
disconnect manifest itself in (1) an underestimation and overlooking
of threats, (2) frustration and perplexity concerning effective
protective measures, and (3) a reactionary mindset of the family
office, constantly putting out operational fires but not being proactive
about preventing them.1
This chapter provides a guide and frameworks that family offices
can consider as part of developing a comprehensive risk and threat
management system across the dimensions of issues they face.
Figure 7.1 illustrates the various dimensions of risk that family offices
encounter.

Figure 7.1 Dimensions of risk

Ensuring Safety

Due to the growing levels of publicity and the inability of families to

truly ever get off the grid, high-net-worth families and their
associated family offices are increasingly challenged by both
physical and cybersecurity issues.2 Family offices are attractive
targets not only because they manage significant financial assets,
but also due to their interconnectivity with operating companies and
the personal activities of the family. Meanwhile, increased
geopolitical tension, rapid technological changes, and greater
sophistication of malicious actors all enhance the likelihood and
severity of potential family office impacts.
This chapter discusses how family offices can become more
informed about these evolving risks and potential mitigation
strategies, with a focus on physical and investigative security and
cybersecurity. It begins with a high-level assessment of the family
office risk profile integrated across physical, cyber, and converged
threats, and then explores in greater detail the physical and cyber
domains individually (figure 7.2).
Figure 7.2 Types of risk. Source: Chad Sweet, “Family Office Risk Management Practices,”
The Chertoff Group, 2019.

Physical security and cybersecurity best practices ground

security programs in the identification of high-value assets. In the
family office context, risk assessment should start by identifying key
business processes and patterns of life, as well as how these factors
periodically change, and then seeking to determine the
consequences that could result from those risks. Risk itself is
generally considered a function of threat, vulnerability, and
consequence. For family offices, threats and consequences across
the physical and cyber vectors might include the items listed in table
7.1.
TABLE 7.1
Threat types and consequences

Physical safety and

security threats Information security threats

• Property • Compromise of sensitive data

intrusion • Stolen credentials allowing access to family office
• Stalking networks, as well as counterparty systems (e.g.,
• Retribution financial service online applications)
• Vandalism • Disclosure of personal and/or location-specific
• Burglary/theft information on social media
• Natural disasters • Denial-of-service attack inhibiting family office
(e.g., fire, operations
earthquake, • Ransomware locking all data and files
flooding)
• Target
kidnapping
and/or ransom
• Health
emergencies

Converged threats

• Travel security–related threats

• Insider threats from a trusted employee or contractor
• Internet of Things (IoT) threats

Potential consequences

• Loss of life or safety

• Property damage
• Loss of confidentiality resulting in disclosure of sensitive information (investment
data, tax returns, business or private e-mail content)
• Loss of data integrity, resulting in corruption of financial data or proprietary
processing functions
• Loss of network availability, resulting in operational impacts
• Reputational damage
• Compliance and regulatory penalties
Source: Chad Sweet, “Family Office Risk Management Practices,” The Chertoff Group,
2019.
 Physical and Investigative Advisory Security

Vulnerabilities to the physical infrastructure of family offices can

present significant risks. These risks are particularly acute where
offices are collocated with family businesses, making families and
their employees more vulnerable to physical threats, including
natural disasters.
A critical aspect to securing family offices is borne out of the
physical and investigative advisory security (P&IAS) practices.
Businesses face these issues as they scale their size, footprint, and
complexity. From screening potential new employees, to due
diligence when making deals, to ensuring that cameras and locks
are installed, P&IAS services are critical to ensuring the safety of
their assets and employees. As a family’s wealth grows, these
services become more important, and it is the responsibility of the
family office to understand how best to protect the family and their
assets.
It is very rare that a family office will keep many P&IAS services
in house because of the sheer cost and complexity of providing
these services and technologies. Typically, family offices associated
with a family business or the principal’s operating company will
borrow resources and then hire third parties to fill in the gaps. Hiring
a full-time P&IAS security director is usually limited to families with a
significant net worth, a high public profile, or issues related to their
location or travel needs.

THREATS Figure 7.3 reflects a number of common threats to a family

office from a physical and investigative standpoint.
Figure 7.3 Types of threats. Source: Chad Sweet, “Family Office Risk Management
Practices,” The Chertoff Group, 2019.

SOLUTIONS The P&IAS firms provide a wide range of services,

including the following:

• Comprehensive threat assessments

• Mergers and acquisitions (M&A) due diligence
• Principal protective details (local needs and international travel)
• Residential and commercial facility security
• Threat intelligence
• Kidnapping and terrorism threat management and training
• Intrusion detection (red team/blue team)
• Maritime security
• Workplace threat management and training
• Collectibles and high-value-item security and logistical support
• Personal security awareness training
• Investigations
• Psychological profiling
• Technical security countermeasures
• 24/7 watch centers

Physical Security
As previously discussed, family offices are attractive targets to
malicious actors, and they face increasingly complex physical
security risks. Significantly, family office physical infrastructure
vulnerabilities can present significant risks that span across other
security domains as well. For example, physical intrusions are a
means that adversaries use to conduct cyberattacks, which can
wreak havoc on a family’s reputation and business operations and
expose sensitive personal and business-related information.
Family offices should consider four physical risk domains as part
of a comprehensive physical security plan: home, local travel, office,
and extended travel. While complete risk elimination is not
attainable, family offices can greatly reduce their risk across these
domains by building a 360-degree physical security program that
assesses risk gaps, actively monitors for threats, and responds to
threats through carefully planned and coordinated activities (figure
7.4).

Figure 7.4 360-degree security program. Source: Chad Sweet, “Family Office Risk
Management Practices,” The Chertoff Group, 2019.
PHYSICAL THREAT ASSESSMENT Family offices should initially take a
threat inventory consisting of exposures, business processes, life
patterns of principals, and high-value assets. After threats have been
recorded, family offices should outline the potential consequences of
these threats.
Effective threat assessments employ open-source and
proprietary information and intelligence sources to identify gaps and
potential consequences. Typical information and intelligence sources
that are gathered and then analyzed include the following:

• Social media outlets, news reports, and blogs

• Commercial database mining on principals, family members, and operating
businesses
• Assessments and interviews of family office staff and other employees with access
to sensitive information
• Vulnerability assessments of homes, offices, commuting routes, and life habits
• War-gaming exercises to identify worst-case threat scenarios, actors, and potential
tactics

PHYSICAL SECURITY BEST PRACTICES The following are a number of

best practices that family offices should consider when developing a
physical monitoring program:

• Conduct an annual physical security risk assessment of residences, offices, and

transportation practices.
• Develop and implement a visitor management system and protocols to ensure the
safety of residences, offices, and operating companies.
• Develop mailroom and parcel screening guidelines to prevent the entry of hazards
into a family office.
• Develop and train employees in a workplace violence prevention and response
program.
• Use Crime Prevention Through Environment Design (CFTED) principles to build
physical security into all elements of a family office.
• Research potential threats carefully prior to international travel.
• Develop a customized executive protection program that is consistent with the
family office principals’ risk tolerance and patterns of daily activities.
• Secure infrastructure at all residences and offices with intrusion detection systems,
closed-circuit television (CCTV) coverage, security lighting, fencing, and other
elements.
 • Develop and implement a key and access credential policy.
• Develop a continuity-of-business plan to react to natural disasters.

MONITORING FOR PHYSICAL SECURITY Family office physical security

programs should consistently reinforce effectiveness through
continuous monitoring, training, and validation. Weaknesses in
control implementation or unintentional modifications can undermine
security programs when staff and principals ad lib instead of
following an agreed-upon set of protocols. Principals, extended
family members, and family office staff should be trained on threats
and tested regularly to help create so-called muscle memory. Family
offices should consider hiring consultants to simulate physical
security events and instill confidence within them about how to act
during real-life incidents. Successful family offices use this type of
training to build a security culture with all employees that support a
family. Basic precepts such as “If you see something, say
something” can help principals and executives identify potential
problems before they manifest themselves into a physical security
incident.

RESPONSE Physical security is considered important by principals

and family office staff; however, given the service and convenience
orientation of family offices, security protocols are very often
overlooked, especially if a family hasn’t experienced a serious threat
before. However, developing and adhering to a set of security
response plans can help a family cope effectively with physical
security issues when they arise. Family offices should also consider
hosting an all-hands, “lessons learned” session after physical
security events occur so that principals and executives can
incorporate these experiences to help avoid future problems.
International travel is a common area where family offices are
asked to support. Family offices can build templates to help plan and
respond. Figure 7.5 presents an example of a travel preparation
template that can be customized according to a family’s needs.
Figure 7.5 Travel preparation list Source: Chad Sweet, “Family Office Risk Management
Practices,” The Chertoff Group, 2019.

IN PRACTICE Employing physical security presents challenges to

family offices because the industry tends to be fragmented and
because of the use of confusing jargon. Many firms in this space
specialize in point solutions (e.g., guards, drivers, CCTV experts,
electronic countermeasure experts) for family offices. On the other
side of the spectrum, family offices have access to comprehensive
physical security consulting firms that help them with complete
physical programs ranging from building strategic plans and
conducting vulnerability tests to hiring the drivers in a foreign
country.
To get started on physical security, family offices should consider
hiring a comprehensive consulting firm to conduct an initial
assessment and provide recommendations for building a plan.
Because small to midsized family offices tend to outsource physical
security resources, engaging a comprehensive security firm tends to
be a good fit and can help manage and control overall spending in
this area. Regardless of how robust they are, physical security
programs and initiatives should be understood and embraced by all
the stakeholders of a family.

Cybersecurity

Family offices are particularly attractive cybertargets not only

because they manage significant financial assets, but also due to
their interconnectivity with both the underlying family-owned
business and the personal activities of the family (including extended
family members). A successful intrusion into family office or business
information technology (IT) systems could release sensitive
information, damage the family’s reputation, disrupt the family’s
business operations, undermine wealth preservation, and enable
surveillance of a family member for follow-on threat objectives.
Cyberthreats to family offices that may give rise to these damaging
consequences, and therefore must be defended against, include the
compromise of sensitive data, stolen credentials, disclosure of
personal and/or location-specific information, denial of service
attacks with the potential to inhibit operations, and ransomware
locking of data and files.
Furthermore, high-net-worth families and family offices are facing
increasingly complex security risks amid the rise of social media. For
example, social media exploitation and social engineering enable
hackers to gain unauthorized access to family networks and e-mail
or other online entities such as online banking accounts. Information
derived from social media is often even sufficient to permit a
malicious actor to steal someone’s identity, and perpetrators may
use accidentally leaked or voluntarily provided personal information
for extortion—indeed, the actual and threatened release of leaked
information represents one of the fastest-growing segments of social
media misuse. Finally, malicious actors often use “patterns of life”
information obtained via social media to engage in theft, burglary, or
other physical attacks—here, online hygiene awareness has
significant implications on the physical security of high-net-worth
families and their members. Evidently, growing publicity and social
media sharing, as well as the combination of poor cyber hygiene and
the ease with which adversaries exploit social media information,
represent clear threats to families’ personal safety, reputations, and
financial and physical security and ought to be considered as part of
a family office security program.

CYBERTHREAT ASSESSMENT Importantly, threat assessments that

leverage open-source and proprietary information and intelligence
sources—included as part of a physical threat assessment, as
mentioned previously—may also yield insightful information on threat
actors interested in using IT-related vectors to infiltrate a family
office. Specifically, an open-source intelligence (OSINT) scan may
identify sensitive family office data on the web, including on social
media platforms. OSINT can be complemented by deep web/dark
web monitoring to identify potentially compromised credentials,
personal identifiable information (PII), or other sensitive data
regarding the family office and its members, including any other
relevant postings on discussion sites or bulletin boards. It is common
for family offices to underappreciate the intent of threat actors to
target the high-net-worth individuals themselves as well as family
office employees, independent advisers, and household staff;
however, more robust threat discovery efforts as part of an overall
cybersecurity strategy can raise awareness of threat activity and
inform decision-making.
In addition, family offices should employ a pathways analysis that
considers reasonably plausible scenarios for the pathway that an
adversary could take to infiltrate a family office, including the
following elements:
 • Reconnaissance: Explores the sources (i.e., social media) that an attacker may
use to collect information about the intended target within the family office
• Initial entry: Maps how an attacker would gain initial entry inside the target’s
network perimeter, such as through phishing, a watering hole attack, credential
subversion, or a hardware-based attack
• Establishment of communications with an external attack controller:
Highlights the methods that an attacker would use to establish communications with
an external attack controller
• Lateral movement and privilege escalation: Reveals how an attacker could
traverse a network, escalate privileges, and identify critical information assets to
ultimately compromise the confidentiality, integrity, or availability of key data
systems

A threat pathways analysis ultimately highlights a family office’s

potential cyber vulnerabilities, providing the office with a fuller picture
of the risks to its environment. Given the range of threats that any
organization—including family offices—may face, eliminating risk is
not feasible; however, focusing on high-value assets and reasonably
foreseeable scenarios for how those assets could be compromised
helps build defensible priorities.
As previously noted, physical intrusions are also a means that
adversaries use to conduct cyberattacks, making the implementation
of an effective physical security program a critical component of
reducing cyber risks in a family office environment. However, there
are also a number of cyber-specific mitigation measures that family
offices and their members can reasonably take to improve their
cyber posture. Next, we highlight a number of cybersecurity best
practices for family offices, first offering governance-related
recommendations, followed by technical recommendations that, if
implemented, can reduce the risk of dire consequences such as the
disclosure of sensitive information, corruption of financial data, loss
of network availability, and reputational damage.

GOVERNANCE BEST PRACTICES Governance and risk management:

Family offices should consider establishing a comprehensive
security strategy and the associated road map for all aspects of
family office staff security requirements. Where there is overlap and
integration, this process may require close coordination with security
leadership at larger family offices. A robust governance and risk
management program would include periodic security assessments
—including risk assessments and audits—and methods for tracking
and remediating findings and progress. Furthermore, any device
connected to the family office’s network is a potential opportunity for
hackers. Without a comprehensive understanding of these
connections, it is difficult to define the risk surface or understand
where to place key controls, raising the imperative for a robust and
thorough asset management capability.
Security policies and procedures: A fundamental step for
family offices is often to create a specific set of information security
policies, standards, and procedures, which provides a minimum
baseline to allow for compliance testing across the organization.
Without clearly documented policies and procedures, family
members and family office employees lack proper guidance and
cannot be held accountable for their actions. Given the increasing
risks associated with social media, security policies and procedures
should also outline guidance for social media use, including for both
during company time and when outside the office. Family office
employees must be made aware of the risks associated with
oversharing on social media and noncompliance with broader cyber
hygiene measures both to the family members themselves and the
office’s sensitive information and reputation.
Training and awareness: Cyberattackers often rely on an
organization’s own employees to gain initial entry into an
organization’s network, such as through phishing, credential
compromises, or watering hole attacks. Employees poorly trained in
cyber hygiene can put the family office’s sensitive data at heightened
risk of compromise. Within family offices, implementation of a robust
cyber awareness and training program is key. While firewalls,
antivirus software, and secure e-mail programs reduce the
technological vulnerabilities of a family office from cyberattacks,
effective cybersecurity also requires mitigation of the human impact
of cyber risk. Without all these, expensive tools and investments may
be rendered useless.
Highly applicable to the nature of family offices, business, travel,
and remote work create an additional set of cyber risks. In addition to
reinforcing in-office cybersecurity guidance such as password
security and spear phishing prevention, security awareness and
training for family offices ought to include guidance for remote work,
such as using a virtual private network (VPN) or a mobile hot spot in
lieu of public Wi-Fi and ensuring that all devices are password
protected and never left unattended. All guidance reinforced to
employees and family members through training and awareness
should be clearly documented in family office security policies and
procedures.
Incident response: Because total risk elimination is impossible,
it is crucial for family offices to be prepared for a cyber incident that
may affect business operations. Developing an incident response
plan, associated incident scenarios, and related procedures should
address family and staff response responsibilities, internal and
external communications during the incident, and continuity of
business operations. “Tabletop” exercises modeled after likely threat
scenarios can enhance cyber preparedness in the event of an
incident and should be used to test the effectiveness and
understanding of the family office’s incident response plan.
Personnel screening and insider threat: While zero-day
vulnerabilities, ransomware, and unpatched software continue to
pose significant threats themselves, a potentially more dangerous
threat continues to grow within businesses—namely, an
organization’s own employees. Instituting robust background
investigations as part of the onboarding process for new employees
and employing periodic reinvestigations for employees and staff with
access to sensitive family office information can provide a family
office with the necessary insight into the insider risks it may face and
allow leadership to take action when needed.

TECHNICAL BEST PRACTICES Access control: Weak access and

authentication mechanisms leave family offices vulnerable to
attackers who are adept at exploiting weak passwords and
inadequate access security. Password protecting all devices with
strong, unique passwords and working to include multifactor
authentication across all systems and applications used can
significantly enhance a family office’s cybersecurity posture. Also
included in the organization’s security policies and procedures
should be a requirement for mandatory password changes on a
regular basis for all family members, employees, household staff,
and third parties for all accounts and applications. To more easily
facilitate the creation, storage, and refreshing of unique passwords
across all accounts, family offices should consider implementing a
password management platform.
Manage privileged access to sensitive data: Closely related to
access control, a critical tenant of a cybersecurity program is
auditing roles, responsibilities, and access permissions regularly to
control access to sensitive information on an as-needed basis. As is
reflected by a threat pathways approach, compromise of network
administrative privileges is a primary method for attackers to gain
access to valuable data by escalating privileges within the network.
Limiting administrative privileges only to those who critically need
access to perform their job functions reduces the attack surface of a
family office or business.
Equip all residence and office computers with updated
antivirus and antispyware software: Without antivirus software,
computers are at risk of becoming infected with malware, which can
lead to data compromise and other severe impacts to business
objectives. Spyware is software that, without a user’s knowledge,
monitors and gathers information about a user from their Internet
connection—mined information may even include account
credentials and credit card numbers, posing a significant risk to
individuals and the family office writ large. Similar to antivirus
software, antispyware can detect spyware activity and either delete
such programs automatically or alert users of their presence.
Data security: Given the highly sensitive nature of the data that
family offices regularly handle, data security is one of the most
critical aspects of a cybersecurity program and must be addressed
for both data at rest and data in transit. Data security should start
with confining storage to approved corporate sites and systems,
disallowing the transfer of all family office–related information to
personal devices, flash drives, or unauthorized cloud storage
providers. Furthermore, sensitive documents shared electronically
with other employees, family members, staff, or third parties should
be password protected; alternatively, employing a single,
enterprisewide, cloud-based file storage and information sharing
platform is a secure and convenient way to facilitate data sharing,
which can be further enhanced via robust passwords, multifactor
authentication, and privileged access. These recommendations
should be documented clearly in security policies and procedures
and be reinforced consistently through security training and
awareness. Finally, family offices should strongly consider using
encryption for sensitive business information—if an attacker
successfully infiltrates the network, strong encryption, if correctly
implemented, can prevent access to and exposure of sensitive data.
Wireless security: Attackers can observe communications and
breach your perimeter by identifying and accessing an unprotected
wireless network, making strong wireless security measures a critical
aspect of overall cybersecurity. First, it is a fundamental best practice
for any organization’s Wi-Fi network to feature a robust, unique
password, changed from the default router administrator credentials
provided by the manufacturer that can readily be found on the
manufacturer’s website. It is critical to change the name of the router
—referred to as the “service set identifier (SSID)”—so that it does
not contain any self-identifying information (i.e., business name or
address). If feasible, it is also strongly encouraged to establish a
media access control (MAC) whitelist for the wireless network, a
method of authorizing only specific, approved devices to connect to
the corporate network. MAC whitelisting should be implemented by
IT, but first it requires insight into how many devices are currently
connected, whether or not they reasonably should be, and the MAC
address for each—information that ideally should be readily available
if an asset management program is in place. Finally, family offices
should establish a distinct wireless network for guests, separate and
segmented from the official business network that is relied upon by
employees and family members. This network should require its own
unique password, which is changed periodically in accordance with
password security best practices.
The family members themselves—the ripest targets of malicious
actors, as well as any employee who regularly works from home,
should also employ these best practices outside the office. As
mentioned in the security training and awareness guidance,
employees should be required and consistently reminded to avoid
using public Wi-Fi networks, which are unsecured, and therefore a
viable avenue for bad actors to observe network traffic and acquire
sensitive information quite easily. Instead, when working remotely,
family members and employees should rely on VPNs, which create
an encrypted tunnel between your device and the VPN service to
protect against nearby hackers; mobile hot spots provisioned by IT
are also a secure alternative to public Wi-Fi.
Keep software updated and patched: Attackers exploit
software vulnerabilities to gain network access, and unpatched and
legacy software feature known security vulnerabilities that bad actors
can easily target. Patching operating systems and applications
before bad actors can exploit them is a fundamental technical
mitigation measure. Employees, family members, and other staff
should also be required to restart their machines periodically to
process updates and install patches as soon as they become
available, preventing prolonged exposure to known threats that can
compromise family office security.

MONITORING As with physical security programs, cybersecurity

programs must consistently reinforce effectiveness throughout
continuous monitoring, training, and validation. For example, training
and awareness programs must consistently be repeated subsequent
to the initial onboarding process and should be further reinforced
with social engineering tests that use realistic scenarios to put
employees in believable situations where they must exercise their
judgment accordingly.
For a cybersecurity program to be effective in the long term, it is
critical that family office leadership advocate for the creation of a
strong security culture by setting a precedent that permeates the
organization. Where necessary, leadership should begin to hold
employees accountable for their security posture through both
positive incentives and negative reinforcements, drawing on
documented policies and procedures to track compliance. Family
offices should also consider hiring consultants to simulate
cybersecurity events and instill confidence in family members and
employees about how to act during real incidents based on defined
roles and responsibilities.

RESPONSE Cybersecurity is often recognized as important,

particularly given the increase in high-profile cyberbreaches that
have had both reputational and financial impacts on businesses and
individuals; however, given a common gap in technical acumen and
a propensity to favor convenience, security protocols are often
overlooked in small office settings, especially if a serious breach has
not yet occurred. Even if a breach has not yet happened in the family
office environment, developing and adhering to a set of security
response plans can help a family cope effectively with cybersecurity
issues when they do arise. Given the critical and sensitive nature of
the data that family offices rely on, full and incremental backups of
data should be made regularly. If an incident were to occur, family
offices should consider hosting an all-hands, “lessons learned”
session to reflect on the experience and coordinate improvements to
processes, procedures, and technologies in the future. Finally, in
addition to mitigating and avoiding risks, family offices may consider
transferring risks through the use of cyber insurance, which can
complement the governance and technical best practices described
throughout this chapter.

Managing Healthcare

Healthcare has become an increasingly important component of

family life organization for affluent families.3 Family offices often are
charged with the responsibility of managing the healthcare needs of
their principals and family members, along with their already
complex traditional responsibilities.
Within the context of how quickly healthcare is changing, and in
turn how quickly the health status of the family members can
change, it is no wonder that family offices view the healthcare
responsibility with some trepidation. The healthcare theme is large
and expansive—and it is an extremely complicated landscape.
Objective, authoritative information on medical strategy, access,
price, and quality is very difficult to find.
 There is also the added complication that affluent families
generally have homes and businesses in more than one location and
therefore travel extensively throughout the globe. These realities
lead, in many cases, to a reactive rather than proactive approach to
managing the family’s healthcare needs. Unfortunately, reactive
mode is nearly always suboptimal. When organized and accessed
properly, modern healthcare is truly a miracle. It can add years of
productive life and can save a life when illness occurs.
It is certainly no secret that affluent individuals and their families
routinely seek the finest physicians and healthcare facilities, and that
it is really difficult for laypeople to understand exactly what quality
healthcare is—it is a subject of much debate even among experts.
This is why an effective family office can be of great value to both the
principal and their family.

Healthcare Advisory and Advocacy

Specialization abounds in virtually every major business category,

but none more so than in the healthcare industry. For example, in
years past, an individual might see an orthopedist for a wide range of
knee, hip, shoulder, and spine issues. Today, at some top hospitals,
a patient may be referred to a specific physician based on what part
of the knee needs treatment! Healthcare advisory firms provide the
navigational and organizational specialization that is required to
partner with a family office to build a successful preventative and
interventional platform for principals and their families.
What are the essential elements of a healthcare advisory firm?
Top healthcare advisory firms have a cadre of professionals who can
leverage their deep domain knowledge of healthcare in all forms.
They enjoy close relationships with the physicians, scientists, and
administrators that truly matter in the healthcare industry, resulting in
an ability to provide clients with ready access to exclusive, closed
practices. They have invested heavily in an intelligence-gathering
capability that can provide expert advice on the diagnosis and
optimal treatment for any medical issue. Investment in intelligence
also allows the advisory firm to span geographies via a network of
top specialists and facilities throughout the world. They have a
planning function that synthesizes emerging diagnostic and
treatment technologies with the immediate and long-term needs of
their clients.
The following is a review of the typical healthcare needs of an
affluent family as viewed through the lens of a competent health
advisory firm:

• Preferred, expedited access to top physicians, hospitals, and allied/ancillary

services.
• A formal design for preventative healthcare services that meets the immediate and
long-term objectives of the principal. This includes the expert selection of the
physician cadre, the specific logic behind those selections, and the strategy and
logic behind the recommended diagnostic regimen.
• An expert case management capability in place and ready to be deployed should a
family member experience a major health crisis or chronic illness. Over time, no
family can escape the reality that at some time, a loved one will become seriously
ill. A knowledgeable health advisory firm can immediately research the medical
issue and clearly communicate the options available to properly diagnose and treat
a disease. A top advisory firm will offer second and even third opinions from world-
class institutions to ensure that the optimal care pathway will be pursued. This also
gives the client the opportunity to assess multiple treatment philosophies and
treatment options. Once a decision is made, the adviser can ruthlessly assemble a
world-class care team across multiple campuses, faculties, and geographies that
best organizes and deploys state-of-the-science care.
• Coordination of routine and emergency healthcare services on a 24/7/365 basis in
any location. Provide advanced contingency planning to access healthcare
services, when needed, in parts of the world that are frequently visited.
• Secure coordination and management of patient medical records across multiple
providers, platforms, and locales.
• A single, unified, and comprehensive medical record and coordination of medical
information among all providers. The utility of this feature should not be
underestimated. A common medical record platform among one’s health providers
fosters clear communication, prevents mishaps like drug interactions or duplicate
diagnostic services, and allows the immediate deployment of one’s complete
medical history to emergency providers. In an emergency, a treatment team has
only two options—treat generically in the absence of critical information, or treat
more precisely based on a comprehensive medical record. Upon notification, a
private health adviser can immediately forward the medical record. It is not difficult
to guess in which scenarios the outcomes would be better.
 • Create clear, secure, and effective lines of communication between the healthcare
system, family members, and the family office. Arrange “need to know” access to
patient information that is compliant with the Health Insurance Portability and
Accountability Act (HIPAA).

Healthy Principles for Affluent Families

CATALOG HEALTHCARE INFORMATION Understanding and cataloging

the precise healthcare status and needs of each family member are
essential to building an effective family office for healthcare. Trust
becomes a very important issue. While nearly every confidential
detail of the family’s financial life is catalogued and managed by the
family office, the family’s confidential medical information may indeed
have been off limits. However, it is critical for anyone managing the
family’s healthcare needs to be fully informed, have a complete and
comprehensive medical record of each family, and have formal,
HIPAA-approved access to vital healthcare records. The potential for
great healthcare is defeated in so many instances by disparate data.
Physicians, labs, and hospitals do not have a unified health
information system—there are literally thousands of individual
islands of systems and databases, and chances are they cannot talk
to one another. This is a great function for the family office, as it is
essential to have a secure, organized, and central repository of all
medical records of family members. The cornerstone of a sensible
approach to an effective long-term program is preventive; we believe
that the best medical outcomes are achieved by altogether avoiding
the need for catastrophic care, particularly when families are
distributed across the globe in the pursuit of business, personal, or
other endeavors.

ANTICIPATE AND PLAN FOR EMERGENCY NEEDS GLOBALLY No matter

what we do, though, the nature of medical and surgical illness is
unpredictable. Even those with the best and most regular access to
primary and preventative care can experience unanticipated illness,
at any time and at any age, by virtue of injury, accident, or a medical
event that arises without warning. We further recognize the
geographic constraints created by the global mobility of affluent
families, as well as the often-limited healthcare infrastructure in
many of the countries where principals travel and reside.
The global mobility of families creates another problem that
needs to be solved: the healthcare experiences of successful
families—from the common cold to orthopedic injuries to unexpected
hospitalizations—are typically scattered across the globe in an
uncoordinated fashion.

GET THE BEST MEDICAL TEAM The cutting edge of modern medical
science and technology is ultrasophisticated and advanced to the
extent that the difference between the very best care and merely
adequate care can literally be the difference between life and death,
recovery or disability. As a result, individuals and families with
sufficient personal resources to secure access to the best medical
services are strongly advised to do so. Expertly matching provider
capability to a specific medical condition requires a deep intelligence
capability that is generally the exclusive domain of top healthcare
advisory firms. Moreover, top physicians have no or very limited
excess capacity—their ability to take on new patients is severely
strained. Therefore, gaining access to the very best specialists,
essential for achieving the best outcomes, requires the strong, long-
term relationships that are the hallmark of top advisory firms.

ENSURE ACCESS TO A BROAD SET OF SPECIALISTS Modern medicine is

superspecialized, often with dozens of distinct subdisciplines within
each field. In this environment, a one-doctor, one-hospital or single-
clinic solution cannot deliver the best care across the healthcare
continuum. This highlights a major defect of the concierge medicine
model, which generally relies on a single, local physician. Ensuring
truly elite care demands access to a broad spectrum of specialists
and hospitals, including leading academic medical centers and
specialized clinics.

FOCUS ON PREVENTION AND PLANNING With the rapid advance of

technology, diagnostic screening and preventative healthcare
planning have become among the most sophisticated fields of
medicine. Today, we are able to assess every vital system of the
human body, screening down to the level of genetic markers. Yet this
proven path to optimal health risk management, well-being, and
longevity is commonly overlooked. Every sound health risk
management plan must begin with a comprehensive, state-of-the-
science medical evaluation, repeated annually, as well as developing
and maintaining a long-term individual healthcare plan.

DIGITIZE VITAL DATA Less than 5 percent of the population has a

unified, secure, and immediately available electronic health record,
but neglecting this resource often comes at great cost to the patient.
Medical data and records must be stored securely and with absolute
confidentiality (i.e., HIPAA-compliant), maintained and updated
continually, globally accessible to authorized caregivers on a
24/7/365 basis, and used as an essential tool in a personal health
strategy.
Family office executives can mitigate healthcare’s risks and
uncertainties while simultaneously building an effective global
healthcare platform for their principals and families by partnering
effectively with a top healthcare advisory firm.

International Travel Medical Needs

For individuals and families who travel globally—whether for

professional or personal reasons—medical concierge offices that
offer medical advice and coverage to people who are travelling can
be life-saving.4 These are specialty practices whose doctors are
trained in emergency medicine and have expert knowledge of
diseases endemic to different parts of the world. They can be
invaluable by helping local physicians treat medical conditions under
their direction with supplies and prescriptions that they provide.
These specialist medical professionals can also give directions as to
where to seek appropriate medical attention.
Travel medicine professionals are usually internal medicine
practitioners or infectious disease specialists. They have a wealth of
knowledge about the complexities and risks of international illnesses.
The concierge doctor can also be invaluable upon the patient’s
return from travel as they conduct follow-up care.
It’s best for the family and/or family office to enlist professional
medical advice from these specialist physicians at least six months
in advance of travel. They can provide invaluable information,
depending upon the destination, about issues and risks regarding
travel during a particular time of year or altitude. Certain destinations
outside the United States pose particular health risks, such as food
safety, environment, sanitation, and rare diseases. An expert travel
medicine physician can ensure that patients have the correct
immunizations, preventative medicines, and local medical risk
advice.

EVACUATION INSURANCE Evacuation insurance is often overlooked. It

typically covers the cost of medical transport from international or
national locations if the medical capabilities of the treating facility are
not sufficient to meet the current medical needs. The cost of this
insurance can be as little as $200 to $300 a year. Without this
coverage, air ambulance expenses can run anywhere from $30,000
to $200,000, depending on the location and the severity of the
medical emergency.
Many families are tempted to use private aviation as the quickest
means of returning home. However, this could prove dangerous and
be analogous to taking a taxi to the hospital rather than using an
ambulance. Depending on the medical emergency, this can be a
serious mistake.
In addition, it’s important to understand the fine details of any
evacuation policy. Not all policies cover preexisting conditions,
pregnancy, mental health issues, alcohol-related or other substance
abuse–related illness or injury, or extreme sports, like parasailing or
all-terrain vehicle excursions (whether practiced domestically or
globally). Many of the policies do not take effect until a patient is
already in a hospital.
A policy that can offer evacuation protection regardless of where
the sick or injured patient is can be vital. Some evacuation
companies only transfer the patient to the nearest hospital that they
deem capable of addressing their needs. Others may offer the added
benefit of evacuating the patient back to a home hospital. It is
advisable for most families to obtain a policy that covers the latter
scenario.
Medical record summaries can be an essential part of preparing
a family member or family office professional for travel. If a medical
emergency occurs, it’s vital to have a copy of the patient’s history,
summarizing even simple medical conditions. Summaries that offer
endless, static electronic copies of prior records as a traditional
medical practice may be cumbersome to sift through while finding
the relevant information. Organizations that offer intelligent, pertinent
summaries are an excellent option in addition to the concierge
practice itself.

Insuring against Risks

One of the more important responsibilities for a family office is

determining, mitigating, and (as needed) insuring the family against
the risks that naturally come with substantial wealth. These include
protecting the value of various assets (including business interests),
reducing health and safety risks related to travel (particularly
abroad), limiting exposures to cybercrime, protecting the family’s
reputation and privacy, and mitigating financial exposures that come
with various roles and responsibilities.
While insurance is a topic with which principals are quite familiar,
incremental insurance needs in areas pertinent to the assets,
activities, and associations inherent to families that have the wealth
to warrant a family office require a dedicated focus and significant
professional advice and guidance. For these reasons, it is a best
practice for someone within the family office to be designated a risk
manager who will spend time periodically assessing a family’s areas
of risk exposure, determining ways to mitigate or insure against
these risks, and working with outside consultants to obtain and
structure appropriate solutions, whether in areas such as policies
and procedures, employee and family education and training,
agreements, and insurance.

Types of Insurable Risks

Generally, risks can be identified based on three broad categories
that apply to family members, family office staff, or both (table 7.2).

TABLE 7.2
Three broad categories of risk

Assets Activities Associations

• Homes • Traveling • Serving on boards

(international)
• Automobiles • Staffing • Hiring independent
contractors
• Aircraft and • Electronic • Engaging in business
watercraft communications partnerships
• Fine art and • Business pursuits
collectibles
• Ranches
• Horses

Types of coverage for the various categories include the following:

• Homes
• Automobiles
• Air and watercraft
• Ranches and livestock
• Equestrian
• Fine art and collectibles
• Excess liability
• Fiduciary liability
• Travel insurance
• Cybersecurity
• Kidnapping and ransom
• Project completion risks
• Workers’ compensation
• Employment practices
• Directors and officers (D&O)
 • Errors and omissions

Risk Management Process

While risk management processes follow the same general steps,

they naturally need to be tailored to the unique needs, activities, and
issues of the family, employees, and various external investment,
business, and philanthropic activities (figure 7.6). The steps are as
follows:
Step 1: Identify the risk—Uncover, recognize, and describe the
risks that might affect the family, assets, employees, and various
business interests. Reviewing exposures across the three domains
mentioned previously (assets, activities, and associations) is a
helpful approach to employ.
Step 2: Analyze the risk—Once risks are identified, it is
important to determine the likelihood and broad consequences of
each risk. The natural consequences could be financial, physical, or
reputational.
Step 3: Evaluate or rank the risk—Evaluate or rank the risk by
determining its magnitude, which is the combination of likelihood and
consequence. This will help determine whether risks are significant
enough to warrant efforts to avoid or mitigate them.
Step 4: Address the risk—Develop a plan to address each of
the identified risks to achieve acceptable risk levels. For some risks,
the family may be willing to self-insure through policies and
procedures, family member and employee training, outsourcing
functions to third parties, or setting limits as to financial exposure.
For other risks, the consequences might be so dire or unable to be
insured that the family chooses to avoid, reduce, or abandon an
asset, activity, or association. In addition, mitigation strategies should
be developed for all risks identified and addressed.
Step 5: Monitor and review the risk—A periodic review should
be conducted to monitor and review risks, including assessing
changes in the family’s overall risk profile that would warrant
following steps 1 through 4 again.
Figure 7.6 Risk management process

Prudent risk management is as much about properly resourcing

and staffing a risk management function as it is about following a
disciplined process. It is also important to work with appropriate
experts in the various fields, including family office–experienced
insurance brokers, personal security and cybersecurity vendors,
specialty asset consultants, and legal teams.

Obtaining Legal Advice

As is the case with any sophisticated business enterprise, a family

office will have a variety of legal needs to address in the course of its
operations and will need a wide range of specific legal expertise.5
The family office legal counsel will need to be cognizant of, if not well
versed in, a number of specific legal disciplines, including corporate,
securities, fund and portfolio company investments, labor, tax, estate
and trust planning, and philanthropy. The legal services required by
the family office will include the following:

• Structuring and organizing the family office

• Determining how the family office and ongoing expenses will be funded initially and
over time
 • Structuring the optimal way of hiring and compensating family office executives and
staff
• Addressing family office governance and succession planning
• Ensuring compliance with applicable legal and regulatory requirements
• Establishing investment management structures and processes to handle the family
office investment portfolio and review of investment documents
• Reviewing technology aspects
• Financial risk management and insurance products
• Coordinating with security advisers to identify and address family, home, travel, and
cyber risks
• Tax planning on both the transactional and estate planning levels
• Structures for achieving the family’s philanthropic objectives

In-house Counsel versus External Service Providers

As family offices grow in sophistication and complexity, they

increasingly face the question long encountered by other business
enterprises: what legal functions should be outsourced and what (if
any) legal functions can be most efficiently brought in house? The
fundamental question as to whether, and to what extent, the legal
function should be brought in house is, in essence, no different for a
family office than it is for any similar-sized business enterprise. A
company considering bringing its legal functions in house typically
looks at factors such as the projected fully loaded employment costs
(e.g., salary, benefits, overhead) of having in-house counsel
compared with the company’s current and projected legal expenses
for outside lawyers.
For a family office, the analysis starts with the same economic
question, but the unique nature of the family office model can make
the decision much more difficult in many ways. As the corporate,
investment, regulatory, tax, insurance, labor, and other challenges
confronting family offices become more complex, it is likely that
family offices, even family offices with in-house counsel, will need to
rely on outside legal specialists.

Lawyers and the Family Office

In looking at the legal needs of a family office, the family decision-
makers need to consider not just the cost analysis described
previously, but also the particular legal profile and legal needs of the
family.6 The fundamental analysis—beyond simply whether the
family office has the economic scale to make the cost proposition
work—is a determination by the family decision-makers of what core
legal functions the family anticipates it will need.
As has been discussed throughout this book, no two family
offices are exactly the same. The legal needs of a family office that is
overseeing the management of one or more family-owned or family-
controlled operating businesses will differ widely from a family office
that is principally an investor of family wealth. Likewise, a family
office serving an immediate family of one or two generations will
have a different legal profile, and widely differing legal needs, than
one serving multiple generations of a founding family.
Core to the legal needs of almost every family office will be tax
advice—income, gift, and estate tax planning. For a family office that
is principally involved with the stewardship of a family’s investments
(rather than the ownership of operating businesses), the necessary
tax support will likely extend to robust expertise on partnership tax
issues. Beyond taxes, however, a family office implementing a
sophisticated alternative investment strategy will need state-of-the-
art legal advice regarding transactional matters, including structuring
and negotiating private equity investments, coinvestments with other
families, debt finance and derivatives transactions, and real estate
investments.
Adding to the complexity of those legal needs, all the legal
strategies involved in those transactional matters need to be
harmonized with, and optimized for, the family entity and trust
structures developed through the family’s estate and gift tax planning
process. This means that a family office’s legal team—whether
internal or external—needs to provide close working coordination
between the tax experts and the transactional lawyers to ensure that
the entry by family members or entities into complex transaction
structures don’t create inadvertent estate or gift tax risks.
 Coordination, in this context, means both the technical
coordination between transaction structures and estate planning and
the coordination of the family’s legal strategy at a macro level. This
need for coordination requires family leadership to consider what
arrangement of counsel (or multiple sets of counsel) will not only
provide the ideal mix of top-drawer subject-matter expertise, but will
also coordinate the planning of estate and gift tax strategies and
entity structures most effectively and efficiently across multiple
generations of the family. Any well-functioning relationship between
lawyers and their clients will involve a significant element of
interpersonal compatibility and fit. In addition, to ensure the
coordination of legal strategy and planning across generations,
family leadership needs to be mindful of the importance of facilitating
the development of those relationships across the succeeding
generations.

REGULATORY For the family office itself, there are important

regulatory issues to be considered. If the family office provides
investment advice about family investments, absent an exemption,
the family office would be required to register as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
Advisers Act). Since 2011, the Advisers Act recognizes an
exemption from registration for family offices that manage their own
family’s financial portfolio. To be eligible for this exemption, the family
office needs to coordinate with legal counsel to confirm compliance
with the applicable eligibility and operational requirements. Similarly,
family offices that provide investment advice with respect to
commodities may obtain “no-action” relief from registration with the
U.S. Commodities Futures Trading Commission as a commodity
trading adviser if the eligibility requirements are satisfied. If the family
office invests in publicly traded securities, legal counsel also needs
to ensure that any applicable filings are made in a timely manner
with the Securities and Exchange Commission (SEC).

CORPORATE FORMALITIES Apart from the Advisers Act, much as

would be the case for the persons responsible for the legal function
in a group of companies, the family office needs to ensure that the
corporate formalities are observed and maintained for all the legal
entities within the family group. The term “corporate formalities”
refers broadly to the formal legal steps to be taken by legal entities to
substantiate their existence as separate legal entities.
This suite of corporate housekeeping matters typically includes
such things as maintaining the good legal standing of each entity
through all required state franchise tax or similar filings, the
maintenance of separate books and records for each entity, the
regular election of directors and officers for each entity, the keeping
of separate records of resolutions adopted and actions taken by
each entity, and the maintenance of separate bank accounts for
each entity. In the corporate context, these steps are important to
ensure that the legal separateness of each entity is respected for the
purposes of liability limitation and financial responsibility. Those
considerations, of course, are equally relevant for family entities. In
addition, the maintenance of proper corporate formalities can help
provide legal substance for intrafamily transactions and help to
mitigate the risk of inadvertent gift tax exposure.

ESTATE AND WEALTH TRANSFERS The operation of the family office

will, in most instances, be intertwined with the estate plans of family
members, particularly the first generation, and in many cases will
involve trust planning. Investments, sales, loans, employment
relationships, and other transactions between and among family
members, trusts for the benefit of family members, and family-owned
entities are common and present special challenges. The family
office legal counsel will need to ensure that all such intrafamily
transactions are properly documented and do not result in
unintended gifts that would be subject to gift tax. Similarly, the family
office attorney will be responsible for ensuring that inadvertent
actions are not undertaken that risk causing assets that are
otherwise excluded from a family member’s estate to become
includible in the estate. The family office, through the use of family
investment vehicles, can also facilitate tax planning, including estate
and gift tax valuation discounts.
CONFLICTS OF INTEREST As to the lawyers themselves, whether in-
house counsel or external, the family office, with its constellation of
entities and individual family members all requiring legal advice, can
present a special challenge—the ethical issue of conflicts of interest
and the question “Who is the client?” Providing legal advice to
multiple generations of family members can present unique
challenges to the family lawyer and the family decision-makers,
whether senior family members or family office professionals, and
the lawyer needs to be alert to potential conflicts of interest. Although
written conflict waivers, joint representation agreements, and other
structural approaches can be valuable tools for mitigating the
potential for ethical conflicts of interest and avoiding intrafamily
disputes, it is almost inevitable that circumstances will arise in which
the differing interests of family members will make it advisable to
retain separate counsel. Identifying those circumstances, when they
arise, and managing that process, pose a unique challenge to the
family lawyer.

MANAGING RISK A critical responsibility of the family office is to

manage risk for family members. Of course, ensuring appropriate
levels of property and casualty, life, medical, and long-term care
insurance should be a primary focus of the family office. One key
item that is often overlooked is directors and officers (D&O)
insurance for those individuals who manage the family office. The
D&O policy should be carefully reviewed and customized for each
family, as the underwriters and brokers often do not fully understand
the complex structures of each family and the scope of coverage is
often narrower than assumed by family members.
Another area of risk management that the family office should
undertake is to ensure that legal contracts and agreements are
reviewed with a focus on indemnification and clawback provisions
that could adversely affect family members and entities. Similarly,
situations in which family members or family entities must guarantee
obligations will need to be carefully evaluated from a legal point of
view.
Family offices, being a source of substantial wealth, are being
confronted with cybersecurity risks with increasing frequency. These
threats continue to grow in sophistication and complexity and expose
the family to serious financial risk, potential disclosure of confidential
personal information, and disruption of computer systems. The
family office counsel will need to assist in balancing the critical needs
for cybersecurity with the desires of family members for simple, cost-
effective, and efficient communications and interface with the family
office.
Another area of risk for wealthy families involves maintenance of
privacy and confidentiality. Most family offices are good at making
sure that they have employees of the family office sign employment
agreements and NDAs, but many other family activities require
similar documentation. This includes hiring assistants, managers of
properties, pilots, and household staff. It will also be important that
confidentiality restrictions cover both financial and personal
information.
Wealthy families are unfortunately confronted with increased
exposure to personal risk. This is especially true for prominent
families in the public domain or associated with businesses that
publicly report financial information. To protect against these risks,
the family office counsel can be instrumental in the engagement of
security advisers to assess and develop security plans that
encompass cybersecurity; personal security needs, including
security plans for residences; due diligence and background
investigations on personal staff and service providers (e.g., private
airplane pilots, yacht crews, household employees, and family office
employees); emergency preparedness; travel safety; and monitoring
of negative or concerning public comments for assessment. The
family office counsel will be tasked with coordinating with security
advisers to develop an appropriate security plan that is compatible
with the family’s lifestyle and minimizes any disruptions to family
culture.

SPECIAL ASSETS The family office will be confronted with requests of

family members to purchase, operate, and otherwise deal with
special classes of assets, including aircraft; yachts; artworks; oil,
gas, and mineral properties; precious metals; and foreign assets.
Contracts with very specific terms that also should be negotiated
with respect to those assets include buying; selling; leveraging and
leasing aircraft; buying, selling, leveraging, or consigning art from
dealers or auction houses; and creating purchase agreements for
natural resources or precious metals.

INVESTMENTS It is critical that the family office attorney review and

negotiate all investment agreements entered into by a family office to
ensure that the fiduciaries understand the terms and risks. A family
may not be able to negotiate specific terms in each instance, but
understanding the risks in documentation is critical. This review
includes managed accounts, fund investments, coinvestments, direct
investments, and agreements applicable to leverage. Often, specific
structures need to be set up to make entities eligible to invest in
funds that have qualified purchaser requirements.
It is becoming commonplace for family office investment
portfolios to include an allocation to international assets.
International investment funds exist around the globe and cover a
multitude of investment asset classes, including hedge funds, private
equity funds, venture capital funds, currency, real estate, and
manufacturing. The family office counsel will need to be involved to
ensure compliance with any applicable non-U.S. laws, as well as
assisting with “know your customer” (KYC) requirements.

ENTITY STRUCTURE AND FUNDING Often, family offices set up various

structures to provide limitations of liability across various family
assets. This acts as an insurance policy to protect cross-liability.
Family investment vehicles are an efficient means of managing
family wealth and achieving desired objectives. Family investment
vehicles also facilitate centralized management and economies of
scale through a pooling of assets.
Family offices, as well as any separate entities that own assets,
can be established as C Corps, S Corps, or limited liability
companies (LLCs), depending on the particular family
circumstances. A review of the tax considerations and a
determination of the optimal tax structure for the family office should
be made.
PRIVATE TRUST COMPANIES For ultra-high-net-worth (UHNW) families
with advanced trust planning, consideration should be given to using
a private trust company, which provides a vehicle for trusteeship not
tied to any one individual trustee and thus minimizes trustee
succession issues. Private trust companies can also provide
significant tax benefits depending on the jurisdiction. The family
office counsel needs to navigate the regulatory requirements for
establishing and operating a private trust company, state law
requirements applicable to fiduciaries, and applicable tax laws.

PHILANTHROPY The family office will undoubtedly be at the forefront

of implementing the family’s philanthropic objectives. The family
office attorney needs to ensure that gifts are made to qualified
organizations in compliance with applicable tax rules. The family
office may also coordinate the establishment of a private family
foundation as a means of consolidating the family’s gift-giving
program. The family office counsel will assist the family office in
navigating the complex rules and restrictions that apply to private
family foundations to avoid self-dealing and other potential pitfalls.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

The Thorne family has an immediate problem to solve around the

wire fraud issue that unearthed lapses in digital hygiene and security,
wire authorization protocols, and insurance coverage. In addition, an
issue surfaced with respect to employee onboarding that fortunately
was resolved through the proactive efforts of one of John’s peers.
Finally, the challenges of how to provide world-class healthcare to
Sofia’s mother became front and center. In each of these areas, the
family office (and the family) realized that they were not as prepared,
or as protected, as they thought they were or should be.

Case Questions
 • What are reasons why the Thorne family would be more likely to fall victim to fraud
and cybercrime than the rest of the general population?
• How was the wire fraud perpetrated?
• What should the family office do in response to this wire fraud?
• What could the family office have done to preempt hiring an employee with a
checkered past?
• How can legal services provide risk management?
• Is there an insurance policy that could cover this wire fraud and BEC scheme?
• What are some considerations around risk management that the family should
consider in the future?
• How can the family office help Sofia’s mother, Gabriella?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What are reasons why the Thorne family would be more likely to fall
victim to fraud and cybercrime than the rest of the general
population?

An obvious risk factor for this family is the magnitude of their wealth.
The Thornes have been accumulating wealth from their private
business for the last two decades, and the sale of their operating
company resulted in a very large liquidity event. The family’s public
profile also lends itself to a large increased risk of fraud and
cybercrime, including John’s coverage in the newspaper over the
years and Sofia’s increasingly public philanthropic activities.
Another challenge stems from the informal processes and
procedures in the family office itself. Family offices are geared
toward convenience and quick responses for the principals.
Principals are oriented towards efficient service delivery from the
family office versus highly effective risk management structures. In
this instance, the quick response to the fake request via e-mail, and
without verbal confirmation, allowed the fraud to be perpetrated
when it might otherwise have been detected.
 How was the wire fraud perpetrated?

This case presents a classic case of a BEC scam. In this scenario, a

genuine-looking e-mail was received by someone that normally
handles the finances in a family office. The e-mail appeared to come
from the principal, the request looked legitimate, and the demand
was similar to previous requests. The e-mail also incorporated a
sense of urgency by the requestor during a time when the principal
was known to be unreachable to confirm its legitimacy.

What should the family office do in response to this wire fraud?

The family should focus on three main areas to shore up their

defenses: training and education of staff and family members,
establishment of risk management policies and procedures, and
upgrade of security technology to support family office operations.
The simple act of writing down what to do when a fraud or
information compromise occurs is another powerful tool that the
family office should implement. There are many good examples
available on the Internet, and the family office should work with a
security consultant to customize these policies and procedures and
educate the staff and family members about them.

What could the family office have done to preempt hiring an

employee with a checkered past?

At a minimum, the family office should have performed a new hire

background and reference check. Bad hires or bad “leavers” can be
a source of great frustration for family offices. Again, normal
business practices often call for more-than-perfunctory background
checks of new hires before they join a company. Family offices will
sometimes do some light screening with credit and criminal checks,
but given the extremely sensitive and personal nature of working in a
family office, more than just superficial screening should be
considered. Where the position or profile of the family warrants it,
family offices should consider working with security and risk
specialists to do a deeper dive on candidate backgrounds. Moreover,
families should also implement ways to monitor employees after they
are hired, as situations may change dramatically and put the family
at risk. Families should also consult with an employment law expert
when developing these human resource–related policies to ensure
compliance with local and national laws.

How can legal services provide risk management?

These typically involve family office employment agreements, NDAs

for investments and other purposes, establishing legal structures for
asset protection and privacy considerations, and review of insurance
policies and proposals (such as crime and cyberloss policies).

Is there an insurance policy that could cover this wire fraud and BEC
scheme?

Possibly. Commercial crime and cyberloss policies have a

tremendous amount of fine print that family offices need to evaluate
to determine if their insurance covers BEC frauds that result in wire
fraud. Sometimes the mechanism of how the wire fraud and the
intended purpose of the wire will affect whether a claim will be paid.
Cybersecurity insurance is a relatively new space in risk
management. Cybersecurity underwriting standards and claim
evaluations are in their infancy compared to other insurance policies
and practices. These factors should be closely evaluated as family
offices explore implementing cybersecurity insurance into their
overall risk management structure.

What are some considerations around risk management that the

family should consider in the future?

As the Thorne family’s public profile and number of family members

continues to grow, additional risk management issues will surface.
Increased exposure can come from a variety of sources:
philanthropic work, direct investments in operating companies,
marriages, divorces, international travel, political volunteering,
seeking public office, to name only a few. The family office should
plan to conduct yearly or biannual assessments of the entire
enterprise using an external risk management consultant. That way,
they can identify gaps on a systematic basis and fill in with solutions
that balance convenience, effectiveness, and security.

How can the family office help Sofia’s mother, Gabriella?

Knowing where and how to get the best medical care is difficult, and
it is the hope that most families will not have to become expert on
these issues. However, given the importance of these issues to
families when they arise, family office–specialized healthcare
advisory and advocacy companies are emerging. These companies
provide ongoing consulting and support for family members, ranging
from extensive preventative care to treatment of rare and acute
illnesses. These firms offer wealthy families access to the top
medical professionals in their field and the top medical facilities in
the world. Some service providers in this field also specialize in
international medical services, such as medical evacuation and
remote diagnosis and treatment assistance. The family office can
immediately assist Gabriella by working with one of these companies
that can also be available for broader health and wellness needs that
the family may have in the future.
 CHAPTER EIGHT

Philanthropy

CASE STUDY

Summary

• Three years after the creation of the Left Seat Management family office
• Focus on philanthropic ambitions
• Charitable vehicles

Key Words/Concepts

• Family philanthropy
• Donor-advised funds (DAFs)
• Supporting organizations
• Private foundations
• Charitable planning trusts

Challenge
Having grown up in Mexico City, Sofia was unfortunately all too
familiar with poverty and the devastating effects that it has on
families, particularly the children. She had the good fortune of
growing up in a middle-class family with parents who allowed her to
pursue her education and ultimately become a lawyer in Chicago,
where she met John. She had a blessed life with three healthy
children, a husband she loved, and now financial security to boot.
Sofia wanted to share her good fortune with others, especially
helping children in need.
Her involvement with the local Children’s Hospital provided her
with this opportunity. Sofia was a great advocate for the research
and care that this hospital was famous for. She knew that she could
be of particular value to the hospital by giving and helping them raise
money. This was an important contribution for her, and Sofia
intended to stay involved and continue to help where she could. She
also enjoyed spending time at a local art museum, which gave her a
chance to learn about art, engage with artists, and help promote
John’s and her interests in central Asian and Russian art.
However, neither the Children’s Hospital nor the art museum
allowed her to get intimately involved with their programs, and she
began to consider doing something with children directly. Her life
experience gave her an appreciation of the benefits of education to
help poor and underserved populations elevate themselves out of
poverty. As such, she wanted to provide support to these groups in a
more tangible and direct manner. Specifically, she wanted to help the
children in and around Chicago to get the additional educational
resources they needed at an early age so that they could develop
the skills and confidence to be successful as they grew older.
Sofia reached out to Michael to ask him to help her based on his
experience with other families and to employ the resources of the
family office. She also thought that more organizational support by
the family office would be of great help to John, who she knew
wanted to do more but was never able to make time for it. Her
children were also starting to show an interest in helping others,
either because of school projects or what they were seeing their
friends do.
 John was also interested in expanding his philanthropy, although
he did not want to run or manage programs. As an engineering
student who often struggled to balance his time and financial
demands, John wanted to help deserving students where he could.
To this end, he was eager to help the school but did not want to be
burdened with the management of any assistance programs.

BACKGROUND INFORMATION

Giving as a Family

The family office is likely to play a central role in the family’s

philanthropic activities, whatever their mission, scale, or scope.1 For
example, foundation administration is a routine task commonly
assigned to the family office, and that covers such matters as record
keeping, legal compliance, and tax reporting for the family
foundation. Increasingly, though, family members are taking a
hands-on approach to philanthropy, meaning that they want to be
actively involved not just in setting philanthropic strategy and giving
policy, but in giving gifts and assessing their impact and
effectiveness. These donors want to see where their money is going
and what it is achieving.
The more active a family becomes, the more will be expected of
the family office to support the extent of their charitable endeavors.
Moreover, wealthy families look to their philanthropic activities as a
means to create a legacy—a way to be remembered by both family
members and the community. Helping to nurture and build that
legacy will be another important job for the family office.
For those families who are mostly passive with their giving, they
can outsource a number of solutions to manage their grant-making,
such as community foundations, commercial donor-advised funds
(DAFs), or philanthropic advisory firms. For those who wish to
develop their own philanthropic mission and to manage the functions
in house, focusing on philanthropy as a business has paramount
importance. Andrew Carnegie famously said, “It is more difficult to
give money away intelligently than to earn it in the first place.”
Families looking to manage their philanthropy in house should take
this advice to heart, focusing on the areas that they care the most
about and considering all the issues that come with active
philanthropy.

Getting Started with Philanthropy

While all wealthy families are different, most that give

philanthropically will follow certain common steps for deciding what,
where, and to whom to give their charitable donations or grants. The
following sections describe these basic steps as a suggested
practice. Note that the steps listed here are presented in a simple,
orderly form, and there is room to be much more thorough and
creative within this process.

ARTICULATE A PHILANTHROPY MISSION STATEMENT Just as a family

would put thought into any gift they give, it’s important to think
through how, what, and where they might give philanthropically. By
discussing the family’s vision for change and shared values, family
members can determine the areas or causes on which they wish to
focus their giving. A philanthropy mission statement describes this
focus and is used to direct giving in the years to come. One way to
approach creating a philanthropy mission statement is to find the
right balance among the following elements:

• What the family cares about and most wants to change

• The causes to which the family or family office is already giving
• What the community or region of focus needs

SET GUIDELINES FOR GIVING Giving guidelines present an extension

of a philanthropy mission statement. It’s a lens through which to
decide what will be funded and what won’t. For example, some
countries offer tax advantages for donating to tax-exempt nonprofits,
in which case families may want to direct their giving to these types
of organizations. Other families may wish to limit their giving to one
particular geographic area—a country, city, or town they grew up in.
 As part of internal giving guidelines, a family might decide what
percentage to allocate to strategic (also called “impact”) giving, what
percentage to allocate to legacy giving (the family’s history of giving),
and what percentage to allocate to more fluid, ad hoc giving, such as
disaster relief, emergency funds, or family members’ discretionary
gifts (those that are of interest to individuals and may fall outside the
mission statement).

RESEARCH OPPORTUNITIES AND ORGANIZATIONS Once the family

knows what it wants to accomplish, the next step is searching for
others that can bring the vision and mission to life. This involves
locating organizations and projects that are doing the work that the
family wants to achieve. At this stage, it can be helpful to consult an
expert or adviser in the specific issue area that can educate the
family and help determine the needs and gaps. Once the family has
narrowed its choices, it’s time to look more closely at the
organizations, companies, and projects that the family is considering.
Due diligence can be a simple or complex process: examples
include checking an organization’s website, reviewing its financial
records, and scheduling a site visit to meet the people actually doing
the work.

Supporting Family Philanthropy

Family office professionals can support the family’s philanthropy in a

number of ways. Typically, these services fall into four categories
related to the philanthropic journey: planning, family governance,
implementing, and assessing impact. The following describes the
activities that fall into these categories.

PLANNING

• Introduce philanthropy into wealth management conversations.

• Explore the family’s motivations and objectives for giving.
• Help individuals and families narrow down and designate a chosen area of giving.
• Research the needs in that issue area or community—who is doing what, where the
gaps and opportunities to contribute are, and how to make an impact.
 • Bring in an adviser or expert on the chosen issue area.
• Make contacts with other donors funding locally or by issue area.
• Provide resources on philanthropy.
• Set up networking opportunities with peers.
• Find out what tax advantages are available.

FAMILY GOVERNANCE

• Help the family articulate their vision, values, mission for philanthropy, and process
for making decisions.
• Help the family office principals write or record their donating intent during their
lives. This will allow the family to communicate openly about their values and
wishes as a family for their philanthropy over the long term.
• Facilitate discussions for how to get the family involved.
• Help set preemptive policies to mitigate unproductive family dynamics.
• Educate the current or next generation on philanthropy (e.g., set up a youth board
to teach children or young adults how to make grants, work together, and other
philanthropic skills).

IMPLEMENTING

• Set up giving vehicles.

• Identify causes, charities, organizations, and projects to support.
• Conduct due diligence on those organizations, including making site visits.
• Manage and oversee donation and grant agreements.
• Review and advise on current giving portfolio.

ASSESSING IMPACT

• Request reports from recipient organizations.

• Monitor donations and financial reports.
• Survey grant partners and community members to evaluate results.
• Determine the social return on investment.

This is not an exhaustive list, nor is it meant to imply that family

offices should engage in all these activities. Rather, it’s a starting
place to support the family’s needs with regard to their philanthropy
at any point along the way. Family offices might offer a range of
these services either in house or with third parties.
 How Philanthropy Adds Value to Families

The following are some ways that family offices can use philanthropy
to add value to the families they represent.

PHILANTHROPY SOFTENS DISCUSSIONS ABOUT MORE COMPLEX FAMILY

AND GOVERNANCE ISSUES Research has shown that families that
prosper from one generation to the next do so because they have
robust governance structures in place. A philanthropy conversation
with the family could serve as an entry point to other, more
potentially contentious discussions, such as family governance,
succession, charters, and unproductive dynamics.

PHILANTHROPY TEACHES THE FAMILY TO WORK TOGETHER AND

PROMOTES FAMILY UNITY OVER TIME Philanthropy develops
collaborative skills. Drawing the family members together around a
philanthropic cause teaches new skills, including collaboration,
compromise, and shared decision-making. This can bring new layers
to relationships and boost the chances for family unity over the long
term.

PHILANTHROPY TRAINS THE NEXT GENERATION TO BE GOOD STEWARDS

OF THE FAMILY’S WEALTH Across all cultures and regions, philanthropy
is seen as an excellent way to educate and ground the next
generation. When done well, it can teach the next generation about
the family’s enterprise, finances, and values and empower them to
do something meaningful. It can help younger family members
develop their own sense of purpose and give them a lesson in
sharing power and responsibility before the stakes get higher.
Philanthropy can help families align their values, create a legacy,
and bring the family together in a way that makes a difference in the
world. Family offices are uniquely positioned to play a role in helping
families achieve these goals.

Involving the Next Generation

Many successful family offices realize that family unity and long-term
wealth preservation depend on their ability to prepare the family’s
younger wealth owners. One of the biggest concerns is how to teach
and pass on leadership to younger-generation family members
(commonly referred to as the “next generation”).
Motivating the next generation can be a challenging task. Older
family members may believe that their young adult children enjoy the
benefits of wealth and want to have little to do with the
accompanying responsibilities. Or they may be waiting to see if or
when their children express the interest, skills, or follow-through to
engage in the family enterprise.
In spite of their concerns, some families don’t do much to ready
younger family members for their future roles in managing the family
enterprise or working together. The next generation may view the
family enterprise as elusive at best, or a burden at worst. They may
lack understanding about the family’s wealth, business, and
philanthropy—and why it’s important to be involved in them. There
may be uncertainty that the older generation even wants them
involved, or if so, what that involvement would entail. Finally, there
may be a reluctance to get caught up in family dynamics and
conflicts.
Philanthropy is an excellent way to bridge this conflict—teaching
the next generation about the family enterprise, finances, and
values, and empowering them to do something meaningful. It can
help younger family members develop their own sense of purpose
and give them a chance to practice good stewardship, take
responsibility, and share power.

IDEAS FOR ENGAGING THE NEXT GENERATION Family offices can use
different methods to engage the new generation in the family’s
business and philanthropy. The following are a few suggestions:

• Invite younger family members to meetings as observers or even participants.

• Talk to the next generation and find out what their interests are.
• Take them on site visits of the family business and/or recipients of family funds.
• Allow younger members an appropriate amount of money that they collectively must
decide to give away, facilitating discussions to uncover their motivations and
 thought processes.
• Provide ongoing professional development through conferences, workshops, and
learning and networking events.
• Offer them a chance to serve on advisory committees of the family council or board.
• Encourage them to serve on charitable boards as a training ground for running the
family office or family business, and learning about other perspectives.
• Ask them for input on projects that they are interested in or about which they have
expertise.
• Establish a next generation fund or philanthropy program to train the younger family
members on philanthropy and grow their collaborative skills.
• Encourage the family to share stories about successes and challenges, as research
has shown that this builds resilience and confidence in the next generation.

One thing to keep in mind is that philanthropic responsibilities can

also impose a burden on children who are either not interested or ill
prepared to handle some the responsibilities and pressures. Children
of wealth are often burdened by their family name, inasmuch as
others may see them as a potential means for their own personal or
professional gain. This includes charities that, although well
intentioned, often aggressively solicit young adult children for
contributions, particularly if they know that they are associated with a
family foundation. In so doing, these charities convey a sense of
importance and value that some children have a hard time
reconciling with, given that it’s not really their money.
This phenomenon is unfortunately inevitable to some extent, and
it will likely happen regardless of whether a child is active in the
family’s philanthropy. It is, however, something that both parents and
family office professionals should be mindful of, and they should help
prepare the children for this situation through wealth education
efforts, either directly or via family philanthropy.

Charitable Entities

Wealthy families use a number of types of charitable vehicles, each

of which has different benefits, tax considerations, administrative
responsibilities, costs, and restrictions. The appropriate charitable
vehicle for a family depends on these factors, as well as a number of
others, including the family’s level of charitable giving, tax
circumstances, desired level of control, and philanthropic ambitions.
As a result, there is no “right” charitable vehicle for every wealthy
family to use, and indeed many families use a combination of them.
The following are common types of philanthropic vehicles used
by wealthy families as an alternative, or supplement, to making
outright gifts of cash or property to public charities.

Donor-Advised Funds (DAFs)

DAFs are charitable vehicles established and maintained by a public

charity, often referred to as the “sponsoring organization.” Examples
include community foundations, religious organizations, universities,
and financial institutions. Their purpose is to allow families to
contribute cash or property to a DAF set up by the sponsoring
organization, while receiving a charitable deduction at the time of the
contribution. Because DAFs are associated with public charities,
charitable contributions receive advantageous tax treatment over
private foundations. They also do not have minimum distribution
requirements, excise taxes, or other prohibitive rules as private
foundations do.
A family can, whether immediately or over time, request that the
sponsoring organization disburse money to charitable causes across
a broad range of recipients, whether recommended by the
sponsoring organization or identified by the family. While the family
can recommend that the sponsoring organization make charitable
gifts to recipients, such gifts must technically be permitted and
approved by the sponsoring organization. This is an important
distinction of DAFs as opposed to private foundations. While private
foundations have more onerous rules and restrictions, greater
administrative burdens and costs, and less favorable tax treatment,
families that set up private foundations control how the foundation is
run and where permissible charitable distributions are made. On the
other hand, while DAFs in practice are quite flexible and afford a
great deal of discretion to the families that fund them, they are
controlled by the sponsoring organization.
 Supporting Organizations

Supporting organizations, while less frequently used by wealthy

families than private foundations or DAFs, can be effective charitable
vehicles where the family would like to support a specific charitable
organization. Examples include hospitals, museums, public charities,
and community foundations. As with a DAF, because the “supported
organization” is a public charity, charitable contributions to it receive
more advantageous tax treatment than those made to a private
foundation. In addition, there are fewer restrictions on when and how
money or property contributed can be held or dispersed, so long as
they are consistent with the charitable mission of the supported
organization.
Supporting organizations provide families with the ability to have
a greater level of involvement in and governance over their
philanthropic vehicles than DAFs do, but only within strict guidelines
regarding control, which can be confusing. Supporting organizations
must be operated, supervised, or controlled by the supported charity.
The actual manner in which these requirements are enforced is
based on a number of tests across organizational, operational,
control, and relationship guidelines. For example, under one such
test, supporting organizations can have family members as part of
the board but cannot hold more than 50 percent of the vote or have
veto power.

Private Foundations

Private foundations, which are discussed at length in this section,

provide wealthy families with the most control of and oversight over
their charitable giving. These are charitable entities established,
controlled, and managed by the family themselves, with the
assistance of the family office or outside professionals. As such, the
family has complete control over governance, investments, staffing,
grant-making, and other aspects. However, this level of control
comes at a cost in terms of administrative complexity, restrictions,
costs, and less favorable tax treatment of charitable contributions.
 For families with significant philanthropic ambitions, whether
financially or based on a desired level of involvement or control,
private foundations are often the preferred philanthropic vehicle.
Furthermore, while private foundations require more time, effort, and
attention than other philanthropic vehicles, these requirements are
not overly burdensome and are well within what a wealthy family is
able to do, particularly those with family offices.

Charitable Planning Trusts

In addition to the philanthropic vehicles discussed thus far, there are

a number of charitable planning trusts used by wealthy families to
augment their giving, often with considerable income or estate tax
benefits. These include charitable remainder trusts and charitable
lead trusts.
While a detailed discussion of these types of charitable vehicles
is beyond the scope of this book, they are worth understanding,
inasmuch as they can help initiate and facilitate a family’s charitable
giving. Often, families meaningfully expand their philanthropic
activities once they have a liquidity event or engage in robust estate
planning. When properly used, charitable planning trusts are an
effective means by which to reduce taxes (whether income or
estate), while also contributing to the family’s philanthropic plans and
ambitions, whether immediately or in the future.
As with each of these philanthropic vehicles, families should
consider using charitable planning trusts only based on the advice
and with the involvement of their legal and tax advisers.

Private Foundations

Private foundations, also known as “family foundations,” are used by

wealthy families that desire the greatest level of control over their
giving. They are also a charitable vehicle that requires a great deal
of administration and oversight. For these reasons, private
foundations are often overseen by family office professionals,
working in whole or in part with family members, dedicated
foundation staff, or both.
The discussion that follows2 provides a broad summary of many
of the legal, operational, and tax rules that apply to private
foundations as of 2020.3 Please note, however, that these rules do
not consider special provisions that came about as a result of the
COVID-19 pandemic—namely, the Coronavirus Aid, Relief, and
Economic Security (CARES) Act and related legislation such as the
Consolidated Appropriations Act, 2021, which contained a number of
additional Covid-19 relief provisions. Readers should consult their
tax and legal advisers when considering which philanthropic vehicles
make the most sense for a wealthy family or family office, as well as
the applicability of any legal, regulatory, operational, and tax rules,
including the deductibility of contributions to private foundations and
other charitable entities.

Presumption of Private Foundation Status

An organization organized and operated for charitable purposes is

presumed to be a private foundation unless it demonstrates that it
fits into one of the exceptions listed in the Internal Revenue Code
(IRC). If a charitable organization is not a type of public charity
described by the IRC, then it is a private foundation.
Private foundations themselves can be divided into two groups:
(1) private operating foundations that directly carry out charitable
activities and are exempt from certain distribution and other
requirements; and (2) private, nonoperating foundations that
primarily receive charitable gifts, invest in funds, and make grants to
other charitable organizations. Private foundations generally receive
their funding from one primary source, such as an individual, family,
or corporation. The most common type of private foundation is the
nonoperating foundation, and it is the focus of this discussion
because it has the most restrictions.
However, families can also establish private operating
foundations if the majority of their income is used to provide a
charitable service or operate a charitable program. Private operating
foundations receive better treatment regarding charitable
contribution limits and are subject to slightly more relaxed rules with
respect to activities and excise taxes. A brief summary of these rules
is included at the end of this chapter.

Advantages of a Private Foundation

The private foundation provides more control to the donor than does
a donation to a DAF, community foundation, or supporting
organization because the donor has the right to distribute the
foundation assets to organizations (public charities) that they prefer
and because they can stay in control of the foundation’s
investments. The foundation often makes the donations for the
family. This is efficient for the philanthropic family because it
designates one entity to receive all requests for donations. The
establishment of grant procedures and reviews of grant applications
by the board of directors or a committee designated by the board
makes the grant approval process more objective because
applications must meet preset criteria. This can alleviate the
pressure placed on family members by grant-seeking organizations
or individuals. In addition, special drafting of the organizational
documents can maintain the family line as members or directors of
the foundation. The family foundation can give younger family
members an opportunity to participate in a meaningful endeavor and
to become familiar with the charitable goals, intentions, and business
management philosophy of the foundation’s creator.

Organization of a Private Foundation—Form of Entity

The foundation is established by the creation of a nonprofit entity

under applicable state law. A corporation is generally the preferred
entity for the private foundation because it provides more protection
from liability for the organization’s officers and directors, but the
foundation can also take the form of a charitable trust. The decisions
of directors in a corporate structure are usually evaluated according
to the business judgment rule, as opposed to the stricter fiduciary
standards applicable to trustees. Careful drafting of corporate
documents can provide family-line succession as members or
directors of the foundation. A trust format can be made very
inflexible, which may be advantageous for founders who want the
tightest possible control after their death or incapacity.

Operation of a Private Foundation—Restrictions

Private foundations are subject to a number of restrictions that must

be monitored closely and adhered to. Failure to do so can subject
both the foundation and its managers to taxes and penalties, as
follows:

• A tax of 1.39 percent of the net investment income of a private foundation for the
taxable year
• Restrictions on acts of self-dealing
• Minimum requirements for distribution of income (typically 5 percent of investment
assets), but this does not apply to operating foundations
• Restrictions on the retention of “excess business holdings”
• Restrictions on investing assets in a manner that jeopardizes the carrying-out of the
exempt purposes
• Restrictions on certain types of expenditures, referred to as “taxable expenditures”
• Tax upon termination of status as a private foundation unless certain requirements
are met
• Prohibitions upon private inurement and private benefit
• Taxes on unrelated business income

Limitations on Donors’ Income Tax Charitable Deductions

In addition to the restrictions and excise taxes imposed on private

foundations, other rules and limitations regarding private foundations
make them less attractive to donors. For gifts of cash and
nonappreciated property, a donor’s income tax deduction is limited to
an amount equal to 30 percent of the donor’s adjusted gross income
in the taxable year, as opposed to 50 percent (generally) for gifts of
cash and other nonappreciated property to public charities and to
other foundations that qualify as public charities. Any excess can be
carried forward for the next five years.
The deduction may be zero, however, if the donor has
contributed capital gains property to public charities in excess of the
30 percent deduction limitation. Corporate contributions are limited to
10 percent of taxable income, with a five-year carry-forward of
excess contributions. For gifts of appreciated property, a donor’s
income tax deduction is limited to 20 percent of the donor’s adjusted
gross income, as opposed to 30 percent for gifts of appreciated
property to public charities. In addition, gifts of appreciated assets
are limited to a deduction of only the donor’s basis in the asset
unless the asset is publicly traded stock. Charitable contributions in
excess of these limitations can generally be carried forward by the
taxpayer for the next five years subject to certain ordering rules
based on the type of contribution and recipient organization, as well
as the year(s) in which they were made. The carryover rules are
complex and not intuitive and so it is important to receive advice
from legal and tax advisers before engaging in charitable giving at
levels that might be subject to these limitations.
There is an exception to the deduction rules for gifts to certain
private foundations that are treated as pass-through foundations. If a
foundation meets certain criteria (i.e., it is considered a pass-through
foundation), the donor may receive a deduction as if the gift were
made to a public charity. A “pass-through foundation” is defined as
any foundation that makes qualifying distributions in an amount
equal to 100 percent of the foundation’s contributions for the year
before the fifteenth day of the third month following the end of the
foundation’s taxable year. No special election is necessary; the
foundation should just make the appropriate qualifying distributions.
To substantiate the higher deduction, the donor must obtain
adequate records or other sufficient evidence from the foundation
showing that the foundation made the appropriate qualifying
distributions. Pass-through treatment of a foundation may be an
attractive planning tool for founders who are willing to make the
required distributions from the foundation during their life to receive
the 50 percent deduction, and then further endow the foundation
after death.
 Private Operating Foundation

To qualify as a private operating foundation, a foundation must

demonstrate that the majority of its income is used to provide a
charitable service or operate a charitable program. To do this, a
foundation must demonstrate to the Internal Revenue Service (IRS)
that it passes the income test. To pass this test, it must show that it
spends at least 85 percent of its adjusted net income or its minimum
investment return (whichever is less) on the active conduct of its
exempt activities (not grants). A foundation’s minimum investment
return is essentially 5 percent of the fair market value of its assets
(other than those held or used for direct charitable activities). In
addition, the foundation must pass one of the following three tests:

Assets test: A foundation passes this test if at least 65 percent

of their assets

• Are used in the active conduct of their exempt activities, a functionally related
business, or a combination thereof
• Consist of stock in a corporation that is controlled by the foundation, and at least 85
percent of the assets of that corporation are used in the active conduct of the
foundation’s activities
• Any combination of the previous two points

Endowment test: A foundation passes this test if their

expenditures on the active conduct of their exempt activities is at
least two-thirds of their minimum investment return.

Support test: A foundation passes this test if

• 85 percent or more of their support (excluding gross investment income) is normally

received from the general public and five or more unrelated, tax-exempt entities
• No single exempt organization contributes more than 25 percent to their support
(excluding gross investment income)
• Not more than 50 percent of their support normally comes from gross investment
income
 Donations to private operating foundations receive the more
generous deductibility limits afforded to public charities, which are as
follows:

Type of Gift:

• Cash (50 percent of the donor’s adjusted gross income)

• Appreciated property (30 percent of the donor’s adjusted gross income)

Finally, to become a private operating foundation, a foundation

must demonstrate that it passes these tests for any three years of a
specified four-year period (with financials for each of the three years
considered individually) or that it passes these tests for a four-year
period that includes the current tax year and the previous three years
(using this method, the financials for the four years are considered in
aggregate).

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

As with many wealthy families, philanthropy has an important place

for both John and Sofia. They each want to share their good fortune
by giving back to specific programs that are near and dear to their
hearts. As with other new ventures, however, active philanthropy, as
opposed to simply writing checks, is unfamiliar to them, and they
need help to make sure that they conduct this activity in a prudent
manner. Engagement with the family’s philanthropy is also a great
way for John and Sofia to involve their children and begin a process
that educates them about the issues and challenges that come with
substantial wealth and how best to address and manage these. The
family office can be of great help to them, given the experiences of
its professionals, its contacts in the community, and the related work
it does in other aspects of their lives (e.g., finance, investments,
legal, insurance, wealth education, and other areas).

Case Questions
 • How might John and Sofia get started with their broader philanthropic ambitions,
and what role can the family office play in helping them?
• What is the most appropriate philanthropic vehicle for the Thorne family?
• What are some of the key steps that John and Sofia should take in developing their
philanthropic plans?
• What are some of the reasons why John and Sofia would want to include their
children in their philanthropy?
• How can the children be integrated into the philanthropic discussions, and what
might be their roles and responsibilities?
• What are some issues that might come up down the road as the family develops its
philanthropic strategic plan, engages the children, and runs and supports
programs?

RECOMMENDED SOLUTIONS

Responses to Case Questions

How might John and Sofia get started with their broader
philanthropic ambitions, and what role can the family office play in
helping them?

The most important initial role that the family office can play in
helping John and Sofia with their philanthropy is to engage with them
around strategic planning and, as needed, take the lead. Raising the
topic, hosting meetings to discuss issues, and soliciting and
synthesizing advice from experts should be the start. As these
discussions unfold, the family will better understand what they need
to accomplish their goals, the appropriate structures to use, and
what potential outside resources to engage. Ultimately, the family
office also plays a role in helping implement, report on, and perhaps
evaluate the effectiveness of the family’s charitable activities.

What is the most appropriate philanthropic vehicle for the Thorne

family?
Families conduct their philanthropy through a variety of charitable
vehicles, including DAFs, supporting organizations, and public
charities. However, the vehicle of choice for most families that have
significant philanthropic resources, active ambitions, and a desire for
control is the private foundation.

What are some of the key steps that John and Sofia should take in
developing their philanthropic plans?

John and Sofia, with the help of the family office, should orient their
initial activities around developing a formal or informal strategic plan.
This is more of a process than an outcome, although the end
document will be an important instrument that the family can rely on
in the future. Part of the strategic plan will be decisions that the
family must make around giving guidelines, the process for
identifying and deciding on programs to support, and decision-
making mechanisms. While this is just the beginning of a longer
process for the family, and it will evolve and change over time, it is a
critically important first step. The plan will help ensure that the
resources, activities, decisions, and involvement of the family are
appropriate and consistent with what will help the family accomplish
their philanthropic goals.

What are some of the reasons why John and Sofia would want to
include their children in their philanthropy?

Growing up with substantial wealth can be a significant challenge for

children, not only because of the well-known entitlement issues, but
because many children must take over the management of their
wealth at some point, often in partnership with their siblings.
Understanding how to deal with wealth is not an innate trait—it must
be learned either through wealth education or (more commonly) by
trial and error. Family philanthropy can help acclimate children to
these responsibilities by allowing them to oversee and make
decisions over philanthropic assets that serve as a proxy for their
own future wealth. The process of developing a philanthropic
strategic plan, stewarding assets and programs, and working and
dealing with others in these pursuits (including navigating conflicts)
can create an invaluable learning environment for children.

How can the children be integrated into the philanthropic

discussions, and what might be their roles and responsibilities?

Much of the response to this question depends on the age of the

children and their expressed interest in participating. For young
adults, it can take the form of inviting them to meetings and letting
them see how information is received from various professionals,
decisions are made, and conflicts are negotiated and resolved. For
older children, the family could allocate to each of the children an
amount over which they have the direct ability to give within or
outside the family’s stated philanthropic mandates. Over time, these
young adult children could take on formal governance roles with the
family’s philanthropy and charitable vehicles.

What are some of the issues that might come up down the road as
the family develops its philanthropic strategic plan, engages the
children, and runs and supports programs?

As John and Sofia embark upon conducting their philanthropy in a

more strategic and coordinated manner (with their children, the
family office, and outside organizations), they may face a number of
challenges for which they should be prepared. These include the
following issues.

HOW SHOULD THE FAMILY HANDLE SIGNIFICANT DIFFERENCES AMONG

FAMILY MEMBERS ABOUT WHERE AND HOW TO GIVE? It is not
uncommon for even the most close-knit families to have differing
views on how best to conduct their philanthropy, the causes to
support, and the roles and responsibilities of family members. This is
particularly true once the principals start to involve their children in
these activities. In these cases, it is possible to allocate charitable
resources among family-specific areas of interest (which are agreed
to by all and are supported by the family foundation) and family
member–specific areas of interest (which are not included in the
family foundation’s charter). In these cases, each family member is
allocated an amount that they can use to support their own causes.
This helps avoid conflicts where a particular family member wants to
support niche causes that are important to that member but not
necessarily important to the rest of the family.

IS THE FAMILY OPEN TO PARTNERING WITH OTHER PHILANTHROPISTS

AND CHARITABLE ORGANIZATIONS, OR ARE THEY MORE INCLINED TO
WANT TO DO SOMETHING ON THEIR OWN? While this question may only
become clearer over time as families engage in their philanthropy, it
is an important initial consideration for them. Many new
philanthropists are enthusiastic about what they can do to help right
now, and they often want to jump right in and get started. The
challenge is that running a philanthropic program is very much like
running a business and requires a great deal of time, effort, patience,
and resources. While Sofia certainly has the resources, devotion,
and time to be successful at building her own early childhood
education program, she should know what is required before
committing to one particular course of action. She should also know
what options are available to her to provide part of the solution while
employing existing providers to supply the others. The family office
can help make sure that she is aware of these issues, including by
enlisting the help of outside philanthropic consultants. These
consultants will provide a great deal of research, insights, and
expertise that can help Sofia understand how she can best
accomplish her goals.

IS THE FAMILY EXPECTING TO BE THE SOLE FUNDING SOURCE FOR

UNIQUE PROGRAMS THAT IT DEVELOPS AND RUNS, PARTICULARLY IN
EARLY CHILDHOOD EDUCATION, WHERE THERE IS SUBSTANTIAL NEED
AND POTENTIALLY ESSENTIAL FUNDING? Related to the question about
running her own programs or working with others to do so, Sofia
should understand the funding that will be required to achieve her
mission. There are obviously a great number of variables that affect
this determination, including the number of children helped, the
depth and breadth of the programs, the needed involvement of other
public, private, or political groups, and whether she partners with
other charities. The answers to these questions will influence the
type of philanthropic vehicle she chooses to use, whom she hires,
and how she conducts the program, including involving other donors.
There is a benefit for many charities to received broad-based funding
from the community as opposed to a single family despite how
wealthy and involved that family may be. It is not uncommon for
philanthropists, particularly those who start a program that requires
significant financial and broader public institutional support
(educational, cultural, vocational, medical, etc.) to at some point
incorporate private or public fundraising programs.
 CHAPTER NINE

Next Generation

CASE STUDY

Summary

• Five years after the creation of the Left Seat Management family office
• Issues that children face growing up with wealth
• Wealth education
• Financial assistance

Key Words/Concepts

• Wealth education
• Inheritors and acquirers
• Family bank

Challenge
As John poured the last glass from his favorite Barolo at an elegant,
rooftop hotel restaurant with an amazing view of Il Vittoriano, he
thought about the last time he visited Rome. It was almost forty
years earlier, and under very different conditions—an overcrowded,
caliginous hostel with a scenic view of a shared bathroom and
bottles of Peroni littering the floor. That trip was with two of his
friends from college, who eventually joined him in starting Rybat
Manufacturing.
John’s youngest daughter picked Italy for this family vacation,
and he couldn’t help but think of some of the changes that he was
seeing in her. Unlike her older sisters and her half-brother Philip,
Emilia never knew a world without private planes, luxurious
accommodations, and a much more relaxed style of life now that her
father wasn’t working more than eighty hours a week to build Rybat
Manufacturing. In contrast to them, she was starting to take for
granted her privileged lifestyle. John thought that one of the reasons
that Olivia and Isabella were more grounded than Emilia on these
issues had to do with their early childhood experiences. Unlike
Emilia, Olivia and Isabella had watched John and Sofia struggle and
spend countless hours on building Rybat Manufacturing and balance
their work with active, hands-on participants in nonprofits that John
and Sofia cared about. Over the last more than twenty-five years
they were together, John and Sofia made financial sacrifices to
create rewarding lives for their children. After the sale of Rybat
Manufacturing, things changed dramatically, and John worried that
Emilia was starting to manifest behaviors suggesting that she
believed that this new and easier life was just how things were in the
world. Emilia was more cognizant and desirous of luxury brands,
spent a lot of time on social media promoting their lavish lifestyle
(flying privately, going on exotic vacations, hanging out with rich and
famous friends), and didn’t manifest any real passions in her life
save for her social and sporting extracurricular activities. Moreover,
the streak of entrepreneurialism and grit that was so evident in his
other girls wasn’t very strong in Emilia.
John knew all the reasons why it was important to worry about
this behavior and why he should work to correct it. His friends in
similar situations had also expressed this attitude, which became
popularly known as “affluenza,” as a problem with which they
struggled constantly. He was starting to think about how to employ
his resources effectively to help with this mission and decided that
the family office might be a good starting point, given the work that
Michael, the chief executive officer (CEO), had done with many
families over the years.
When he returned to the United States, he sat down with Michael
to talk about how the family office could be helpful in instilling those
values that he and Sofia held dear, and not just with their youngest,
but also with the rest of their daughters. Their oldest daughter, Olivia,
had graduated at the top of her class from Columbia University,
where she majored in economics and mathematics and studied
abroad in Paris. Olivia got a job on Wall Street as an analyst in the
investment banking division of a prominent bulge bracket bank. She
was working too many hours a week, but she loved her job and had
ambitions of eventually joining a private equity firm in New York City.
Isabella was finishing college at the Massachusetts Institute of
Technology (MIT), getting degrees in computer science and
engineering. She had grown up tinkering with computers, building
websites, and creating apps. She was the kid who attended coding
and math camps in the summer and was an avid chess player. She
had developed and sold a niche social media app for high school
kids when she was a senior in high school, and had aspirations of
getting into the start-up scene in San Francisco after graduation from
MIT. Her dream was to start and run her own company in the Valley
someday.
Emilia was attending a private high school in the Chicago area.
She was an avid tennis player and swimmer with a diverse set of
extracurricular activities that at times distracted her from getting the
best grades. She also seemed to find a new passion every month,
and some of these interests grew more expensive over the years.
She wasn’t exhibiting the same kind of drive as her sisters. Ski trips
to Aspen with her friends and arguing about what kind of car she
wanted (or “deserved”) were top of her mind these days.
Philip, John’s son from a previous marriage, was a teacher in
Chicago. He was married for the second time to Song, whom he had
met during a teacher’s conference in South Korea. Philip grew up
with his mother in suburban Detroit and spent summers in Chicago
with John. He graduated from the University of Michigan with a
degree in industrial and operations engineering. He was married
briefly right after college and had one child, David, with his first wife.
Philip had come a long way from the struggles that he had in his
youth. After graduating from college, he completely changed course
regarding taking an engineering job, dropped everything, and
traveled abroad to try to become a photographer. His drinking in
college was heavy, but it became even worse after his travels
abroad. It culminated in a drunk-driving accident, but thankfully no
one was seriously hurt. Philip rolled his car and was lucky to walk
away with only a few bumps and bruises. This event helped turn his
life back on track. After the accident, he attended an extensive rehab
center, moved in with John and Sofia, and went back to graduate
school to get a master’s degree in education. Philip then started
teaching math in a private school outside Chicago. A few years ago,
he remarried, and he and his new wife recently had a child.
Michael had gotten to know all the children since coming in to run
the family office. In his private banking career, he had worked with
many wealthy families over the years and supported the parents
through many common issues that came up with their children.
There were some good practices in wealth education, and John and
Michael spent an afternoon going over a plan to help John and Sofia
with their concerns and goals.

BACKGROUND INFORMATION

Wealth Education

It’s a common quandary among wealthy parents—perhaps a

universal one: what do we tell the kids, and when? As with many
tough questions, the likely answer is, “It depends.” Some children will
be ready to understand at an early age the challenges they will face
as future stewards of significant wealth and begin to behave
accordingly. Others may never achieve such an understanding. The
financial particulars of each family’s situation vary, as do the maturity
and capacity of each child. Laying it out on the table all at once may
overwhelm them. That’s why the answer must usually be, “It
depends.”
The important question is not just what do they know about the
family’s wealth. Knowing does not do anything and has no
behavioral implications; what is wanted is for children not only to
know about their wealth, but also to understand their responsibility,
expectations, and values about using it. This is a more active stance.
Young inheritors have to know what is expected of them and be
engaged in a discussion about whether they are committed, willing,
and able to abide by the family’s rules and support their values. This
is a discussion, not a lecture. The family has to not just offer
information, but also hold a values discussion and create
expectations and rules about how members should behave. Each
young person has to learn a role as a steward of wealth, a more
active role than being a passive beneficiary.
Yet—the family’s financial particulars aside—there is no reason
why every person should not begin at an early age to learn about
responsibility and stewardship where money is concerned. Will the
children be prepared? The answer to that question depends on their
parents. But the family office can, and should, be expected to help.1

Life Journeys of Wealth

People come into wealth in essentially two ways: they acquire it

during their lifetime through effort or chance, or they inherit it from
someone else. The way by which a person comes into wealth is an
important determinant of how wealth affects their personality and
character. There are a number of stages in the development of an
individual’s wealth identity, ranging from innocence about the power
and pain of wealth, to a level of conflict over their own wealth, to the
achievement of a sense of reconciliation and integration of the
wealth.2

Acquired and Inherited Wealth: What’s the Difference?

Acquired wealth can be defined as a significant rise in
socioeconomic level within one generation. A hallmark of acquired
wealth is the psychological and sociological sensation of transition.
The individual achieving wealth status travels not across distance,
but rather across socioeconomic class, setting out from a blue-collar
or middle-class culture toward the promised land of wealth.
A second fundamental point is that acquirers come, in most
cases, to their new status having already developed much of their
personal identity in the common culture of their birth. This, then, is
the significant factor: with acquired wealth, one’s identity is partly or
wholly established before it occurs.
Inherited wealth, by contrast, describes those of the
multigenerational wealth class who are born into their upper
socioeconomic level. Compared to the transition in socioeconomic
class that acquirers experience, the experience in multigenerational
wealth is of maintenance of one’s class. This gives rise to many of
the stresses and anxieties reported by heirs. Inheritors may be
fortunate enough to improve their wealth status by their own efforts,
thereby achieving that rare combination of being both inheritors and
acquirers.

The Five Challenges of Wealth Inheritors

Children of wealth must overcome five key challenges to generate a

sense of life purpose and a positive and facilitative emotional
connection to their money.3 Each challenge describes an important
aspect of the psychological relationship to the saving, spending, and
sharing of wealth. To develop a positive wealth identity, children must
resolve conflicts and overcome their vulnerabilities in each area.

CHALLENGE 1: FINANCIAL AWARENESS Many children avoid the issue

of their wealth by using it unconsciously, without knowing anything
about it. This challenge indicates the degree to which they have
actively become aware of money matters: how much they have, how
it is invested, and how it is spent and shared. Not knowing about
money is a way of denying it or not being responsible for taking care
of it. Success in this area indicates that they have a solid hold on
their finances, characterized by the feeling of truly “owning” their
money.

CHALLENGE 2: LIFESTYLE MANAGEMENT The element of lifestyle

management points to how children get pleasure from using their
money, their spending habits, and the nature of their lives. Positive
identity is seen in those who get genuine pleasure and satisfaction
from spending their money, and who spend in ways that are not
ultimately compulsive or self-destructive. They buy things that have
meaning, and they also buy things for fun. However, they also
practice values-based spending—balancing saving and sharing
money with spending it.

CHALLENGE 3: STEWARDSHIP It is not enough for children with wealth

to just consider their own personal satisfaction. Having wealth gives
them the opportunity to influence and help others, and studies show
that the greatest pleasure and life satisfaction come when one gives
both to oneself and to others. A steward views wealth as a
multidimensional resource that is preserved and shared for the
benefit of both current and future generations. A healthy person
wants to look around and think about what can be done for other
people and for the future.

CHALLENGE 4: SELF-ESTEEM/PERSONAL SECURITY Money by itself

does not make children feel personally secure or good about
themselves. In fact, its presence may lead them to feel increased
anxiety. This element of self-esteem refers to how much their sense
of personal value, self-respect, and personal identity is founded on
wealth. Specifically, it means how comfortable and secure they feel
in their own skin, which includes their inheritance and the role that it
has defined for their lives. Unless children have a strong sense of
personal identity, the fear of losing money may lead them to feel
continually vulnerable. Strength in this element means that a child
has a solid and coherent foundation of self-esteem and personal
security that is not primarily dependent on net worth. They feel in
charge of their lives, enjoying the advantages of money without
feeling that it makes them a better or more worthwhile person—or an
evil one either.

CHALLENGE 5: TRUST IN RELATIONSHIPS A child’s willingness to trust

others in a personal relationship is affected by wealth. The presence
of money can make it hard to trust others, even as it attracts them.
Wealthy children must learn how to select and trust other people in
their interactions, or they will always feel that money undermines the
nature of their relationships. People can always wonder if someone
likes them for their money or for who they are. A mature person will
find ways to make friends who are genuine. When children find that
personal comfort zone in handling the impact of money on personal
relationships, they are able to trust other people and deal with
money issues without poisoning or undermining their relationships.

How the Family Office Can Help

Family offices can assist principals in preparing their children for

both growing up with and being responsible for their wealth. While
this must be done with the active involvement or tacit approval of the
parents, it is an important role of the family office. Indeed, the daily
work of a family office, as well as the utilization of various
governance structures in conducting this work, can be a valuable
training ground for children of appropriate age. The key is for
executives of the family office to anticipate this need and to look for
ways to include children, particularly if some of the issues discussed
previously manifest themselves. The family office can also develop,
usually with the help of outside experts, a number of training
programs for children across a range of ages.

Family Meetings

A common practice among successful families is to hold regular

family meetings. At the end of the day, the families themselves must
come together to address many of the issues that come with
substantial wealth. Family meetings are such a forum, and they
provide a mechanism for sharing information, communicating and
promoting important values, providing education and training, and
developing mechanisms for conflict resolution. The family office often
plays an important role in scheduling and facilitating family meetings,
including creating agendas, preparing and presenting information,
answering questions, organizing special events, and inviting
speakers.

The Family Bank

Another mechanism commonly used by family offices that oversee

the affairs of larger families with adult children across multiple
generations is the family bank. This is a mechanism by which the
family, typically through the assistance of the family office, can
provide financial support to family members for things such as large
personal expenditures or new business endeavors.
Benefits come from the formality and professionalism by which
the family bank should operate. Families with multiple generations
often have members whose financial requests and desired
investments range considerably. The family bank provides the family,
and therefore the family office, with a way to address these needs in
a manner that provides some level of equity with respect to how
spending and investment decisions are made across family
members. It also provides parents a forum through which they can
impart their values and expectations, promote entrepreneurialism,
and encourage related engagement among the children.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

John is reflecting on his children and how Emilia is dealing with

growing up never really knowing what life was like without the
megawealth her family has created. He is noticing some trends in his
youngest daughter that are not appealing and do not reflect his and
Sofia’s values. He turns to Michael for help with how to address
these issues.

Case Questions

• Why is wealth education important?

• What characteristics do wealthy children have if they grow up in a family that is
acquiring wealth versus after the wealth was created?
• What can the family office do to support wealth education for the Thorne family?
• What are family meetings, and how can they be used to support wealth education?
• What roles, if any, are there for children within the family office?
• What wealth education issues should the family office consider five to ten years
from now?

RECOMMENDED SOLUTIONS

Responses to Case Questions

Why is wealth education important?

Children of wealthy parents regularly struggle with problems of

financial literacy, motivation, outsized lifestyles, identity, and trust. A
well-designed wealth education program with measured outcomes
can be helpful to mitigate some of these common challenges in the
following ways:

• Enabling family members to manage their financial affairs independently through a

high degree of financial literacy and subsequent healthy habits around investing,
spending, and saving
• Fostering a desire by children to use the family’s wealth in a manner consistent with
the values espoused by the principals
• Establishing lessons learned and frameworks to help children deal with major life
events and challenges such as careers, marriages, births, adoptions, divorce, and
death
• Promoting entrepreneurial mindsets and healthy risk-taking behaviors
 What characteristics do wealthy children have if they grow up in a
family that is acquiring wealth versus after the wealth was created?

How children approach wealth and money is greatly influenced by

observing their parents as they go from childhood into young
adulthood. Children that grow up in families with more humble
beginnings that accumulate significant wealth over a relatively long
period of time tend to share their parents’ attitudes and behaviors
toward wealth (although not always). These children are able to
experience and observe their parents’ struggles and success at
obtaining wealth through (1) a hardy work ethic, (2) financial and
personal sacrifices during tough times for the family and/or business,
(3) a deep passion and dedication to grow an operating business, (4)
learning (sometimes painful) lessons and adapting to challenges as
they build their fortunes, and (5) using part of their fortune to support
causes in line with the family’s values.
However, children of established wealthy parents who have not
grown up watching their parents engage in broadly healthy behaviors
are often challenged in the areas of motivation, financial literacy,
drive and purpose, healthy risk-taking, independence, and anxiety
about not having enough wealth to maintain their privileged lifestyle.
These children may also experience a relentless sense of pressure
to succeed, which can come from observing the tremendous
success that their parents have achieved or a direct push by their
parents to be successful themselves.

What can the family office do to support wealth education for the
Thorne family?

The family office can support John and Sofia’s wealth education
efforts in several meaningful ways. Once they decide, and indeed
demonstrate through their actions and decisions that wealth
education is an important goal of theirs, then the family office can act
as a coordinating agent. For example, it can help build a wealth
education strategy, communicate that strategy to the children, and
report the results of these efforts back to them. Family office
executives such as John and Jason typically have professional
experiences and backgrounds that are relevant to provide advice in
areas such as investing, business management, and general
financial literacy.
One delivery method for wealth education John can suggest is
family meetings. The family office can host these meetings and
incorporate wealth education topics into the discussions. John and/or
others within the family office can deliver the wealth education
instruction directly, through breakout sessions, or with professional
external facilitators.

What are family meetings, and how can they be used to support
wealth education?

Family meetings are gatherings of family members where

information is shared, issues are deliberated, and decisions that
affect the family are made. Properly employed, family meetings can
be a powerful tool for principals and family offices to align
stakeholders to a common vision, serve as a “state of the union”
check for the family enterprise, encourage and develop deep bonds
among family members, educate family members on critical
nonfinancial topics (e.g., cybersecurity), and provide an effective and
efficient communication platform to discuss complex (and sometimes
prickly) topics that affect the family. Family meetings can be informal
or formal and sometimes include a yearly family vacation to a
destination.

What roles, if any, are there for children within the family office?

Encouraging participation by children in the family office can be an

effective way to engage the future generations of the family;
however, execution is critical to success. Principals vary widely in
terms of what they want to reveal to children about their wealth.
Moreover, some children have little to no desire to be involved in the
family’s financial affairs, and forcing them to work in the family office
could be a distraction to operations and a drain on the limited
resources of the office.
However, there are particular strategies that help engage the
children with the family office. These include philanthropic activities,
participation on governance committees, summer internships, etc.
By involving the children slowly in age appropriate roles, they can
“learn by watching” how (1) family members interact with the family
office and outside advisers, (2) business is conducted across a
multitude of areas, and (3) conflicts are raised, discussed, and
resolved.

What wealth education issues should the family office consider five
to ten years from now?

Five to ten years from now, the family will have matured and
hopefully benefited from the structures put in place as the family
office continues to flourish. Philip’s children will be teenagers and
young adults. In this case, the family office would have to increase
the breadth of their wealth education programs, given the growing
number of both younger and older members of the family. In
addition, family members will likely seek support for their own
entrepreneurial, personal, and philanthropic projects. Therefore,
mechanisms to support those projects (e.g., a family bank) could be
deployed to assist with these issues. Finally, the children will be of
an age where they can take on more direct responsibility for their
own financial affairs and decision making. The family office could
begin working with them as individual family office “clients” helping
them address issues specific to their needs.
 SECTION THREE

Governance

BACKGROUND INFORMATION FOR CASE STUDIES 10

THROUGH 12

Ten years have passed since John created his family office, Left
Seat Management. The family and the family office experienced the
typical growing pains during those years, although the challenges
they experienced became catalysts behind creating additional
structures and developing more formal processes. The family office
now oversaw over $1 billion in assets, served twelve family
members, and had thirty employees (see figures s3.1 and s3.2).
Figure s3.1 The updated Thorne family tree

Figure s3.2 The updated Left Seat Management organizational chart

On the family front, John and Sofia were now the parents of
adults who had their own careers and, for some, families of their
own. John endeavored to assist his children financially, but he had
not taken the steps to transfer or give the children access to a
significant amount of the family’s wealth. All of his children were
pursuing their own paths in life and experiencing their own struggles
and joys. While this was what John and Sofia wanted, it also meant
that they were in less frequent contact with them.
The family office had become an integral part of all of their lives,
albeit to greater and lesser extents. Management of the investment
portfolio was increasingly professional, especially with the hiring of a
dedicated chief investment officer (CIO), Jack, who oversaw a small
team focused on both public securities and private investments. The
family office continued to outsource most of their public securities
portfolio. They were also very active in direct investing, mostly as
minority investors partnering with other families or via private equity
funds.
The family was bringing in house much of their increasing
amount of legal work by hiring one of their trusted corporate
attorneys, Chase, who was supported by a paralegal. John also had
decided to establish his own flight department, given his familiarity
with private aviation and the challenges of always having to rely on
management companies to source pilots. His chief pilot, Henry, had
flown with him for years and brought both technical expertise and
managerial skills to oversee a function that had become an important
part of their lives. Michael also decided to create an Operations
Manager role and promoted Veronika to this position to oversee
dedicated estate management, concierge, and security personnel.
However, despite this professionalization of the family office,
Michael seemed to be dealing continually with staff issues and
putting out fires. There were always service and communication
breakdowns between family members and the family office that
required him to intervene. He also had noted, and was surprised by,
the little things that tended to upset John or Sofia (or both). Based on
his experience as a senior executive, he couldn’t understand why
because all the major responsibilities of managing their personal and
financial assets were being done well (or, at least no one in the
family was complaining about these). Michael was starting to
consider whether the family office was focused on all the right things.
As John contemplated his legacy, he was exploring ways that he
could creatively get his children more interested and involved in the
family office. Their levels of interest varied greatly, and he was
growing concerned about how the family office would survive once
he and the executives were no longer around. Planning for
succession seemed logical, but it was also something he wished he
could put off until he was much older. But in just one example,
Michael was now sixty-seven and indicating to John that he planned
to retire soon.
 CHAPTER TEN

Communications and Planning

CASE STUDY

Summary

• Ten years after the creation of the Left Seat Management family office
• Best practices for communications
• Building a sustainable plan

Key Words/Concepts

• Communications
• Strategic planning

Challenge

Michael put the finishing touches on a family newsletter that he had

been working on over the last couple of weeks. This newsletter came
about after strains in interactions between the family office and the
principals regarding services and communication had become all too
frequent.
There was also the issue of engagement by the children. Right
after the business e-mail compromise fraud that the family
experienced during their trip to Russia a number of years ago, the
family office hired Evelina, an information technology (IT) specialist,
and an outside security consultant who jointly implemented regular
training sessions for the family office staff and the family members.
At first, attendance at these training seminars was strong because
the security event was fresh in everyone’s mind. However, over the
years, family members less frequently sat in on risk management
education sessions. Sometimes the reasons for not attending came
from conflicts caused by their increasingly busy personal schedules,
although the younger family members simply claimed they “didn’t get
the message” about the meetings. Michael knew that he was going
to have to get creative to make sure that important messages were
properly disseminated and understood by the family, and that
meetings were attended regularly.
In business environments large or small, miscommunications
occur. Family offices are no different and suffer from the same kinds
of communication issues. Michael was on top of most things for
which the family office was responsible. However, as the scope of
services and number of family members grew, Michael noticed that a
few things were starting to fall through the cracks. Michael believed
that a family newsletter would help him initiate a dialogue around
how the family office can better align with John’s and his family’s
service and communication expectations. He also believed that there
had to be a better way to organize and execute as the complexity of
the family increased.
During this period of time, John was becoming increasingly
focused on his passions, which he was able to indulge in more often
thanks to his liquidity event. One of those passions was direct
investing. John dedicated more of his time on, and worked with
Michael to have the family office devote more resources to,
supporting his interest in direct investing. John also joined a number
of boards and spent time with their management teams to help them
expand their businesses. He also increased his personal networking
efforts to find new investment opportunities, particularly with other
family offices. While John recognized that it was better for him to
remain in mostly a minority owner capacity with his direct
investments, he missed running a business and having influence
over something important to him. He met these desires by taking on
leadership roles with one of the charities he generously supported
and through focusing on how he could perpetuate his legacy.
The meaning of legacy was evolving for John. He knew what had
been important to him when he was building Rybat Manufacturing—
namely, managing and growing a company that he built from the
bottom up. However, this new chapter of his life was similar in some
respects, but very different in others. He had more time to think
about his kids and grandkids. How well was he preparing them to
live successful lives, and how would they and their children be
provided for after both Sofia and he died? What did he define as
success, and how did that differ from his children’s perspective? Was
he going to give the majority of his money away to charity, or should
he try to maximize the wealth of his children, grandchildren, and
generations of the Thorne family to come?

BACKGROUND INFORMATION

Communications

Family offices may be small and intimate, with few participants all in
close proximity to each other. But that doesn’t mean they are
immune from communications breakdowns. A key imperative for the
family office is to develop protocols for communicating with principals
and other family members. Communications should be active,
outreaching, and engaging, and not limited to formalities like periodic
financial reports.
Broadly speaking, family offices should consider a
communications plan that evaluates current communications
protocols, incorporate family office objectives into it, execute it, and
measure its results.
 Evaluate Current Communications Protocols

Examining how a family office currently communicates with key

stakeholders is a critical step in this process. It will provide both
family members and executives with an account of how information
is shared, both internally and externally. To make such a survey
successful, executives should work with principals to understand
their priorities of who should be included (next generation, in-laws,
cousins, divorced parties, and others). This will help avoid
misunderstandings and ensure alignment with principals. The “who”
elements will help answer the “why” and “how” communication
questions that follow in this evaluation. Moreover, executives should
take this time to evaluate the quality of messages by asking
questions such as the following:

• Do the current communications provide adequate information on the financial

standing of the family office?
• What happens if the unexpected death of a principal occurs?
• Does the family office’s messaging provide inspiration to younger generations of the
family to achieve the legacy ambitions of the principals?
• Who in the family office is engaged? Who should be more engaged?
• How do immediate and nonimmediate family members feel about being included in
the affairs of the family and the family office?
• Is communication with external advisers/parties adequate (e.g., operating
companies, financial/legal/tax advisers, or philanthropic efforts)?
• Are communications transmitted in the right form (e.g., for the next generation) or
with the right frequency? Are the right staff supporting these efforts?

These baselines will help all parties ensure that future

communications will provide credible messaging with adequate
resources.

Incorporate Family Office Objectives

The development of a stronger communications plan can help start

or enhance conversations with principals about what they want the
family office to do. Executives should incorporate the mission and
vision of the principals and help make sure that they fit the SMART
paradigm—which means “specific, measurable, attainable, relevant,
and time-limited.” Doing so will help make sure that communications
are aligned and that the principals’ goals can actually be met. Taking
these steps can help the family office in many ways, including
increased family harmony, more transparency about how the family
office invests, greater buy-in to the mission and vision of the
principals across the family office enterprise, and improved
preparation of the next generation to live better lives and take over
the reins of the family office.

Execute the Plan and Measure Its Results

Once executives agree on a communications game plan, the hard

part of execution begins. Executives should build a project plan that
highlights the frequency and mix of messaging across the family
office enterprise. Communications methods should be varied,
frequent, and tailored to individual stakeholders. These can range
from newer technologies (e.g., mobile messages, private family
social networks, and videoconferences) to more traditional forms
(e.g., hard-copy letters to family members, family meetings and
retreats, and a family history book). Examples of deliverables that
family offices should consider as they execute a personalized
communication plan include the following:

• Regular review of financials in hard copy for principals and digital copies of
summarized/minimized financials for next-generation and noncore family principals
• A newsletter that updates the family’s foundation efforts and results
• An annual family shareholder letter, written by principals and shared as appropriate
• Congratulations notes to celebrate the accomplishments of family members
• Financial education materials and messaging, such as a monthly blog delivered to
next-generation family members
• Economic and geopolitical updates from external advisers

Measuring the results of these activities is easier if goals are

defined up front. Executives should start with smaller and less
ambitious projects to get some early wins. Families can also
consider hiring outside consultants to help facilitate family meetings
or manage crisis situations.
In summary, strong communication plans and engagement of
principals are critical contributors of success for any family office.
Finding the correct communications tempo, messaging, and delivery
methods are even more important as the family size grows and
operations become more complex. Regardless of the stage or size of
the family office, a solid communications plan will help family offices
in good times and bad.

Building a Sustainable Plan

No single factor is more important in ensuring the long term

“success” of a family across generations than cohesion among
family members with respect to certain important objectives, such as
a family’s vision or mission, desired culture, or legacy.1 One of the
important roles of a family office can be to assist families in
determining these objectives and building a sustainable plan that
helps them achieve them. To do so effectively, a number of questions
need to be asked, including: Is the family willing and able to set up
effective governance structures and decision-making processes?
Are family dynamics such that comity will prevail over the inevitable
misunderstandings? Can major interests across generations be
aligned? Is the family committed to working together to determine
shared goals, values, and priorities such that they can be articulated
into a strategy that will shape its future for another generation or
two? A family that can answer “yes” to all those questions exhibits
the kind of cohesion that will place it in good stead for a successful
future.
It is important to focus here on the last item from this list—
namely, developing a strategy that will shape and guide the family for
the future. In essence, strategy is a means of implementing a shared
vision of things to come. Coalescing around a common vision of the
future, and then taking the concrete steps needed to put that vision
in place, are prerequisites for a strategic plan. In truth, every
organization needs one in some form, from the small charity to the
multinational corporation. As the number of stakeholders grows, as
complexity increases, and as the planning horizon extends from
years to decades, the need for strategic planning becomes more
compelling. And that is certainly true of wealthy families.
And yet family offices are not frequently asked by their principals
to help with strategic planning, certainly in the first generation, and
often beyond. Initially, the founding generation’s goals, values, and
priorities will take precedence, and whatever strategic plans that
might be produced will be in sync with them. If, as is often the case,
privacy, control, and service continuity are among the top priorities
when the family office is established, they will probably remain so
while the founders are still running things. A comprehensive strategic
plan for the family’s future, including the role of the family office—
who needs it? The new family office’s initial years will likely be taken
up with operational concerns of the moment, such as putting
financial and risk controls in place, building and refining an
investment approach, and finding the right talent with the necessary
expertise. Strategic planning can wait until there’s a more pressing
need for it.
In contrast, no one would say that a first-generation business
doesn’t require a strategic plan to chart its course and prosper. A
strategic plan can be useful from day one to help the new business
retain focus, allocate scarce capital, and respond appropriately to
opportunities and unexpected threats. The same is true for wealthy
families and the family offices that serve them. Yet, as previously
noted, few family offices are asked to take the time to develop and
adopt strategic plans for the family or themselves. This seems
paradoxical, given that family office principals are often successful
business owners who have built their wealth on the basis of strategic
business plans. Yet, family and family office strategic plans are still
the exception rather than the rule.
Despite this, there are tremendous benefits to the family that
come from the family office engaging in a strategic planning process.
As a road map, a strategic plan provides the office with direction for
short-term challenges, as well as long-term ones. It supplies
benchmarks to help the family measure and evaluate both its and
the family office’s performance towards these plans. And to the
extent that the strategic plan both reflects and enhances family
cohesion, it can be a powerful bulwark for family sustainability.
Strategic plans can help shape the response to adverse or
challenging events by guiding decision-making, ensuring that heirs
are prepared, and seeing that the family’s mission and values are
respected.
Those family offices that take the time and effort to help a family
engage in a strategic planning process and develop strategic plans
find it to be of great benefit. Chief executives of successful family
offices are increasingly putting into place strategic management
processes modeled after those used in government and business.
While strategic planning is most likely adopted by family offices as
they mature and develop multigenerational constituencies of family
members, it has gained a foothold in the family office world and can
be expected to spread as its benefits become more widely
recognized.

The Family Office Strategic Planning Process

Family offices can use a strategic planning process to identify

requirements and gaps, determine objectives, and develop a
feedback mechanism to monitor the tasks required to complete
those objectives while identifying additional areas of improvement.
Tables 10.1 and 10.2 provide an overview of the strategic
planning process and success factors that family offices can
consider. Customization of this process to fit idiosyncrasies and
dynamics within individual families is critical to achieve success in
this exercise.

TABLE 10.1
The family office strategic planning process—defining goals,
assessment, and building a road map

Key strategic
planning step Purpose Success factors
Defining Who are we, The initial assessment phase requires
goals and what do articulating both a vision and a mission
we want to statement. There are many effective ways
become as a that a family can craft these statements.
family and as Sometimes using an experienced external
an facilitator can be helpful.
organization?
Assessment Where are An assessment helps executives and
we today in principals understand the current family
comparison office’s strategic and operational balance
to our goals sheet and identify ways to improve,
and streamline, or jettison existing processes
objectives? and capabilities. Several methods and tools
can be used here, including SWOT and gap
analyses.
Building a Where would A detailed road map to achieve stated goals
road map we like to go, and objectives can help drive the family
and how will office’s activities and serve as the blueprint
we get there? for benchmarks to measure success.
Strategic objectives should be well defined,
time bound, measurable, distinct, aligned
with principals’ desires, and clear about the
boundaries of the family office’s
responsibilities.

TABLE 10.2
The family office strategic planning process—implementation and
tracking

Key strategic planning

step Purpose Success factors

Implementation What do we Once a strategy has been developed,

need to do to family offices should focus on
put the plan implementation. Here, the family
into action? develops a set of action items that
support the achievement of goals and
allow stakeholders to monitor their
 progress. Implementation should include
the use of a workflow management
system to help the family office prioritize,
allocate resources, and stay on top of
execution. Accountability is key. Those
responsible should be identified by
project, and projects should be ranked
by priority.
Tracking How are we Each action item ought to have
doing with measurable metrics reported at
regard to our appropriate intervals, including
plan, and ownership of action items and progress
where can reports in a format favored by the
(or should) principals. The monitoring process
we make should be simple and focus on progress
adjustments? and gaps.

BEST PRACTICES Strategic planning can be a rewarding system for

families looking to improve direction and operations; however, proper
implementation is critical. Family office executives must be careful to
design a plan around the desires and needs of the family principals,
even if that requires running a less efficient operating model for the
family office. Family offices are designed to support the requirements
of a family and (typically) not external stakeholders or shareholders.
Understanding and operating in this paradigm will help executives
with alignment of interests and better relationships with family
principals.
Here is a list of best practices that family offices can consider as
they build and implement their strategic plans:

• Keep all stakeholders fully informed, with regular communications throughout the
process.
• Show quick wins to encourage buy-in and maintain momentum.
• Use an external consultant or professional to design data gathering and
communications during the process.
• Monitor projects that support strategic objectives using a robust workflow system.
 • Communicate through the media preferred by family members (e.g., electronic
versus hard-copy reports).

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

John’s family office has matured, and his family has grown older and
larger. John and Michael are starting to feel the predictable growing
pains as the family office expands, complexity increases, and the
children become more independent. The family office and John are
right to focus their efforts on improving family communications, as
this will help in the near and long term. Now that the family office has
been established for a number of years, John is also well positioned
to spend more time on a strategic plan to help Sofia and him achieve
their goals.

Case Questions

• What can John and his family office do to improve communications strategies and
updates across his entire family enterprise?
• What are some common communications deliverables that family offices produce
for principals, and how could John’s family office employ them?
• Why should the family office help John and Sofia engage in a strategic planning
process?
• How should the family office help John and Sofia develop a strategic plan?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What can John and his family office do to improve communications

strategies and updates across his entire family enterprise?

John is experiencing a common issue that principals experience

after significant time has passed after a major liquidity event. Life
has become more complex, the children are grown and living their
own lives, and he is feeling out of touch with them. It is apparent that
John is taking some steps to address this by launching his family
office newsletter, and there are additional ways that he can use his
family office to improve communications for his family.
The first step to fixing issues around communication is
developing a formal plan with principals and family office
stakeholders. When a family office is in its earliest days, family office
professionals are often challenged to create such schemas.
Principals create family offices for different reasons, but a common
purpose is to make their lives more convenient. As such, they will
often skip the chain of command and engage with any and all levels
(and employees) within the family office responsible for tasks
undertaken to support their lives. This can lead to some
communications failures in a family office because additional
workflows don’t come via a universally accepted method. Family
offices will often apply Band-aids to communication issues until
major problems arise; principals then tend to lead the charge to find
and implement a better strategy.
To kick off a formal communication strategy, John should take
stock of who the primary stakeholders are (other principals, family
office personnel, outside advisers, extended family members, and
others), what messages are currently being delivered, and which
ones need to be, how, and at what frequency. Moreover, he should
recognize that communication style preferences and methods will
vary among individuals, and certainly between generations. Finding
ways to make the family meetings and family news updates more
interesting and to deliver them in a method tailored to a particular
audience’s preference will pay dividends.
Finally, to assist with the process, John should work on
establishing strong communication feedback loops among the
important family office stakeholders so that there is buy-in across the
board. He should also make sure that the family office develops a
strong project management system, with dashboards and regular
reporting to keep items on track and demonstrate progress made
(including communicating initial quick “wins” that can be vital to
increasing commitment to the process).
 What are some common communications deliverables that family
offices produce for principals, and how could John’s family office
employ them?

From the case study, we can see some of the ways that John has
addressed communications (e.g., his newsletter, education sessions
from external experts, and family meetings), but given the evolving
nature of his family, it will be important for John and the family office
to customize deliverables to meet the demands of various family
members.
Family offices are responsible for a variety of communications-
related deliverables, and often the first priority will revolve around
consolidated reporting updates to principals. Adapting to the
communication preferences around financial reporting presents good
lessons for how the family office will need to tailor all the messaging.
John should consider utilizing the following typical deliverables:

• A yearly or semiannual “state of the union” letter written by the principal with the
help of the family office and delivered throughout the family
• Updates on family philanthropic activities
• Updates on the family bank to appropriate stakeholders
• Wealth education materials for the next generation
• Congratulation notes to members of the family to recognize major accomplishments
in their lives
• Training sessions or educational content for family members on topics that affect
the entire family (e.g., risk management, health and wellness, business continuity)
• Chronicles of family history
• Maintenance of a variety of family-related chat forums
• Surveys of family members to provide input to support the activities of the family
office and the desires of the principals

Why should the family office help John and Sofia engage in a
strategic planning process?

At this point in John’s life, he is dealing with the issues of how

different building and running a family office ecosystem are
compared to when he was running his own operating company. The
formality of strategic planning and operational execution is typically
largely absent in a family office environment. However, that does not
mean that John can’t employ his family office to build, operate, and
(over time) improve its strategic planning process.
A common refrain of family office executives is that they generally
feel like they are always putting out operational fires. A rigorous
strategic planning process will help family office executives find
solutions that move them from feeling that they are constantly
jumping from one issue to another while executing a planned and
effective business strategy. Family offices that implement a robust
strategic planning process are also more equipped to handle
additional requirements, such as an expanding number of
stakeholders to integrating operating companies. In so doing, they
can improve readiness and execution, increase resilience and
continuity, advance family harmony, facilitate conflict resolution, and
increase cooperation and buy-in across the entire family enterprise.

How should the family office help John and Sofia develop a strategic
plan?

Similar to the general idea around improving communication

strategies, the family office should work to establish a formal
strategic planning process that focuses on obtaining buy-in from
John, Sofia, and all other important stakeholders. Given the bespoke
and often large degree of variance in both motivations and priorities
between principals in a family office, doing so in practice can be a
challenge. While families tend to have central figures that yield more
influence than others (in this case, John and Sofia), new
stakeholders develop as families grow in size and as the family office
functions for these family members grow in scope.
There are many established and tested corporate strategic
planning frameworks that the family office can modify to fit its
preferences and needs. However, a suggested initial design could
revolve around a five-step process. In this process, the family office
can work with John and Sofia to (1) define their mission and vision,
(2) evaluate the current snapshot of the family office, (3) design the
future state of the family office and assign goals, (4) manage
discrete projects to achieve objectives, and (5) measure and report
on progress and course-correct as necessary.
Finally, the family office should consider hiring an expert in the
strategic planning field to guide and augment the internal process.
There are valuable lessons that can be learned by hearing about
how other families have addressed similar issues, needs, and
concerns. An independent, and expert, consultant with experience
with other families can help make this complex process more
effective and efficient for all parties involved.
 CHAPTER ELEVEN

Structures

CASE STUDY

Summary

• Ten years after the creation of the Left Seat Management family office
• Governing mechanisms and vehicles
• Regulatory issues

Key Words/Concepts

• Governance structures
• Family businesses and family offices
• Private trust companies (PTCs)

Challenge

John (now sixty-eight), Sofia (now fifty-eight), and the entire

extended family were spending the Christmas and New Year
holidays in Cabo San Lucas, something they tried to do each year. It
was hard to do given the growing size of the family and the busy
lives everyone had. The family had grown to twelve members,
including two in-laws and four grandchildren.
Philip, who was now forty-one years old, enjoyed being a teacher
and had a spunky new baby daughter, Maggie. He also was active in
the upbringing and financial support of David, who lived with his
mother. John and Sofia helped Philip financially through annual gifts
of cash within the gift tax limits. Philip was also the beneficiary of an
irrevocable trust that was set up for him many years ago. This trust
has accumulated a significant amount of wealth over the years
through various gifting strategies John and Sofia employed. With the
approval of an independent trustee, Philip was able to take a certain
amount of income each year out of the trust. These amounts, when
added to his teacher’s salary, provided Philip and his family with
more than enough to live comfortably.
John and Sofia had done the same for each of their four children.
They received the same annual cash gift and could withdraw the
same level of income from their trusts once they reached the age of
twenty-five.
Olivia, who was now thirty-one, was married to a lovely woman
named Brecken, whom she had met while studying abroad in
France. Brecken was a fourth-generation family member of one of
the country’s largest privately held media companies. Olivia and
Brecken had stayed in touch after Paris while Olivia worked as an
investment banker and Brecken worked in marketing for her family’s
company. They married three years ago and have adopted two
daughters, Devin and Katie. Brecken’s family was quite large, with
over fifty siblings, cousins, and grandchildren. Brecken involved
Olivia with her annual family meetings, inviting her to serve on
various family committees, and solicited her opinions and feedback
on many of the issues that the family business and family faced. In
particular, Olivia was asked to be on the family’s investment
committee given her background as an investment banker, and the
family assembly as an in-law. These experiences gave Olivia a
perspective on issues that other families of significant wealth face
and how they addressed them, particularly with many more family
members across multiple generations.
Isabella, who was now twenty-seven, was enjoying her life in San
Francisco. She was working at a start-up and had a long-term,
serious boyfriend. Emilia, now twenty-two, was a junior at the
University of Colorado Boulder. She indulged her passion for sports
by playing tennis. She also took up skiing and became quite good at
it. Emilia was focusing on getting a degree in environmental studies
but wasn’t really sure what she wanted to do after college.
As John looked out over the Sea of Cortez, he thought about his
family, particularly his children and grandchildren. He was proud of
how they were growing up and, despite understandable sibling
conflicts and arguments, seemed to really love and support each
other. However, he knew that they were still quite young and had
many life challenges ahead of them, some of which were the result
of their station in life. John was starting to focus on what he could do
to support them after he was no longer around. This need also
became clear as he starting hearing from Olivia about what
Brecken’s family did to help oversee a family business. Her family’s
company was started 100 years ago and now had to manage a very
large business that included siblings and cousins. The business
eventually would also have to successfully navigate numerous
succession events.
The family office was an obvious means to provide this support to
an operating company, although John wasn’t sure how or who would
do that. As structured and operated today, it dealt with issues as they
came up, mostly around managing assets, personal needs, and
transactions. Decisions also currently were being made exclusively
by John or Michael.
John was interested in how he might involve his children more in
the decision-making in the family office, although he never really had
a conversation with them about this or their level of interest. He also
was concerned about what would happen once both he and Michael
were no longer around. Would the children be able to manage the
family office? How would they work together? Who else could step in
and help?
 BACKGROUND INFORMATION

Boards and Committees

There is a great deal of overlap between family offices and the

issues and challenges that family businesses face. This is
particularly true with respect to the involvement of family members
and the benefits and types of various governance institutions. The
following is a discussion1 of various family business governance
approaches and structures that apply to select family offices as they
grow in size to oversee a larger and diverse group of family
members.
The family aspect is what differentiates family companies from
their counterparts. This is also true with respect to many family
offices, particularly those that have been around a while and oversee
the affairs for a number of family members across multiple
generations. As a consequence, families can and do play a crucial
role in the governance of family offices. This implies different ideas
and opinions on how the family office should be run and its strategy
set. It becomes mandatory, then, to establish a clear family
governance structure that will impose discipline on family members,
prevent potential conflicts, and ensure the continuity of the business.
A well-functioning family governance structure will mainly aim at
doing the following:

• Communicating the family values, mission, and long-term vision to all family
members
• Keeping family members (especially those who are not involved in the family office)
informed about major accomplishments, challenges, and strategic directions
• Communicating the rules and decisions that might affect family members’
employment, cash flow, and other benefits they usually get from the family office
• Establishing formal communication channels that allow family members to share
their ideas, aspirations, and issues
• Allowing the family to come together and make any necessary decisions

Developing such a governance structure will help build trust

among family members (especially between those inside and outside
the family office) and unify the family, thus increasing the family
office’s prospects for viability. The major constituents of a family
governance structure are

• A family constitution (figure 11.1) that clearly states the family vision, mission,
values, and policies regulating family members’ relationships with the family office
• Family institutions, which can have different forms and purposes (e.g., a family
assembly, a family council, and other family committees)

Figure 11.1 The structure of a family constitution

Family Governance Institutions

Family governance institutions help strengthen the family’s harmony

and relationship with the family office. By allowing family members to
get together under one or more organized structures, family
institutions increase the communication links between the family and
the family office, as well as provide opportunities for family members
to network and discuss aspects that can be related to the office.
These organized activities help increase understanding and build
consensus among family members.
Family members should be well informed about the purpose and
activities of any established family governance institutions. This can
be achieved by developing written procedures for these institutions
and sharing them with all family members.

FAMILY CONSTITUTION The family constitution is also referred to as

the family creed, family protocol, statement of family principles,
family rules and values, family rules and regulations, or family
strategic plan. The family constitution is a statement of the principles
that outline the family commitment to the core values, vision, and
mission of the family or, as the case may be, the family office. The
constitution also defines the roles, compositions, and powers of key
governance bodies of the family office, the family members and
stakeholders, management, and the board of directors. In addition,
the family constitution defines the relationships among the
governance bodies and how family members can meaningfully
participate in the governance of their family office.
The family constitution is a living document that evolves as the
family and its family office continue to evolve. As a consequence, it
is necessary to update the constitution regularly to reflect any
changes in the family, the family office, or both.
The form and content of family constitutions differ from one family
to another depending on the size of the family, its stage of
development, and the degree of involvement of family members in
the family office. However, a typical family constitution will cover the
following elements:

• Family values, a mission statement, and a vision

• Family institutions, including the family assembly, family council, and education
committee
• A board of directors (and a board of advisers, if one exists)
• Senior management
 • Authority, responsibility, and relationships among the family, the board, and senior
management
• Policies regarding important family issues such as family members’ employment,
transfer of shares, and chief executive officer (CEO) succession.

ADVISORY BOARD The advisory board consists of independent

advisers to the principal and senior executives of the family business
or family office who typically do not hold voting rights. The board
deploys the expertise of its various members to provide guidance on
strategic planning, investment policy, and sensitive issues.
The advisory board is a group of experienced and respected
individuals that many family offices form when, in the case of a
family business, their own boards of directors remain composed only
of family members and company senior managers, or, in the case of
a family office, when there is no other governing board. In this case,
the board or principal might lack expertise and outside perspective in
certain strategic areas, such as governance, finance, human
resources management, and investment management. Accordingly,
the advisory board is then created to compensate for the
shortcomings of the principals without the family diluting any control
over decision-making or being required to share information with
outsiders. The advisory board can also add value to the family office
through the business connections that its members might have.
The advisory board is often considered a compromise solution
between a family-dominated and a more independent board. Many
principals of family offices recognize the need for an independent
board but are also uncomfortable with sharing sensitive information
(personal or financial) and decision-making power with a group of
outsiders. These principals usually opt to create advisory boards as
a way of getting outside advice and expertise.
The most practical size for an advisory board is from three to
seven members. Keeping the size of the board small helps maintain
its effectiveness and makes it possible for its members to clearly
communicate their ideas to the rest of the group. Members of the
advisory board are usually experts in areas such as finance,
management, and investments. They also provide expertise and
experience when the family office moves on to new activities. The
advisory board usually meets three to four times a year, depending
on the family office’s size and complexity of operations. The CEO
and a few senior managers from the family office can also be part of
the advisory board in order to coordinate and orient the meetings’
discussions toward the company’s/family office’s needs.
To ensure the objectivity of the advisory board, the following
individuals are typically not part of it:

• Suppliers or vendors to the company or family office

• Friends of the principals with no relevant expertise to offer
• Existing providers of service to the company (e.g., bankers, lawyers, external
auditors, consultants), because their advice is already provided in other forms and
their objectivity and independence might be questionable because they are working
for and being paid by the company
• Individuals who have a conflict of interest with being advisers to the company or
family office
• Individuals who are already overcommitted and would not be able to perform their
roles as members of the advisory board properly

Table 11.1 summarizes some key advantages and disadvantages

of advisory boards.

TABLE 11.1
Advantages and disadvantages of advisory boards

Advantages • Its members have no legal responsibilities, which reduces the

company’s costs (because insurance is less necessary) and
makes it easier to recruit members (because membership is
less risky than being part of a board of directors).
• The board can provide the family office with additional skills,
technical expertise, and knowledge that are not available at
the current management and board levels.
• Its advice is usually unbiased.
• Its members may offer new contacts that can lead to
additional insights and opportunities.
Disadvantages • The advisory board functions like a group of experts whose
advice is not systematically followed by the family office. As a
 consequence, the advisory board might not be taken as
seriously as a real board of directors.
• The advisory board has no authority to request information
from the management, so its recommendations can be based
only on what management is willing to share with the board
members.
• Advisory board members have little or no influence on the
strategy and performance oversight of management.
• The lack of legal responsibility makes it difficult to hold
members of the advisory board accountable for their advice.
• Some advisory board members might not take their role
seriously and put in the necessary preparations and
contributions that they would do if they were “real” board
members.
Source: International Finance Corporation, IFC Family Business Governance Handbook
(Washington, DC: World Bank), 2008.

FAMILY ASSEMBLY The family assembly comprises the universe of

family members that is often delineated by major family groups. It is
a forum used to educate family members on the family office, family
business, philanthropy, or other family undertakings; to provide
updates on important events and milestones; and to reinforce the
family constitution or mission statement.
Also called the family forum, the family assembly is a formal
platform for discussion by all family members about family and
related business issues. During the founders stage of the family
office, the family assembly is replaced by a more frequent and
informal family meeting. These informal meetings allow the founders
to communicate family values, generate new ideas, and prepare the
next generation of the family office’s leaders.
The purpose of the family assembly is to bring family members
together to reflect on areas of common interest (family, family office,
and family business issues). It allows all the family members to stay
informed about these issues and gives them the opportunity to voice
their opinions. These assemblies help avoid potential conflicts that
might arise among family members because of unequal access to
information and other resources. Family assemblies are usually held
about once or twice a year to discuss and manage issues of interest
to the family. Some of the issues handled by family assemblies
include the following:

• Approving any change in the family values and vision

• Educating family members about their rights and responsibilities
• Approving family employment and compensation policies
• Electing family council members (if the council exists)
• Electing other family committees’ members
• Dealing with other important family matters

As a general rule, family assemblies are open to all family

members. However, some families prefer to set membership
restrictions, such as minimum age limits, participation of in-laws, and
voting rights during the assembly. The scheduling and chairing of the
family assembly are usually handled by the family head or some
other respected family figure. In larger families, this task is usually
given to the family council, as discussed next.

FAMILY COUNCIL Also called the family supervisory board, the inner
council, and the family executive committee, the family council is a
working governing body elected by the family assembly among its
members to deliberate on family business or family office issues.
The council is usually established once the family reaches a critical
size (i.e., more than thirty members). In this situation, it becomes
very difficult for the family assembly to have meaningful discussions
and make prompt and qualified decisions. The family council is
established at this point as a representative governance body for the
family assembly in coordinating the interests of the family members
in their family business or the family office.
The composition, structure, and functioning of family councils
differ from one family to another. However, their duties typically
include the following:

• Being the primary link between the family, the board, and senior management
• Suggesting and discussing names of candidates for board membership
• Drafting and revising family position papers on its vision, mission, and values
 • Drafting and revising family policies such as family employment, compensation, and
family shareholding policies
• Dealing with other important matters to the family

Just like any well-functioning committee, the family council should

have a manageable size (i.e., five to nine members). These
members are usually appointed by the family assembly by
considering their qualifications and availability to perform the
council’s duties. Some families prefer to impose certain restrictions
regarding membership in the council, such as age limits and
experience requirements and barring the participation of in-laws and
family members who also serve on the board or are part of a family
company’s or family office’s senior management. One good practice
is to set limited terms for the council’s membership to allow more
family members to be part of the council and create a feeling of
fairness and equal opportunity within the family.
The family council should have a chair, who is also appointed by
the family assembly. The chair leads the work of the council and is
the main contact person for the family. It is also a good practice to
appoint a secretary of the council, who will keep the minutes of
meetings and make them available to the family. Depending on the
complexity of issues facing the family, the council would meet from
two to six times per year. Decisions are usually approved by a
majority vote of the council’s members.
Table 11.2 outlines the major differences between the family
meeting, family assembly, and family council.

TABLE 11.2
Family meeting, family council, and family assembly—what’s the
difference?
 Investment Committee

Structuring, implementing, and governing the investment

management program for a wealthy family generally benefit from
following, over time, the guidelines and approaches adopted by
institutional investors. Two of the more important of these
approaches is the use of an investment committee and the
development of an investment policy statement (IPS).
Family offices of all sizes and stages of development should
consider establishing an investment committee to assist in the
oversight of their investments, both internally and externally
managed.
The objectives of the committee include the following:

• Providing a formal process to manage the family’s investable assets

• Developing and implementing investment decisions

The broad responsibilities of the committee include the following:

• Holding regular meetings, typically quarterly

• Developing the IPS
• Selecting and monitoring investments
• Setting reporting guidelines and evaluating performance
• Approving the hiring and firing of advisers and managers
• Documenting any decisions that the committee makes

The investment committee should be made up of both internal

and, if possible, external professionals and advisers, although the
makeup and diversity of these members tend to evolve over time.
Many newer family offices limit the committee to the principals and
senior members of the family office, such as the CEO or chief
investment officer (CIO). Principals new to managing money via a
committee are often reluctant to invite outsiders to weigh in on
investment decisions. It is their money, after all, and they have been
making all the decisions in the past and expect to continue to do so
in the future. Over time, however, as the family’s wealth grows and
investment management becomes more complex, or the principals
begin transitioning governance to others, receiving independent
advice from others becomes more valuable and important.
The chosen membership of the investment committee is of great
importance and typically also evolves over time. It is not uncommon
for newer committees to include the close friends and peers of the
principals. This is understandable and often fine, so long as the
committee members bring both valuable expertise and gravitas to
the committee. It does no good for any governance committee to be
comprised of friends and peers who do not provide expert, balanced
views that at times differ from those of the principals.

Other Family Institutions

Families in business or part of a large family office might find it useful

to develop other types of institutions that cover areas of particular
interest to them. Some of these institutions are the following:

• Education committee: This committee is responsible for nurturing the family’s

human capital and its capacity to collaborate effectively in the tasks of governance.
The education committee anticipates the developmental needs of family members
and organizes educational events and activities for them. For example, the
committee could organize an accounting seminar for family members to help them
read and understand the financial statements of their family company or family
office.
• Shares redemption or distributions committee: This committee is overseen by
the family council and manages an established fund for the shareholders of family
companies who wish to cash in their stock at a fair price to pursue other activities
with this money. The fund is usually built by contributing a percentage of the
company’s profits to it each year. This committee can also set distribution policies
for family members who are not part of a family company and instead rely on
income from a portfolio overseen by the family office.
• Career planning committee: This committee serves to establish and oversee entry
policies for family members interested in joining the family business or family office.
It also helps monitor the careers of family members, offers career mentoring, and
keeps shareholders, stakeholders, and the family council informed about their
development. The career planning committee can also be very useful for advising
family members who choose not to work in the family business or family office
about how best to pursue their external careers.
 • Family reunion and recreational committee: The purpose of this committee is to
plan fun events and other activities in order to bring family members together
around recreation. The committee also organizes yearly family reunions designed
to nurture relationships among family relatives by providing opportunities to come
together and enjoy each other’s company.

Learning from Family Businesses

In addition to governance structures, there are a number of issues

for embedded or related family offices to consider when the family
sells their closely held family business. One of them is how the
family office should prepare for and manage some of the changes
that occur with respect to the roles and responsibilities, family
cohesion, individual finances, and mission and vision of the family.
These changes will have a material impact on governance because
the nature of governance best practices within a family business is
often different than for a stand-alone family office.
The following are some observations about the nature of family
offices compared with family businesses, as well as some possible
implications for family office governance.2

THE COHESIVE “GLUE” OF THE BUSINESS IS MISSING For families that

own operating businesses, the business itself can act as a cohesive
element in keeping them together and focusing on agreed-upon
goals for the future. When a family transitions to a primary task of
wealth management rather than business management, reasons for
staying together may be less clear.
Participants in a family office must think carefully and continually
about their reasons for staying together as collaborating owners.
While vision and mission are important for business-owning families,
the vision and mission for the family office may need to be revisited
with greater regularity, and family leaders may need to focus more
strongly on managing family cohesiveness.

INDIVIDUAL RIGHTS ARE INHERENT TO OWNERSHIP AND MUST BE

RESPECTED The family business typically represents a single entity
that should be managed for the benefit of a unified shareholder
group. As families grow and family units increase, the benefits of
ownership are increasingly distributed among more discrete units (in
other words, nuclear families). This can have a further impact on
fragmenting ownership vision.
In addition, there are more degrees of freedom with investing
than with running a business, so people are free to have more
disparity in their financial objectives. The risk, growth, and profit
profile of a business is somewhat constrained by the industry in
which the business operates, so owners must accept that profile or
get out. When it comes to investing, there are many more choices.
Family members can choose profiles that fit their needs, which are
typically not going to be the same across the group.
Individual ownership units must think carefully through their
financial objectives, and a process must be established for them to
articulate these objectives and design an investment portfolio that
meets their needs. Particularly when individual participants in the
office vary considerably in income level and age, the processes of
articulating investment objectives and integrating disparate goals
become crucial. While a clear investment policy approved by all
participants may contribute to the continuity of the family office,
recognition of diversity and efforts to accommodate the various
perspectives will become increasingly important as the family grows.
The aspiration for a family business is a cohesive ownership
group with a consensus on business goals and objectives. By
contrast, family office management must be more responsive to
individual needs, and processes should be developed to identify and
address individual differences and needs.

THE FAMILY CULTURE IS THE BUSINESS CULTURE A key element of

family firm governance is the separation of family and business
domains. While the family mission, vision, and objectives provide
parameters in which the business operates, an independent board, a
family employment agreement, and other elements of governance
are intended to limit the family’s personal influence over business
management. In the family office, however, the mission and vision
are the family’s mission and vision.
The family culture takes on more importance and relevance in the
family office context because this culture will form the matrix that
gives rise to mission and vision. Well-run family offices recognize
these circumstances through a strong and continuing emphasis on
shaping a functional family culture, providing financial education,
engaging in philanthropic initiatives, and taking an entrepreneurial
approach to the creation of new wealth for the family. There should
be at least equal emphasis on shaping and nurturing the family
culture as on developing structures that support the family office’s
investment and other activities.

AUTHORITY IS VESTED IN FAMILY OWNERS RATHER THAN THE FAMILY

OPERATORS In the family business, business leaders are usually a
limited group of family members and nonfamily members whose
authority is recognized by family and nonfamily alike. But in the
family office, every owner may have a legitimate right to interact with
managers. This means there is the potential for a greater number of
diverse (and potentially conflicting) authoritative requests being
made of managers. This also means that all owners will be
responsible for making more decisions in the family office
environment than in the family business environment.
Family office managers must be vigilant about the possibility of
conflicting messages or requests from family members. Triangulation
can be a real threat to the smooth operation of the family office.
Executives thus must be clear on their rights, responsibilities, and
authority relative to family members. A clear process must be
established for managing the flow of requests from the family to the
family office staff, and boundaries on what is appropriate to request
of the staff must be clearly defined as well. Finally, given the amount
of responsibility foisted upon owners in the family office environment,
more education of family members with regard to the business of the
family office is crucial, whether or not they have a background in the
business.
Compared to a family business, family owners in the family office
may have considerably more power. Therefore, it is crucial that
family office operations be clearly defined with regard to lines of
authority and the process of managing family requests to the
executives and operators of the office.
FAMILY OFFICES TEND TO OVERSEE A BROAD RANGE OF ENTITIES AND
SERVICE PROVIDERS While the family business is often a single entity
or a small number of entities, family offices typically manage assets
with a broader range of complexity. This may include active
management of businesses, majority or minority investments in
businesses managed by others, partnerships, or passively managed
assets. Such complexity drives increased decision-making
requirements for owners and management and a good flow of
extensive information so they can make sound decisions. At the
same time, even the largest family offices typically outsource a
number of their functions, making clarification of accountability and
oversight more complicated.
Clear authority and responsibility for oversight of service
providers to the family, as well as accountability for service provider
performance, are crucial. Also essential to ensure sound decision-
making are good information flow and programs that educate family
members about the various components of the family investment
portfolio. In many ways, the requirements for management
accountability, communication with owners, and owner education are
similar in the family office and family business contexts.

Is Good Governance Different for Family Offices?

Taken together, these observations suggest that family governance

—in the form of vision, mission, role clarity, and next-generation
education and development—are at least as important (if not more
so) in the family office environment as they are in the family business
environment. Family offices differ in their need to recognize and
integrate a more powerful role for family owners and to respect and
manage individual differences. This points to a requirement for a
well-structured organization with articulated policies, plans, and
ownership roles that can accommodate the need for ongoing,
individually tailored conversations with owners.

Private Trust Companies

Wealthy families create private trust companies (PTCs) to provide a
form of governance via privately owned, professionally run trust
companies over which the families have some level of control. PTCs
are often used when one generation of leadership in a family
transitions to another, but that generation is not interested in playing
as active a role in the oversight and management of the family’s
wealth. PTCs are also commonly used where a professional
fiduciary is required (or desired) due to tax and estate planning, but
where the family wants to retain some level of permitted and
appropriate oversight and control.
For families that own family businesses, have active investment
family offices, or prefer not to work exclusively through institutional
fiduciaries, PTCs offer a unique opportunity to further both their
estate planning and family governance schemes. However, they are
complex and have substantial operational, legal, tax, and
governance issues and requirements that must be understood and
followed.
The following discussion provides a brief overview of PTCs and
summarizes many of their advantages and disadvantages.3

What Is a Private Trust Company?

A PTC is a state-chartered entity designed to provide fiduciary

services to members of a family, and as such is prohibited from
doing business with the general public. A PTC is distinct from a
family office in that it can serve as a fiduciary under state law. They
can take on many responsibilities commonly performed by the family
office, including investment and financial management, accounting,
and recordkeeping. They can also operate separately from the family
office, while still relying on it for administrative and back-office
support through a service contract.

ADVANTAGES Every family has its own reasons for establishing a

PTC, but some of the primary advantages in most cases include:
• A permanent trustee that can adapt to changing family dynamics over time, as
opposed to an individual trustee, which often presents succession concerns.
• The consistency and continuity of a trustee that is knowledgeable about the family.
Because the PTC serves as a trustee and the board of directors includes several
trusted advisers, ideally with differing ages and tenures, it preserves an
advantageous institutional memory.
• Enhanced flexibility and control over decision-making. Families can choose board
members, draft policies and procedures, structure the organization to suit their
needs, obtain voting power for important decisions, and arrange the distribution
process to their liking.
• The ability to contribute to the investment and asset management process through
serving on the investment committee of the PTC. In addition, families can be more
involved in the drafting of the investment and asset management policies and
procedures. This level of involvement is unlike that of a traditional trustee.
• Acting through directors and officers who have errors and omissions insurance
provides increased liability protection for decision-makers.
• Better decision-making with respect to closely held and family-owned assets by
involving multiple trusted advisers, including lawyers, accountants, investment
managers, and others who are intimately familiar with family assets.
• Greater control over trustee fees and costs through ownership, involvement, and
decision-making in the PTC.
• Enhanced privacy because the family has more control over the PTC and the
disbursement of information. A large institution is not involved in day-to-day
administration, and fewer people are privy to family issues and concerns. In
addition, some states have laws that reflect this privacy concern.
• The ability to integrate the next generation into the administration of the family
enterprise through involvement in board meetings, committees, and decision-
making. This level of involvement is unlike that of a traditional trustee situation, in
which family involvement can be somewhat limited.
• Families that utilize a family office structure are well equipped to transition to a PTC
structure. The families can choose their longtime, trusted advisers to run the family
PTC, all while concurrently integrating the next generation into the family’s wealth
planning and management.
• A PTC can be established in a tax-friendly state that doesn’t levy state income or
capital gains taxes on trusts.
• A family office may be exempt from registration as a registered investment adviser
(RIA) if their PTC is regulated by state law and submits to some level of regulatory
oversight.
• It potentially enjoys more flexibility in managing and investing trust assets, such as
offering relief from pressure to diversify concentrated positions.
DISADVANTAGES As with all complex planning vehicles and
governance structures, there are disadvantages particularly in the
areas of increased administration, regulatory oversight, reporting,
and costs. For PTCs these include:

• PTCs are relatively untested entities, although a growing number of states are
adopting statutes to promote their use and there is an increasing body of
knowledge and experience among tax and legal advisers regarding their use and
requirements.
• When family members are involved in a PTC, there is the potential for family conflict
if the trustee is not truly independent of family control.
• In addition to having high initial capitalization and start-up costs, a PTC has
continuing administration costs.
• In cases of mismanagement, breach of trustees, or poor investment performance,
family members may have little practical recourse against the fiduciary, as
compared to recourse afforded by a corporate trustee (such as a bank or trust
company).
• There are potential adverse estate, gift, generation-skipping transfer (GST), and
income tax consequences if certain family members retain too much influence over
specific PTC activities, such as distribution decisions.
• There are numerous regulatory, oversight, and financial reporting requirements.

PTC FORMATION Wealthy families typically choose family members,

advisers, and/or commercial trustees with whom they have had
personal, professional, or business relationships over the years to be
their trustees. PTCs allow these individuals to continue to participate
in the family operations and also provide them with additional
governance, structure, and support, all while dramatically reducing
their personal liability and providing many other key advantages.
A PTC is generally a limited liability company (LLC) or corporate
entity that is typically 100 percent owned by the family and qualified
to do business in the PTC jurisdiction, usually after acceptance by
the jurisdiction’s Division of Banking (DOB). The PTC then typically
works with the family office, often located in the family’s resident
jurisdiction, via a service agreement to provide related services, such
as investment advisory and management and asset allocation, as
well as illiquid asset, real estate, and private equity management.
 PTCs may be either regulated or unregulated. The regulated PTC
generally receives a charter, and the unregulated PTC usually
receives a license. The question of whether to establish a regulated
or an unregulated PTC is important (as discussed next). The
formalities associated with the regulated PTC, such as a charter,
capital requirements, state audits, policy and procedures manuals,
and compliance all help to ensure that the PTC is a properly
functioning entity and trustee. Some unregulated PTCs also follow
many of the formalities of the regulated PTCs to strengthen their
position as viable trustee alternatives and hopefully prevent the
ability to pierce the corporate veil. Other unregulated PTCs simply
have the corporate agent keep their license in a drawer without
many (if any) formalities, which could prove to be problematic.

SELECTING A JURISDICTION Typically, the PTC is located in a

jurisdiction with favorable PTC laws, as well as favorable trust, asset
protection, and tax laws. Some of the more popular PTC jurisdictions
are Nevada, New Hampshire, South Dakota, Texas, and Wyoming,
and some of the newer jurisdictions enacting PTC legislation include
Florida, Ohio, and Tennessee. Family offices should consult with
their attorneys to obtain an updated list of states that have enacted
PTC statutes. When selecting a PTC jurisdiction, many families
typically consider the following aspects:

• The jurisdiction’s PTC laws

• Support of the PTC from the state legislature and governor
• Whether the jurisdiction has an accredited DOB with experience in and support for
handling PTCs
• A corporate agent in the jurisdiction with experience in assisting with the PTC’s
formation, ongoing operation, compliance, and formalities
• A trustee agent in that jurisdiction with experience in providing trust administration
• Trust, asset protection, and tax laws of that jurisdiction
• Dynasty trust/rule against perpetuity statutes
• The economic conditions of the PTC jurisdiction

OWNERSHIP STRUCTURE The PTC ownership structure varies with

each family. The most popular organizational entity for the PTC is
generally an LLC, which is usually one or more of the following: (1)
owned outright by the senior family member; (2) a purpose trust with
dynasty provisions and no beneficiaries, whose sole purpose is to
care for and perpetuate the PTC; (3) a nonpurpose dynasty trust with
family member beneficiaries; and (4) a family trust.
The internal governance of the PTC (figure 11.2) is generally
structured similar to a corporation, with a board of managers or
directors that specifically appoints and works with separate
committees, each comprised of family members and their trusted
advisers. Typically, these committees are responsible for trust
distributions and trust investments. Sometimes the investment and
distributions committees are combined as one, or even made part of
the board of managers. The requisite number of board members
varies among the PTC jurisdictions, generally ranging from three to
twelve. Further, while a few of the PTC jurisdictions may not require
it, most families prefer to have at least one resident board member
provide a closer nexus to the PTC, which can prove to be very
beneficial.
Figure 11.2 PTC chart Source: Al W. King III, South Dakota Trust Company, LLC (SDTC),
2016.

SITUS REQUIREMENTS The PTC formation jurisdiction will often

require the regulated PTC to have an office located there. Families
will typically hire the services of a corporate agent in the PTC situs
jurisdiction to fulfill this requirement. Consequently, the corporate
agent provides a local nexus and gives a family the minimum
statutory contacts necessary for the jurisdiction’s PTC application
process, as well as for the ongoing operation of the PTC. For
example, a corporate agent in a regulated PTC jurisdiction might
maintain three contracts with a family office in that jurisdiction: (1) a
lease for the office and vault space; (2) a service agreement to
answer the telephone, receive faxes, forward mail, and provide
service of process; and (3) an arrangement for the corporate agent
to serve as the local PTC director. These services generally provide
the requisite contacts with the PTC jurisdiction without burdening the
family with seeking out, hiring, and monitoring a staff in the
jurisdiction, although many families elect to hire staff in the
jurisdiction.
Moreover, while a corporate agent will generally satisfy the
statutory situs requirements of a PTC, it may not be sufficient for
maintaining a trust situs in the PTC jurisdiction. If this added benefit
is desired, some corporate agents can also act as trustee agents to
accomplish this goal, or, alternatively, the PTC can hire separate
trustee agents that are independent of the corporate agent. A trustee
agent hired by the trustee PTC can provide the necessary trust
administration services in the PTC jurisdiction to validate trust situs
in the jurisdiction, allowing the family to benefit from the favorable
trust, asset protection, and tax laws of the jurisdiction, if the PTC is
properly structured. Alternatively, most regulated PTC jurisdictions
have reciprocity with other jurisdictions, thus possibly allowing the
trust administration by the PTC to be done in the family’s resident
jurisdiction. This reciprocity usually applies only if the PTC is
regulated. However, taking advantage of such reciprocity will
generally preclude the PTC from taking advantage of the favorable
trust, asset protection, and tax laws of the PTC jurisdiction because
the trust needs to be administered properly in the PTC jurisdiction to
accomplish this goal.

FORMALITIES It is extremely important to exercise the proper

formalities with a regulated PTC regarding the PTC’s ongoing
operation. Generally, the key formalities include (1) shareholder,
board, and committee meetings and minutes; (2) creation of and
compliance with a policy and procedures manual; (3) annual trust
account reviews; (4) trust investment policy statement reviews; (5)
proper decision-making and documentation regarding trust
distributions and investments; and (6) the PTC jurisdiction’s DOB
audits.
As a result of the PTC being owned by the family and named as
a trustee for the family trusts, the family must be careful with the
operation to avoid estate tax problems. While the Internal Revenue
Service (IRS) no longer issues private letter rulings (PLRs) regarding
the estate tax consequences of a family-owned PTC, it has offered
some guidance by issuing IRS Revenue Notice 2008–63 and has
determined that if structured and operated properly, a PTC will not
result in any negative estate tax consequences. Although not
binding, prior PLRs provide some additional guidance.

DECISIONS TO MAKE Once a family office chooses to establish a PTC,

it must make several decisions. For example, in which jurisdiction
should the PTC be established? Should it be regulated or
unregulated? How will the PTC be organized? What kind of entity will
it become (e.g., a corporation or LLC)? What about its ownership
and governance structure? How will the PTC be compensated for
services?
The first step is to determine the jurisdiction in which the PTC
should be formed and, depending on that jurisdiction, whether the
trust will be regulated or unregulated. A regulated PTC is chartered
to offer trust services and is regulated under state or federal law. An
unregulated PTC is incorporated in a state that allows a “limited
purpose corporation,” thus recognizing the unregulated PTC as
providing fiduciary services to a single family.
 Most states require that a PTC be fully regulated and have formal
capital and policy requirements, as well as regulatory oversight and
reporting requirements. A regulated PTC isn’t required to register
with the SEC as an RIA, and the state regulatory process makes
independent review possible. This is because a trust company,
which is supervised by state or federal authorities, satisfies the
definition of a bank and isn’t considered an investment adviser under
the IAA (Investment Advisers Act of 1940).
By contrast, an unregulated PTC isn’t chartered as a state trust
company and generally is not subject to supervision, though it may
perform limited fiduciary services. This kind of trust company may
not create a common trust fund, although it offers families more
privacy and is less expensive than a regulated PTC to form and
operate. Consequently, such unregulated PTCs may have to satisfy
the SEC’s family office exemption rule to avoid its registration
requirement.
Once a family office decides whether to formulate a PTC, its
decision about whether to be regulated or unregulated will affect the
choice of jurisdiction available to it. Family offices should check with
their legal advisers to understand which states permit PTCs, and to
receive guidance regarding the best jurisdiction in light of these and
other family-specific needs and concerns. These concerns include
the following:

• Costs of forming a PTC in addition to capital requirements

• The state’s income taxes and their impacts on PTCs, trusts, grantors, and
beneficiaries
• The state’s applicable fiduciary laws and investment standards affecting the
trustees and the trust

As a practical matter, the PTC’s geographic location may also be

a factor. Bear in mind that legal matters involving a trust must be
handled in the trust’s jurisdiction. For some families, having a PTC in
a distant state may pose too many logistical difficulties because of
the time and travel involved.
GOVERNANCE There are many issues to address when structuring a
PTC, such as determining its purpose, as well as the roles and
responsibilities of its shareholders, directors, and investment and
distributions committees.
PTCs often take over the functions and formalize the structure of
an existing family office and help preserve family privacy. In addition,
the PTC creates a separate identity for dealing with the business
world; centralizes administrative functions for the family, such as tax
preparation and investment management; and segregates the family
and investment functions from other family entities, such as a closely
held family business.
There are two basic levels of governance and their composition:

• Shareholders: These people are responsible for electing the board of directors,
approving amendments to bylaws and articles of incorporation, and approving
extraordinary corporate actions, such as a merger and a recapitalization.
• Directors: These people are elected by the voting shareholders and are
responsible for the daily business of the PTC, including hiring and compensation,
operational matters, and appointing committees to assume specific functions. One
to three directors are a practical size for this group, and they should include at least
one person who’s independent, with no beneficial interest in any trust for which the
PTC acts as trustee, and should not be related or subordinate to a grantor or
beneficiary of the trust. One independent director must serve at all times.

Potential adverse estate, gift, GST, or income tax consequences

may arise if certain family members retain too much influence over
specific PTC activities. Examples include when a grantor retains too
much power over trust property and when a grantor may alter,
amend, revoke, or terminate enjoyment of that property and cause
unintended grantor status for tax purposes.
In selecting directors, shareholders need to bear in mind that the
PTC’s bylaws must prohibit any director or member of the trust’s
distributions committee from acting on or approving any discretionary
distribution from a trust that such person or their spouse created or
has a beneficial interest in. A “discretionary distribution” is defined as
a distribution for any purpose in excess of health, education,
maintenance, and support (known as an “ascertainable standard”).
Such a limitation, therefore, heightens the importance of selecting
independent directors for the trust.

Other Considerations

One of the benefits of establishing a PTC is that it allows the

fiduciaries and employees to get to know the beneficiaries better
than is typically possible with a corporate fiduciary. This provides
both groups with greater insight into the needs and desires of the
beneficiaries. This helps promote cohesion among the family and the
trust company employees. It also facilitates governing the trusts in a
manner that addresses the idiosyncratic needs of trust beneficiaries.4

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

John is enjoying having all his family with him during the holiday
season and reflecting on his life and accomplishments. The children
have also started to form adult identities, with jobs, interests, and
families of their own. John is starting to think about governance
mechanisms for both overseeing the family office and giving ongoing
guidance to his children. This is a particularly important issue now,
as John cannot, necessarily, plan for when there might be a need for
a transition in the family office. These transitions require time to
develop and integrate into how the family office operates and makes
decisions. There is also an open question about the desired level of
involvement by John’s children and when and how they might be
involved.

Case Questions

• What role can the family office play in helping John address and manage these
concerns?
• Where might the family office look for guidance about appropriate governance
structures and best practices?
 • What are some key considerations for implementing governance structures and
procedures for within the family office?
• Which governance processes and structures would make the most sense for the
family at this point?
• Which governance processes and structures might make the most sense for the
family in ten or twenty years?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What role can the family office play in helping John address and
manage these concerns?

In many ways, family offices should take the lead in introducing

discussions about broader governance and related leadership
succession issues. Principals of family offices often do not want to
address this issue or postpone doing so because it entails both
dealing with one’s mortality and potentially giving up control. In this
case, while John is the one introducing the topics, the family office
should take the lead in developing and suggesting structures to
John. Michael, in light of his experience and connections, is in a
great position to gather information about how other family offices
that are similar to John’s in terms of size and family makeup govern
themselves and provide mechanisms for succession.

Where might the family office look for guidance about appropriate
governance structures and best practices?

Due to the ubiquity of governance issues for closely held family

businesses, there is a great deal of academic study on the subject
and numerous consulting resources available to these families.
Family office professionals can look to this academic research and
engage with consultants to learn about common approaches to
succession and governance that can be tailored to the unique needs
and attributes of their particular family office.
 What are some key considerations for implementing governance
structures and procedures for within the family office?

Governance structures should be developed around the unique

needs, stakeholder makeup, and interpersonal dynamics within each
family office. As a result, they vary even for very similar-looking
families. This is also the reason why involving consultants can be
very helpful in working with the family and family office to design
governance policies and structures.
In the case of the Thorne family’s evolution, formal governance
procedures and structures are just starting to be implemented. This
is because the family office is still largely controlled by John, and the
children are still quite uninvolved. As a result, the family has no
familiarity with or perceived immediate need for more formal
governance, save for the intellectual arguments why some are
needed and would be beneficial. In these cases, the family office can
introduce more formal governance processes and structures in a
measured way as they conduct their daily business and engage with
family members.

Which governance processes and structures would make the most

sense for the family at this point?

Regardless of any initial governance efforts, the family office should

suggest and help the family host family meetings. These will be the
first formal efforts to bring the family members together around
common interests and needs, help promote communication, and
provide an efficient recurring forum for education.
The family office could form an investment committee and start
including the children in overseeing their investment portfolio. While
the children may not be expected to actively engage initially, given
their backgrounds and historic lack of involvement, involving them
will start to acclimate them to a way of making decisions that has
broader applications across other areas of governance need. In
essence, the children will learn by watching how to behave, make
decisions, and raise and resolve disputes.
 Finally, the family office could suggest to John and Sofia that they
consider developing a family constitution or important subelements
of such a governing document, like a mission or vision statement. If
they decide to do so, the family should engage with outside
consultants to help them develop the statement, engage the
children, draw out commonalities and differences, and mediate
discussions.

Which governance processes and structures might make the most

sense for the family in ten or twenty years?

In ten to twenty years, the family’s makeup and needs will be quite
different than they are today. As a result, the governance structures
and mechanisms will also be different. Key changes will include a
much larger and more diverse group of family members and a
management structure that by necessity includes select family
members, outsiders, or both. At this point in the future, it would not
be unlikely to have a number of governance structures, including a
family assembly that represents all the family members, a family
council that includes selected family members who represent various
constituent groups, and perhaps an advisory board for the family
office leadership and professionals themselves. The family might
also consider creating a PTC to formalize many of these governance
needs and efforts via a more institutionalized process by outside
professionals, but where they can retain a level of control.
 CHAPTER TWELVE

Succession and Leadership

Insights

CASE STUDY

Summary

• Ten years after the creation of the Left Seat Management family office
• Michael is retiring, and John is hiring a new chief executive officer (CEO) to replace
him
• Insights into what Michael has learned

Key Words/Concepts

• Succession within a family office

• Leadership insights

Challenge
For the last few years, Michael had been preparing John and Sofia
for the fact that he intended to retire in the next few years. During his
years running the family office, he had become very close to both of
them and knew the significance of this change. The family office was
not just a resource to John and Sofia; their professionals were an
extension of their family, much as the senior management team had
been at Rybat Manufacturing. However, in this case, the importance
of maintaining this unique and important relationship could not be
overstated due to how deeply the family office touched and affected
the lives of everyone, particularly the children.
Michael understood and appreciated these facts and took his
responsibilities for this transition very seriously. Three years earlier,
he began planning his retirement. This included communicating his
intentions to John, Sofia, and the senior professionals at Left Seat
Management; instituting a number of important governance
structures; and developing important wealth education programs for
the children.
He also engaged a recruiter to help the family find a suitable
replacement for him. The recruiter worked with John, Sofia, and
Michael to identify candidates with both the professional and
personal qualifications that would be needed to oversee such an
important job. This was a lengthy process and had taken the better
part of a year. They had found a great CEO successor, someone
uniquely suited to help the family office manage not only its current
challenges, but those that lay ahead of them due to the changing
needs and roles of the various stakeholders.
The new CEO, Tracey (age fifty), had been a partner at a well-
respected venture capital firm based in Minneapolis. In this role, she
invested in both companies and people and as a result had great
insights into managerial and governance best practices. This would
be important as the family office transitioned over the next several
years from mainly serving the needs of only John and Sofia to those
of a wider and more complex infrastructure of family members,
structures, and activities. Tracey also had significant private
investing experience, which was important given the large and
growing commitment that the family office was making to direct
investing. Finally, she worked extremely well with the Thorne
children and was closely connected to them, by virtue of both age
and areas of investment interest, particularly impact investing.
Tracey, however, did not have private client experience, certainly
as it related to managing a large family office. It was in this area that
Michael felt that he could be a great immediate resource for her. He
scheduled a meeting with her to discuss many of the unique
managerial and service dynamics that come with working for a
wealthy family and within a family office.

BACKGROUND INFORMATION

Succession

Transitions in senior personnel at a family office can be very

challenging and tremendously disruptive to both the principals and
the family office staff. This is not unique to family offices, but most
family offices are quite small, with select individuals that have an
outsized influence over the organization, and very few have an
experienced second-in-command who can take over.
Further complicating transitions is the fact that great senior
leaders at a family office are deeply connected with family members
on a personal level, and the family has placed their confidence and
trust in them over many years. This relationship can be hard to
replace, and it is very difficult to assess these qualities in candidates
for the top job. While a great deal of work can and should be put into
assessing fit at this level, there is always an amount of
unpredictability.
Finally, relatively newer family offices, as well as those created by
the primary generation after a liquidity event, are likely still
undergoing a series of changes and adjustments as responsibilities
increase, principals become more experienced, and the family grows
in age, service needs, and expectations. Transitions in leadership
create both an opportunity and a challenge in this respect. For some
families, hiring a new leader who will continue to manage the family
office and guide the family in a manner similar to the way their
predecessor did can be a positive or a negative enterprise. As
families evolve and mature, so do their needs, and occasionally the
nature of leadership needed by the family office as well. Examples
include families transitioning from one generation to the next; those
that have strategically or behaviorally decided to focus more on one
particular area (such as direct or impact investing); and ones where
oversight and management need to be conducted through formal
governance vehicles, structures, and committees, as opposed to by
individuals, whether it be a family member or family office CEO. In
these cases, it is possible that the family office not only needs new
leadership, but also different skills and experiences in that leader.

Determining the Path Forward

For many of the reasons stated previously, a transition in leadership

provides a wealthy family with the opportunity to assess what they
have relative to what they need. They should consider their priorities,
preferences, and requirements, both now and in the immediate
future. For some families, this will be the first time that they do this
sort of strategic planning. Further, families should reflect on what
they like and do not like about the family office and services that they
have provided.
Perhaps there were some needs not being met in an adequate or
timely way, which would warrant hiring someone who can better
focus on delivering these. They might consider whether certain
functions should be outsourced, thereby allowing them to allocate
time, personnel, and resources to other more important needs.
Finally, the family and family office professionals could consider
inviting other families to use the services of the office, thereby
creating a multifamily office (MFO), particularly if the family office is
overseeing the needs of a diverse group of next-generation, adult
family members or branches. For obvious reasons, engaging in
these types of discussions informs the decision about whom they
need to hire because they help clarify what the family office should
do going forward.

Process
When hiring for senior leadership positions within a family office,
principals should follow the prescribed process outlined in Section
One, including giving serious consideration to the use of a recruiting
firm. The family office industry is still quite small relative to both the
number of family offices (as compared to other industries) and the
prevalence of senior professionals who have both the relevant skills
and the necessary personality and demeanor. For these reasons,
relying on experts who are both connected to qualified candidates
and experienced at assessing fit has paramount importance.
This process should include having candidates spend time with
not only the principals and senior family office staff, but also any
adult children and important outside advisors. These are all
important stakeholders who will be interacting with and relying upon
the new leader. While it is possible that a great candidate will present
themself early, it is also often the case that a search can take many
months, if not years. Families should not be put off by this because
making the wrong hire is often difficult to unwind, and not only that, it
may cause more damage than waiting for the right hire.

Leadership Insights

Family offices have many basic characteristics in common with

commercial businesses, particularly professional and financial
services firms. This is because they provide services and advice to
wealthy, complex “clients” and because the organizational structures
and staffing are, by necessity, similar. Indeed, a number of family
offices evolve into providing services to numerous families, both
related and unrelated, and in so doing compete against traditional
professional and financial services firms (so-called MFOs).
Yet, as it pertains to leadership (and in other areas), they differ in
a number of material respects due to (1) the unique nature of family
offices (e.g., initially controlled by involved principals), (2) the captive
nature of the environment for both the family and the family office
personnel (e.g., exclusive versus multiple service providers for the
family, and single versus multiple clients for the employees), and (3)
the intimate nature of the services they provide (e.g., bill paying,
lifestyle, and concierge). Moreover, family offices are idiosyncratic
and unlike each other in myriad ways, which is typically the result of
the personalities of the principals and what was referred to in chapter
1.
The following are a number of unique leadership insights gleaned
from those who have worked for and with family offices.1

Understanding Motivations

Family offices are not in the business of making a profit, at least by

the standards applied to businesses. This can make it hard for a
family office to orient their activities and resources toward
quantifiable goals such as shareholder value, revenue growth, and
net income. Yes, family offices invest money and often have return or
risk targets and ranges. They also have budgets and financial
forecasts that indeed are measurable and quantifiable.
However, these are seldom the most important motives for
principals and/or their family members. It is, therefore, important for
family office executives to understand what drives family members
so they can properly orient the family office and its activities toward
helping them achieve their goals. Examples of these categories are
lifestyle, philanthropy, direct investing, hobbies, and family harmony,
the measurement of which can be quite subjective depending on
family members’ interests. Despite the challenges of measuring
outcomes in these areas, family office executives should endeavor to
identify them and do their best to manage their time, the office, and
the staff to ensure that the principals and/or their family members
have the greatest chance of success at achieving them.

Leadership through Teaching

There is a well-known saying among equestrians: “You can’t force a

horse to do something, only suggest it.” The same goes for family
office principals. Family offices are, at the end of the day, simply
management organizations established to oversee the wealth and
personal affairs of the principals. It is their money, after all, and
senior executives at family offices are wise to remember this fact.
 Leadership within a family office is often best conducted through
education and behavioral examples, as opposed to by executive fiat.
While the term “servant leadership” typically describes a leadership
style that emphasizes the education and growth of employees, it can
be modified in the context of family offices to include educating
principals through leadership actions. As has been discussed many
times throughout this book, the issues that come with substantial
wealth are not necessarily those with which a principal is familiar,
whether it is managing complex assets, overseeing a large liquid and
nonliquid investment portfolio, or pursuing philanthropic ambitions.
Senior leadership within a family should anticipate this point and
recognize that solutions to many of these challenges must be
introduced, explained, and addressed in a manner that educates and
acclimates very successful and confident principals.

Aligning Focus and Resources

It is often said that there are three “who’s”: who we think we are; who
others see us as; and who we really are. In the context of family
offices, there are three “what’s”: what the family office spends its
time on; what they should be spending their time on; and what the
principals would like them to spend their time on (in either stated or
unstated goals).
Probably the best example of this is in the area of accounting and
finance. Chief financial officers (CFOs) of family offices will almost
universally say that they spend more time and resources on this than
what they think they should. And, for most principals, this is not an
area of great interest to them, other than making sure that the bills
get paid, there is proper reporting, and that both are done in a timely
and accurate fashion.
In resource-constrained family offices—usually newer ones that
have not yet invested in the resources and personnel to manage this
imbalance—this often means that the time invested by leadership
and staff in this area does not align with either what senior
leadership believes should be required or the key areas of interest of
the principals. Senior executives need to be mindful of this and make
sure that they request and receive (if possible) the resources they
need so they can devote an appropriate amount of their time, and
the staff’s time, on matters and opportunities of greater interest to
the principals and their families. This might include, for example,
sports teams, philanthropy, and direct investments.

Service Expectations

Not unsurprisingly, principals and their family members have high

expectations for service, responsiveness, execution, and insights.
This can create a challenge for family office employees, inasmuch as
it sets a high-water mark in terms of service and its delivery, whether
by the family office or outside advisors. For understandable reasons,
the family office will not be able to ensure excellence in execution
across all the various service and advisory needs of wealthy families.
For example, there are only so many times that the office can secure
backstage passes to the Rolling Stones, obtain timely backup pilots,
or ensure that the hotel in Italy properly accommodates and treats
the family. However, they must be prepared for, and be able to
handle gracefully, both reasonable and (occasionally) unreasonable
demands and criticisms.

Differing Perspectives

Family office executives often make the mistake of consciously or

unconsciously applying their own standards and beliefs to decision-
making for allocations of capital, resources, or time by, or on behalf
of, the principals. This is understandable inasmuch as family office
professionals, particularly less senior staff, have neither the means
of nor close personal experience with individuals of significant
wealth. In so doing, they run the risk of failing to understand,
anticipate, and suggest opportunities and solutions that make sense
for the principals applicable to their perspective. This might include
things like seemingly extravagant expenditures, excessive liquidity,
or vanity investments that are sure to lose money. It is important for
executives and staff to be mindful of this, and to balance providing
thoughtful advice about cost/benefits with an appreciation for the
relative impact of choices that the principals make from their financial
perspective.

ASSESSMENT AND ISSUES SURFACED

What Did We Learn?

Having gone through a very thoughtful and extended process to find

his successor, Michael is now focused on helping set Tracey up for
success by making sure that she understands many of the unique
dynamics that come with working for wealthy families. These are
often things that executives don’t realize and learn until they have
been on the inside of the workings of a family office.

Case Questions

• What are a number of challenges that family offices face when trying to find and
hire new employees, and in particular senior leadership?
• What did Michael do well to help manage these challenges?
• What examples might Michael share with Tracey of unique managerial issues with
respect to each of the key leadership areas, whether at Left Seat Management or in
a hypothetical scenario?

RECOMMENDED SOLUTIONS

Responses to Case Questions

What are a number of challenges that family offices face when trying
to find and hire new employees, and in particular senior leadership?

While the family office industry is indeed maturing and

professionalizing, it is still early in its evolution relative to other
industries. As a result, established hiring practices, resources, and
industry-knowledgeable applicants are in short supply. In addition,
principals at family offices are often loath to use recruiters and
instead prioritize hiring individuals with whom they are familiar
because the CEO of the family office is such an important and
personal role. Furthermore, even if they are open to using a recruiter,
principals rarely know where to go for help or how to assess
candidates properly.

What did Michael do well to help manage these challenges?

As a former wealth management industry professional who worked

with wealthy families and family offices before, Michael was well
aware of these issues and instituted a professional process for
finding his replacement. This process included a number of
important steps, including the following:

• Communicating early his intention to retire in order to socialize it with the family and
allow them time to process, prepare, and plan
• Using the services of a recruiter to not only help them source candidates, but also
to evaluate the candidates in light of the family’s unique needs and members’
personality types
• Sitting down with Tracey to provide her with some unique insights that pertain to
family offices generally, as well as the Thorne family specifically

What examples might Michael share with Tracey of unique

managerial issues with respect to each of the key leadership areas,
whether at Left Seat Management or in a hypothetical scenario?

UNDERSTANDING MOTIVATIONS John has a number of great interests,

including private aviation and direct investing. Likewise, Sofia is
increasingly active and interested in a number of specific areas of
philanthropy. The family office dedicated resources to each,
including developing a flight department and initiating strategic
discussions with philanthropic consultants. However, it is clear
through the investments that Michael made in these areas, such as
hiring a CIO and an analyst and creating a flight department, that he
recognized the importance of each of these areas to John and Sofia.
LEADERSHIP THROUGH TEACHING While John was certainly an
accomplished businessman, he did not have a great deal of
experience investing across multiple asset classes, and certainly not
at his newfound level of wealth. Michael, on the other hand, had
spent his career in financial services and understood both the space
and its players quite well. However, John was used to managing his
own affairs, including indulging his penchant for private investing. As
a result, he initially relied on his legacy advisers to bring him ideas
from which he would choose investments.
To be successful, Michael would likely have taken his time
executing a new investment strategy by “bringing John along”
through a combination of specific recommendations and education,
as opposed to by executive fiat (to the extent that such a power
exists within a family office). The migration to a more institutional
portfolio management approach, away from John’s long-standing
financial advisers, would be one example.

ALIGNING FOCUS AND RESOURCES It is difficult to say, based on the

limited case study information provided, whether Michael and the
family office aligned their resources properly relative to John’s and
Sofia’s stated (and unstated) needs and desires. The success that
Michael had by staying in his position for ten years and the respect
and affection he developed with both of the principals suggests that
he did a good job. Where understanding the importance of aligning
focus and resources might be better illustrated is in the area of
consolidated reporting. As was made clear in the case study, the
demands of keeping track of all the investments and related activities
had outstripped the personnel resources and technologies of the
family office at one point. As a result, the office made changes that
allowed them to address the need for timely and accurate reporting
in a manner that did not divert resources from other areas of greater
importance to John and Sofia.
While this may seem like an obvious and inevitable area where
family offices recognize the need for change in order to align focus
and resources properly, that is not always the case. It is quite
common for family offices to retain outdated and time-consuming
technologies in spite of the impact on time and resources needed
elsewhere. This lack of proper attention to the needed realignment of
focus and resources can manifest itself in constant delays or
mistakes in reporting that will be noticed by the principals, and for
which senior executives at the family office will be held accountable.

SERVICE EXPECTATIONS There are a number of areas where service

expectations by wealthy families set a high bar for family office staff.
While there are not many examples where the professionals at Left
Seat Management failed to meet or even exceed the expectations of
John and Sofia, it is not hard to imagine the areas where this could
happen. Examples include problems with making the plane available
due to pilot staffing, broken lights at the Cabo San Lucas house
because staff failed to check which ones needed to be replaced, and
an embarrassing spelling mistake made on the invitations that Sofia
sent out for a charity fund-raising gala. While it is impossible to avoid
mistakes or to be able to anticipate service errors or disruptions by
third-party vendors, family office professionals must pay strict
attention to each and every detail in all areas of service to family
members. Further, they must be able to handle the problems or
issues that inevitably come up right away, and in a professional
manner.

DIFFERING PERSPECTIVES One of the most obvious examples where

wealthy families can (and do) spend a great deal more than they
otherwise need to is in the area of private aviation. While there are
numerous legitimate reasons to fly privately—from time efficiency to
scheduling flexibility to personal security—it is for many principals an
indispensable luxury and one for which the brutal economics of
owning a private plane are not considered. While it was mentioned,
but not discussed in detail, John’s choice for a jet, the Challenger
350, was more than he needed to ferry his family to and from Cabo
San Lucas. There are many less expensive planes that could make
that trip without stopping, and given his relatively infrequent use,
there also are more cost-effective options, such as charter or
fractional planes.
 SECTION FOUR

Industry Data and Resources

One of the reasons behind publishing this book is that data on family
offices, while increasingly available, is dispersed across multiple
providers through episodic surveys, reports, and white papers. (The
same can be said of technical reference materials across the
multitude of service and advisory areas.) There is no single
repository for this data when it comes out from the various wealth
management and professional services firms, consultants and
advisers, service providers, trade organizations, academic
institutions, and networks and clubs.
The authors have endeavored to collect much of this information
and make it available in one location with the express permission of
the parties involved. This information can be found at
www.thefamilyofficebook.com, which catalogs select surveys,
reports, and white papers of relevance to academics, students,
principals, practitioners, advisers, and vendors interested in learning
more about family offices, their practices, and their behaviors across
multiple areas, as well as the industry overall.
 This section provides data collected about family offices through
a number of surveys, reports, and white papers in the following
areas:

• Demographics
• Investment allocations
• Costs
• Compensation
• Risk and threat management
 CHAPTER THIRTEEN

The Numbers

DEMOGRAPHICS

How many family offices are in operation today? No one really

knows. Their penchant for privacy and avoiding the limelight helps
most of them to remain largely anonymous. Many are embedded
within private companies, further shielding them from public
awareness. If and when those companies are sold, the founding
families may set up formally dedicated entities to handle their affairs
and manage the wealth derived from their business sales.
Sometimes family office functions are supported on an informal basis
by family members or operating company employees, with no
separate legal entity established for that purpose. In other cases,
families may pool their resources to jointly hire professionals to serve
them and thus benefit from economies of scale. Whatever their
approach, these families have several characteristics in common:
They face the challenges of managing substantial wealth. They need
ongoing services from dedicated professionals. Also, they often want
to delegate significant leeway and authority to those professionals in
handling their day-to-day wealth management needs.
One way to gauge the number of family offices is by identifying
the number of families that have a sufficient net worth so that the
issues and challenges of substantial wealth typically exist, and the
requirement to rely upon others for assistance can be reasonably
assumed.
Globally, there are approximately 18,000 ultra-high-net-worth
(UHNW) families worth $250 million or more.1 While it is unknown
whether these families all have family offices, or leverage a family
office solution through one of the various forms discussed in Section
One, what is known is that the issues that warrant a family office
easily present themselves at this level of wealth. It can be
reasonably assumed, therefore, that most will be employing multiple
professionals to help them manage their affairs. Contrariwise, many
families with less than $250 million also find reason to establish a
family office and so the actual number of family offices will differ but
could easily be higher based on the methodology we are employing.
Figure 13.1 provides an approximate distribution of family offices
around the world for those UHNW families worth $250 million or
more.
Figure 13.1 World map of family offices

These families control an extraordinary and disproportionate

amount of wealth. Of the approximately $32 trillion in global wealth,
UHNW families worth $250 million or more control approximately
$16 trillion.2 This represents half of all the wealth controlled by
UHNW families globally.3
An increasing number of surveys are being done on family
offices, although their use is somewhat limited to providing a
snapshot in time over the respondents’ average and range of
investing behavior, compensation practices, operating costs, and
trends and concerns. As a result, they are helpful inasmuch as they
provide a look at the practices of other family offices across a
number of attributes. However, they are not necessarily definitive
about how a particular family office should (or does) invest their
assets, structure their organizations, compensate their employees,
or prioritize concerns.
Included next are select survey results regarding family office
asset allocations, operating and investment management fees and
other costs, senior executive compensation, and risk and threat
management concerns and practices.

INVESTMENT ALLOCATIONS
A 2019 survey of 360 families broadly dispersed globally (figure
13.2), and with approximately 80 percent of the respondents
representing single-family offices (SFOs), as opposed to multiple-
family offices (MFOs) (figure 13.3), found the following:4

• Global equities and private equity continue to constitute the top asset classes that
family offices invest in, with portfolio shares of 32 percent and 19 percent,
respectively (figure 13.4).
• Going forward, family offices aim to further diversify their portfolios, with significant
numbers reporting that they plan to make larger allocations to developing market
equities, private equity, and real estate.

Figure 13.2 World geography of family offices Source: Campden Wealth and UBS, “Global
Family Office Report 2019,” Campden Wealth and UBS, 2019.
Figure 13.3 Types of family offices Source: Campden Wealth and UBS, “Global Family
Office Report 2019,” Campden Wealth and UBS, 2019.
Figure 13.4 Asset allocation Source: Campden Wealth and UBS, “Global Family Office
Report 2019,” Campden Wealth and UBS, 2019.

COSTS

The costs to run a family office vary greatly based on the number of
employees; the office’s location, responsibilities, and portfolio
allocation; and the experience and backgrounds of both the
principals and senior executives. Figure 13.5 shows the average
expenses as a percentage of assets under management (AUM)
according to the respondents to the 2019 global survey previously
mentioned. It is important to note that the average wealth and AUM
for the SFO respondents were $1.3 billion and $802 million,
respectively. For family offices with fewer AUMs, the average costs
will undoubtedly be higher as a percentage of assets managed. The
findings included the following:

• In 2019, the total average spending of family offices on services stood at $11.8
million, including $6.8 million in operational costs and $5.1 million in external
investment management administration and performance fees.
• Family offices spent an average of $1.5 million (14 basis points) on general advisory
services, $2.5 million (25 basis points) on investment-related activities, $1 million
(10 basis points) on family professional services, and $1.7 million (17 basis points)
on administration activities.
• Family offices are, on average, spending less in 2019 compared to 2018 on internal
investment-related services ($2.5 million), and more on family professional services
($1 million) and general advisory services ($1.5 million).

Figure 13.5 Operating costs Source: Campden Wealth and UBS, “Global Family Office
Report 2019,” Campden Wealth and UBS, 2019.

Costs (by Service Area)

Table 13.1 shows the costs for individual services according to the
same survey respondents.

TABLE 13.1
SFO and MFO costs of individual services from main service
categories
 COMPENSATION

The following is a summary of findings from a family office

compensation consulting firm that the authors believe most
accurately represent the level of compensation paid to family office
senior executives as of mid-2020 (notwithstanding caveats regarding
the application and accuracy of the data due to things such as the
geographic location of the office, backgrounds of the principals,
experience and backgrounds of the candidates, etc.).5
The positions shown in tables 13.2 through 13.5 include chief
executive officer (CEO), chief investment officer (CIO), chief financial
officer (CFO), and chief operating officer (COO), respectively.
Compensation data for the following additional positions can be
found at www.thefamilyofficebook.com:

• General counsel
• Comptroller
• Portfolio manager
• Tax manager
• Investment analyst
• Accountant
• Executive assistant
• Bookkeeper
• Property manager

TABLE 13.2
CEO compensation
TABLE 13.3
CIO compensation
TABLE 13.4
CFO compensation
TABLE 13.5
COO compensation
 RISK AND THREAT MANAGEMENT

The following data provides additional information on risk and threat

management concerns and practices for family offices.6 These
findings come from a 2020 survey conducted of more than 200
family offices regarding their perceptions of various risks and threats
and what they are doing to mitigate them. The survey uncovered a
number of insights about the risk and threat management state of
the industry. The following are a number of interesting findings from
that survey.

Over 25 percent of family offices have been hacked.

These figures, which are in line with other surveys in the family office
space, demonstrate the grave threat that families face from a
cybersecurity perspective despite their concentrated efforts to lower
their public profile and the risk mitigation mechanisms already in
place (figure 13.6).
Figure 13.6 Hacking of family offices Source: Boston Private, Dentons, McNally Capital, The
Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,” 2020.

Only 19 percent of family offices conduct background checks of staff

on a regular basis.

The data on background checks on family office employees

highlights a large problem, but it also presents a great opportunity
that family offices across the board can focus on (figure 13.7). By
failing to create a systematic and regular review of employees,
families open up the risk of insider threats—whether intentional or
accidental. Partnering with risk management professionals to create
a review system will improve the risk and threat posture for these
families.
Figure 13.7 Background checks at family offices Source: Boston Private, Dentons, McNally
Capital, The Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,”
2020.

Mitigating tail risk is a primary focus when considering investment

risk.

Figure 13.8 provides some insight into the mindset of families during
the 2020 COVID-19 pandemic and economic fallout around the topic
of investments. It clearly shows a focus on mitigating tail risk in
portfolios. Further study over a longer period of time would be
valuable to determine if these concerns change over time and under
different market conditions.
Figure 13.8 Investment risk concerns Source: Boston Private, Dentons, McNally Capital,
The Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,” 2020.

Family offices only sporadically evaluate threats and risks using

third-party vendors.

Family offices tend to ignore the threats that result from third-party
vendors for a variety of reasons, including awareness of risks, costs
of evaluating, and lack of ability to properly contrast and compare
various suppliers. Figure 13.9 shows responses to the survey
question “When was the last time your team conducted a review of
the risks and threats to family members or family office clients using
third-party vendors? How can a family office know which risk vendor
is best for them and their situation? To lower their supply-chain risk,
family offices would benefit from working with risk management
professionals to establish protocols to select and monitor vendors
and advisers.

Figure 13.9 Third-party vendors Source: Boston Private, Dentons, McNally Capital, The
Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,” 2020.

A total of 59 percent of family offices say there should be more

conferences where they can network and learn more about emerging
threats and best practices in risk management.

Many family office conferences and associations are available, in all

parts of the globe. Family offices are private in nature but tend to
appreciate opportunities to collaborate with peers. The results shown
in figure 13.10 indicate a demand for more connectivity around risk
and threats. Advisers to family offices should consider developing
additional risk and threat management content for existing
programming.
Figure 13.10 Demand for network conferences Source: Boston Private, Dentons, McNally
Capital, The Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,”
2020.

The top two obstacles to implementing risk management measures

in a family office are underestimating threat levels and complacency.

As discussed previously in chapter 7, the nature of how principals

and family office executives view risk management presents
potential pitfalls. These problems often show up as underestimation
and overlooking of threats, frustration concerning effective protective
measures, and a reactionary mindset in the family office. The survey
results provide additional evidence and insights into this issue (figure
13.11). Knowing that these issues exist, families can work with risk
professionals to build better protection systems and general threat
awareness in the family office.
Figure 13.11 Obstacles to risk management Source: Boston Private, Dentons, McNally
Capital, The Chertoff Group, and Data Tribe, “Family Office Risk and Threat Management,”
2020.

INDUSTRY RESOURCES

For Students and Academics

The study of family offices and instruction regarding their various

classifications, organizational and behavioral types, services
provided, and unique dynamics are just now becoming a common
part of graduate business school curricula, whether as part of a
master of business administration (MBA), master’s of professional
studies in wealth management (MPS), executive education, or
professional studies program. This book was written in large part
using problem-based learning pedagogy to assist educators in
presenting information on these topics.
 In further support of these programs, the authors have developed
a number of additional educational resources for academics to use in
discussing and presenting family offices to their students. Access to
this information can be found at www.thefamilyofficebook.com.

For Principals, Practitioners, Service Providers, and Vendors

As discussed throughout this book, there are an increasing number

of family office networks, clubs, conferences, and academic
programs that can be invaluable resources to principals,
practitioners, service providers and vendors.
Given the ever-changing nature of this information, it is not
possible to list it all here. Instead, the authors have developed a list
of certain networks and programs that can be accessed at
www.thefamilyofficebook.com.
 Conclusion

IN THE beginning of Anna Karenina, Tolstoy famously writes, “Happy

families are all alike; every unhappy family is unhappy in its own
way.” Family offices are no different. To be sure, family offices differ
because they reflect each principal’s distinctive personality and
preferences. However, this does not necessarily mean that the
solutions to common challenges that they face are so different. It’s
the application of those solutions that tends to distinguish family
offices from one another.
We wrote this book to share those solutions that we believe
explain why successful family offices are far more alike than they are
different. We did so by providing detailed insights into the challenges
that wealthy families face, the solutions they adopt, and how they
manage them, all from the perspective of a particular family as they
addressed these issues and implemented solutions.
It is our sincere hope that this book serves its purpose of being a
broad resource for those interested in learning about family offices,
whether students and academics, principals and practitioners, or
service providers and vendors.
 Appendix

Book Website

For up-to-date information on this work and the family office industry,
please visit the dedicated book website:
www.thefamilyofficebook.com. Here, you will find numerous
resources, including questions to ask when starting a family office;
teaching materials and templates; and access to events, podcasts,
interviews, and much more.

Appreciations

It would be impossible to name all of the individuals who contributed

to this book, either directly through their advice and/or contributions
as we wrote it, or indirectly, through the guidance they provided us
throughout our careers. However, we endeavor to do so with the
following list (presented in alphabetical order). We apologize in
advance for any omissions or oversights.

Lon Augustenborg, President, Novus Intelligence

Jennifer Bailey, Vice President, Internet Services, Apple Pay at
Apple
Milton Bearden, retired Central Intelligence Agency executive
Daniel Berick, Esq., Partner and Global Head of Family Office,
Squire Patton Boggs (US) LLP
Trish Botoff, Managing Principal, Botoff Consulting
David Braham, Braham Consulting Limited
Stewart Brenner, retired financial services executive
Tom Broderick, retired managing director at WTAS
Jason Brown, Strategic Advisor, SEI Family Office Services, and
Chairman, Proteus Capital.
Wesley Bull, Chief Executive Officer, Sentinel Resource Group
LLC
Paul Carbone, President and Managing Partner, Pritzker Private
Capital, LLC
Robert Casey, former editor of Bloomberg Wealth Management
Frank Dazzo, PhD, Professor, Michigan State University
Beth DeBeer, Chief Executive Officer, iImpact Consulting Network
Anthony DeChellis, Chief Executive Officer, Boston Private Bank &
Trust Company
Brad Deflin, Founder and President, Total Digital Security
Anthony DeToto, Senior Vice President, Bank of America Private
Bank
Allan Dunlavy, Esq., Partner, Shillings
John Dvor, Helge Capital
William F. Farren, President, My Accountant, Inc.
Rick Flynn, Managing Partner, Flynn Family Office
Randy Gantenbein, Founder and Chief Executive Officer, Vestis
Collection, Inc.
Michael Gray, Esq., Partner, Neal, Gerber & Eisenberg, LLP
Suzanne Hammer, President, Hammer & Associates
Thomas Handler, Esq., Partner, Handler Thayer, LLP
Dennis T. Jaffe, PhD
Al King III, Co-founder and Co-Chief Executive Officer, South
Dakota Trust Company LLC
Jeremy King, President, Benchmark Executive Search
Jay Frederick Krehbiel, Managing Director, KF Partners, LLC
David Friedman, Co-Founder, WealthQuotient, Co-Founder,
Wealth-X
Neil Kreuzberger, Founder, Kreuzberger Associates, LLC
David Lansky, PhD, Principal Consultant, the Family Business
Consulting Group
David Linnemeier, Founder, Linnemeier Aviation Advisors
Kevin Lorenz, Chief Investment Officer, Katz Group
Will Lymer, investor and cybersecurity expert
Anne Lyons, Founder and Chief Executive Officer, Tapestry
Associates, LLC
Linda Mack, Founder and President, Mack International
Michael McAndrews, Principal, Abbot, Stringham & Lynch
Jamie McLaughlin, Founder, J. H. McLaughlin & Co.
Ward McNally, Founder and Managing Partner, McNally Capital
Mike McNamara, Chief Executive Officer, Dentons US
Brian Mefford, Chief Executive Officer, Wooden Horse Strategies
Michael Montgomery, Chief Executive Officer, Brush Street
Investments
Charles Moorcroft, Owner, Charles Moorcroft, Inc.
Darren Moore, Esq., Bourland, Wall & Wenzel
Steven Oyer, Chief Executive Officer, i(x) investments
Joel Palathinkal, PhD, Chief Executive Officer and General
Partner, Sutton Capital
George Pavlov, Chief Executive Officer, Bayshore Global
Management
Jon Preizler, RH Capital
Stephen Prostano, Head of Family Advisory Services, PKF
O’Connor Davies
John Prufeta, Chairman, Medical Excellence International
Waldek Raczkowski, Kedlaw Capital
Kathy Reilly, Chief Executive Officer, Lifestyle Advisory
Angelo Robles, Founder and Chief Executive Officer, Family Office
Association
John Rompon, Marjo Investments, LLC
Rick Ross, Partner and Global Chair, Hotels and Leisure and
Global Co-Chair, Family Office and High Net Worth Dentons
James Ruddy, President and Chief Executive Officer, Dillon Trust
Company
Eric Schreiner, Chief Financial Officer, Pritzker Group
H. E. “Bud” Scruggs, Managing Director, the Cynosure Group
Ladislav Sekerka, Partner, Consillium Family Office
Chris Sidford, MD, Founder and Medical Director, Black Bag
Molly Simmons, Partner, McFarland Partners
Brian Smith, Assistant Editor, Columbia University Press
Parks Strobridge, Managing Director, UBS
Chad Sweet, Co-Founder and Chief Executive Officer, The
Chertoff Group
Keith Swirsky, Esq., President, GKG Law, P.C.
Mike Szalkowski, Adjunct Professor, UNC Kenan-Flagler Business
School
Geoff Teall, Owner, Montoga, Inc.
Steve Thayer, Esq., Partner, Handler Thayer, LLP
John Thiel, former Head of Merrill Lynch Wealth Management
Myles Thompson, Publisher, Columbia University Press
Mark Vorsatz, Global Chairman and Chief Executive Officer at
Andersen
Ingo Walter, PhD, Professor, New York University—Leonard N.
Stern School of Business
Tracey Brophy Warson, former Head, Citi Private Bank, North
America
 Glossary

Advisers Act: The Investment Advisers Act of 1940.

Advisory board: Independent advisors to the principal and senior
executives of the family business or family office who typically do
not hold voting rights.
Aircraft management company: A business that helps owners
oversee some of or all the management of their private aircraft.
Business e-mail compromise (bec): A cyber scam where e-mails
appear to come from legitimate sources; used to induce behaviors
that often end in fraudulent transfers of money.
Cessna 172: A four-seat, single-engine, fixed-wing aircraft popular
with private aviation enthusiasts.
Concours d’Elegance: A well-known car show typically held in
Pebble Beach, California, each year.
Consolidated reporting: Comprehensive reporting of all investable
assets held by a wealthy family across multiple managers and
custodians, including nonmarketable assets such as private
equity, hedge funds, and real estate.
Custodian: A financial institution that holds customer securities
(either physically or electronically) for safekeeping to minimize the
risk of their theft or loss.
Dodd-Frank Act: The Dodd-Frank Wall Street Reform and
Consumer Protection Act enacted on July 21, 2010. Passed after
the Great Recession during and following 2008 and 2009, it
overhauled federal financial regulatory agencies and much of the
financial services industry.
Estate management: The oversight and periodic care and
maintenance of personal residences, vacation homes, ranches,
and other real estate holdings.
Executive: Refers to a senior professional who works for a family
office. Also referred to as a “practitioner.”
Executive recruiter: See Search consultant.
Family assembly: The universe of family members, often delineated
by major family groups.
Family constitution: A statement of the principles that outline the
family commitment to the core values, vision, and mission of the
business, or as the case may be, the family office.
Family council: A working governing body that is elected by the
family assembly among its members to deliberate on family
business or family office issues.
Family Office Rule: A provision of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) that
provides guidelines by which family offices could be excluded
from the definition of an “investment adviser” under the
Investment Advisers Act of 1940 (Advisers Act).
FBO: Fixed Base Operator.
Federal Aviation Administration (FAA): An agency of the United
States with powers to regulate all aspects of civil aviation within its
borders, as well as its surrounding international waters.
Financial sponsor: A private equity firm, particularly one that
invests in leveraged buy-outs.
Fixed base operator (FBO): A business located at most airports to
assist private aircraft owners with fueling, hangaring,
maintenance, and similar services.
Flight department: An entity created by a wealthy family to allow
them to formally employ pilots and support staff.
General ledger: The accounting system used to record all
transactions relating to a company’s revenues, expenses, assets,
and liabilities.
Governance: The manner and systems by which organizations are
overseen and controlled at the highest levels.
Hedge fund: A private investment partnership or fund following
proprietary strategies to invest or trade in various securities and
assets in order to generate returns at reduced risk.
Impact investing: Investments intended to have both financial
returns and positive societal or environmental effects.
Investment committee: The governing board that oversees
investment management for a wealthy family, including
development of an investment policy statement (IPS), selection of
strategies and third-party managers, rebalancing of the portfolio to
IPS guidelines, and the involvement and education of family
members.
Investment policy statement (IPS): The governing document that
provides strategic guidance for the planning and implementation
of an investmnt management program related to governance,
asset allocation, implementation, monitoring, and reporting.
Lifestyle management and concierge: General description of
meeting the personal service needs of wealthy families, including
finding and hiring assistants and household staff, making travel
arrangements and reservations, and planning special events.
Lift: A term used to denote the various ways in which wealthy
families fly privately.
Major domus: During the Roman Empire, a term for the manager of
a household and/or numerous estates.
Managed service provider: An information technology (IT)
company that provides users with outsourced access to the
servers, networks, and specialized applications to help them run
their organizations.
National Business Aviation Association (NBAA): An organization
designed for companies that rely on general aviation aircraft to
help make their businesses more efficient, productive, and
successful.
Part 135: Federal aviation regulations that govern commercial
aircraft and their operators. Generally, these rules set more
stringent standards within private aviation for commuter and on-
demand charter operations.
Partnership accounting: Complex financial and tax reporting for
asset ownership vehicles used by wealthy families, usually
partnerships or limited liability companies (LLCs), particularly
when family members and entities used for their benefit have
different profits or capital ownership interests.
Principal: The individual for whom the family office is established.
Also referred to as the “patriarch” or “matriarch.” A family office
can have more than one principal.
Private trust company (PTC): A legal entity established by a
wealthy family to provide a form of governance, via a privately
owned, professionally run trust company, over which the family
has some level of control.
Ransomware: A cyberattack where files or systems are locked until
a victim pays a ransom (usually in the form of cryptocurrency).
Renaissance: Transitional period in Europe during the fifteenth and
sixteenth centuries that marked the transition from the Middle
Ages to modern times.
Search consultant: Firm that specializes in finding and assessing
executives and staff within a particular industry or industries.
Securities and Exchange Commission (SEC): A government
agency created to monitor and regulate investments and the
national banking system for the protection of investors.
STEM: An acronym for educational programs that focus on science,
technology, engineering, and math.
Ultra-high net worth (UHNW): A term typically used to refer to
families with a net worth of $30 million or more.
Wealth education: A term referring to a broad range of integrated
activities that provide next-generation family members with the
education, resources, and tools needed to become successful
stewards of the wealth of themselves and/or the family in general.
 Notes

INTRODUCTION

1. When used throughout this book, the term “wealthy families” means families with $100
million or more of net worth.

BACKGROUND INFORMATION FOR CASE STUDIES 1

THROUGH 3

1. The ages listed in this summary are those of each person at the time of the sale of
Rybat Manufacturing.

3. LEADERSHIP AND STAFFING

1. Linda Mack, “Recruiting and Retaining Top Leadership Talent,” Family Office
Association, 2017, http://www.mackinternational.com/documents/Family-Office-Association-
Recruiting-and-Retaining-Top-Leadership-Talent.pdf.
2. Trish Botoff, “Compensation Trends, Best Practices, and Market Data,” (unpublished
report, August 25, 2020), typescript.

BACKGROUND INFORMATION FOR CASE STUDIES 4

THROUGH 9

1. Left Seat Management, LLC, is the corporate name of the family office management
company for the Thorne family.
 4. FINANCE

1. The authors would like to thank William Farren of My Accountant for his contributions
to this chapter. William F. Farren, “Bill Paying Services,” (unpublished manuscript, July 24,
2020), typescript.
2. Jason Brown, “Innovations in Private Wealth Technology and Reporting,” SEI
Archway, 2018, https://resources.archwaytechnology.net/innovations-in-private-wealth-
technology.
3. The authors would like to thank Stephen Prostano, Gemma Leddy, Thomas Riggs,
and Marc Rinaldi of PKF O’Connor Davies’ Family Office Group for their contributions to this
chapter. Stephen Prostano et al., “Tax Reporting,” (unpublished manuscript, August 19,
2020), typescript.
4. Brad Deflin, “Family Office Cybersecurity IT and Trends,” Total Digital Security, March
8, 2018, https://www.totaldigitalsecurity.com/blog/it-and-cybersecurity-for-the-family-office.

5. LIFESTYLE

1. The authors would like to thank Kathy Reilly of Lifestyle Advisory for her contributions
to this chapter. Kathy Reilly, “Lifestyle Management and Concierge,” (unpublished
manuscript, July 24, 2020), typescript.
2. The authors would like to thank Anne Lyons and Judy Boerner-Rule of Tapestry
Associates for their contributions to this chapter. Anne Lyons and Judy Boerner-Rule,
“Estate Management,” (unpublished manuscript, July 24, 2020), typescript.
3. The authors would like to thank Keith Swirsky of GKG Law for his contributions to this
chapter. Keith G. Swirsky, “Private Aviation” (August 19, 2019), typescript.
4. This section benefited greatly from many conversations with David Linnemeier,
Founder, Linnemeier Aviation Advisors.

6. INVESTMENTS

1. Daniel G. Berick, Karina Abolina, and Amy E. Gilbert, “The Family Office Rule under
the Investment Advisers Act,” Squire Patton Boggs, Family Office Insights, 2017,
https://www.squirepattonboggs.com/-/media/files/insights/publications/2017/06/family-office-
insights-the-family-office-rule-under-the-investment-advisers-act/26895-2017_june_family-
office-insight_-family-office-exemption.pdf.
2. World Economic Forum, “Direct Investing by Institutional Investors: Implications for
Investors and Policy-Makers,” November 2014,
http://www3.weforum.org/docs/WEFUSA_DirectInvestingInstitutionalInvestors.pdf.
3. This section benefited greatly from many conversations with Ward McNally, Managing
Partner, McNally Capital.
4. This section benefited greatly from many conversations with H. E. “Bud” Scruggs,
Managing Director, the Cynosure Group.
 5. This section benefited greatly from many conversations with Paul Carbone, President
and Managing Director, Pritzker Private Capital.
6. Steve Thayer, “Risks and Opportunities for Family Offices in the Direct and Co-
Investment World,” Handler Thayer, LLP, July 23, 2020,
https://stevenjthayer.com/2020/07/23/risks-and-opportunities-for-family-offices-in-the-direct-
co-investment-world/.
7. The authors would like to thank Joel Palathinkal of Sutton Capital for his contributions
to this chapter. Joel Palathinkal, PhD, “Investing in Venture Capital,” (unpublished
manuscript, August 16, 2020), typescript.
8. Beth deBeer, “Impact Investing and Family Offices,” Impact Consulting Network, 2020.
9. Mary Elizabeth Klein, “The Democratization of Art and Its Impact on Family Offices,”
Family Office Association and Angelo Robles, 2018, http://familyofficeassociation.com/wp-
content/uploads/2020/04/klein_family_office_art-1.pdf.

7. RISK MANAGEMENT

1. Boston Private, “Demystifying Risk Management for Family Offices,” 2020,

https://files.bostonprivate.com/file/Demystifying-Risk-Management-for-Family-Offices.pdf.
2. The authors would like to thank Chad Sweet of the Chertoff Group for his contributions
to this chapter. Chad Sweet, “Family Office Risk Management Practices,” (unpublished
manuscript, October 1, 2020), typescript.
3. The authors would like to thank John Prufeta of Medical Excellence International for
his contributions to this chapter. John Prufeta, “Healthcare Advisory and Advocacy,”
(unpublished manuscript, August 15, 2020), typescript.
4. The authors would like to thank Chris Sidford of Black Bag for his contributions to this
chapter. Chris Sidford, MD, “International Travel Medical Needs,” (unpublished manuscript,
September 1, 2020), typescript.
5. The authors would like to thank Michael Gray of Neal, Gerber & Eisenberg, LLP, for
his contributions to this chapter. Michael B. Gray, “Legal Services,” (unpublished
manuscript, January 30, 2021), typescript.
6. This section benefited greatly from numerous conversations with Daniel G. Berick,
Americas Chair of Global Corporate Practice, Squire Patton Boggs (US) LLP.

8. PHILANTHROPY

1. The authors would like to thank Suzanne Hammer of Hammer & Associates and Vahe
Vartanian of Global Family Office Community for their contributions to this chapter. Suzanne
Hammer and Vahe Vartanian, “Family Philanthropy,” (unpublished manuscript, July 30,
2020), typescript.
2. Michelle Coleman-Johnson, Bourland, Wall & Wenzel, P.C., “Creating a Family
Foundation,” GPSolo, Law Trends & News, Estate Planning, Volume 2, Number 2, February
2006.
 3. The authors would like to thank Darren B. Moore of Bourland, Wall & Wenzel for
reviewing and updating the information contained in this section.

9. NEXT GENERATION

1. The authors would like to thank Dennis Jaffe for his review of this chapter.
2. Dennis T. Jaffe and James A. Grubman, “Acquirers’ and Inheritors’ Dilemma:
Discovering Life Purpose and Building Personal Identity in the Presence of Wealth,” 2007,
https://dennisjaffe.com/download/acquirers-and-inheritors-dilemma-discovering-life-
purpose-in-the-presence-of-wealth/.
3. Dennis T. Jaffe, “The Five Challenges for Wealth Inheritors to Develop a Positive
Wealth Identity,” 2018, https://dennisjaffe.com/download/the-five-challenges-for-wealth-
inheritors-to-develop-a-positive-wealth-identity/.

10. COMMUNICATIONS AND PLANNING

1. This section benefited greatly from many conversations with Michael Montgomery,
Chief Executive Officer, Brush Street Investments, LLC.

11. STRUCTURES

1. International Finance Corporation, World Bank Group, IFC Family Business

Governance Handbook, International Finance Corporation, 2008,
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/r
esources/guidelines_reviews+and+case+studies/ifc+family+business+governance+handbo
ok.
2. David Lansky and Jennifer Pendergast, “Is Good Governance Different in the Family
Office Setting?” Family Business Magazine, 2010,
https://www.familybusinessmagazine.com/good-governance-different-family-office-setting-
0#:~:text=Taken%20together%2C%20these%20observations%20suggest,environment%2C
%20if%20not%20more%20important.
3. Al W. King III, “Tips from the Pros: The Private Family Trust Company and Powerful
Alternatives,” WealthManagement.com, January 28, 2016,
https://www.wealthmanagement.com/estate-planning/tips-pros-private-family-trust-
company-and-powerful-alternatives; Matt Tobin and Tom Cota, “Nine Reasons to Start a
Private Family Trust Company,” Family Office Exchange, January 9, 2018,
https://www.familyoffice.com/insights/nine-reasons-start-private-family-trust-company.
4. This section benefited greatly from many conversations with James Ruddy, President
and Chief Executive Officer, Dillon Trust Company.
 12. SUCCESSION AND LEADERSHIP INSIGHTS

1. This section benefited greatly from many conversations with George Pavlov, Chief
Executive Officer, Bayshore Global Management.

13. THE NUMBERS

1. Wealth-X, “Ultra Wealthy Population Analysis: The World Ultra Wealth Report 2019,”
September 25, 2019, https://www.wealthx.com/report/world-ultra-wealth-report-2019/.
2. Wealth-X, one of the leading wealth intelligence companies, defines UHNW as
meaning families with $30 million or more in net worth.
3. Wealth-X, “Ultra Wealthy Population Analysis: The World Ultra Wealth Report 2019,”
September 25, 2019, https://www.wealthx.com/report/world-ultra-wealth-report-2019/.
4. Campden Wealth Limited and UBS, “Global Family Office Report 2019,” 2019,
http://www.campdenwealth.com/article/global-family-office-report-2019.
5. The authors would like to thank Trish Botoff of Botoff Consulting for her contributions
to this chapter. Trish Botoff, “Compensation Data Tables,” (unpublished spreadsheet,
August 25, 2020), spreadsheet file.
6. Boston Private, Dentons, McNally Capital, The Chertoff Group, and Data Tribe,
“Family Office Risk and Threat Management Survey,” 2020,
https://www.bostonprivate.com/our-thinking/vault/articles/surveying-the-risk-and-threat-
landscape-to-family-offices-2571.
 Index

Page numbers in italics indicate figures or tables.

AAA. See Appraisers Association of America

academics, 308
accelerators, 136
accounting: accounts payable groups and, 61; bill payment and, 29, 30, 58, 59–65, 80;
bookkeepers and accountants, 35; CPAs and, 21, 33; issues in, 61–65; ledger reporting
and, 58–59, 67, 81; LLCs and, 65; outsourcing, 61–65; overview of, 59–60; payment
approvals, 60; payroll and, 58; POs and, 58, 61; purchase approvals, 61; for special
projects, 97–98
acquired wealth, 221–222, 226
active-controlling investing, 125–126. See also investment services
active trader family offices, 13
administrative family offices, 12
advice, 28–29, 50. See also legal advice
Advisers Act. See Investment Advisers Act
advisory board: advantages and disadvantages of, 255; members of, 253–254; overview of,
252–254; size of, 253
affiliated family office, 122
“affluenza,” 218–219
aircraft. See private aviation
antifraud provisions, 135
antiques, 145. See also art and collectibles
antispyware, 173
Appraisers Association of America (AAA), 148
art and collectibles, 156, 157; antiques and, 145; art market for, 145–146, 147–148; art
valuation for, 147–148; categories of, 145; fine art, 145; inventory records and
documentation for, 148–149; investing in, 118, 144–150, 153; legal issues and
stewardship, 148, 149; lending and using as collateral, 149–150; LLCs for, 149;
managing investments, 146–147; risk management for, 147–148; tax planning for, 146–
147; wealth preservation strategies for, 150
asset allocation, 293, 294
assets test, 211
assets under management (AUM), 45, 295
Astor, John Jacob, 10–11
AUM. See assets under management
aviation law, 106, 107. See also private aviation

background checks, 172, 194, 304, 304

BEC. See business e-mail compromise
behavioral assessments, 40
behavioral interviews, 40
bill payment: accounting and, 29, 30, 58, 59–65, 80; credit cards for, 64; invoices and, 63;
for LLCs, 65; multiple names and data entry for, 63–64; multiple payments, 63; recurring
payments, 62–63; wire transfers and, 64–65
bonuses, 44, 46
bookkeepers, 35
bulk charters, 103, 105, 105
business aircraft, 106–109. See also private aviation
business e-mail compromise (BEC), 157–159, 194–195

capitalization table, 138

capital projects, 97–98
career planning committee, 260
Carnegie, Andrew, 198
carried interest, 46
case studies, xxvii–xxviii; background on, 1–5; character summaries, 5–6; on
communication and planning, 233–246; on family office formation, 1–6; on family office
governance, 247–276; on family office services, 20–31; on family office types, 7–19; on
financial services, 57–83; on investment services, 117–154; on lifestyle management,
84–115; on next generation, 217–228; on philanthropy, 196–216; on risk management,
155–195; on staffing and leadership, 33–50; on succession, 277–288
CEO. See chief executive officer
certified public accountant (CPA), 21, 33
CFO. See chief financial officer
charitable entities: charitable trusts, 123, 206; DAFs, 198, 204–205; philanthropy and, 204–
212, 213, 216; private foundations, 206, 207–212; supporting organizations, 205. See
also philanthropy
chief executive officer (CEO), 34; leadership by, 36, 37; of Left Seat Management, 51–53,
52, 278–279; salary and compensation, 299
chief financial officer (CFO), 35; leadership by, 36, 37, 283; salary and compensation, 301
chief investment officer (CIO), 34, 52, 230; leadership by, 36, 38; salary and compensation,
300
chief operating officer (COO), 35; salary and compensation, 302
CIO. See chief investment officer
cloud computing, 74, 75, 173
club deals, 132–134
coinvesting, 131–134, 133
coinvestment opportunities, 46
commercial multifamily offices, 14
commercial property, 94
committed club structures, 133–134
communication: assessment, 242; case study on planning and, 233–246; challenges with,
234, 243–244; cybersecurity and, 170; deliverables, 237, 244; evaluating current
protocols in, 235–236; family office objectives and, 236–237; game plan and execution
of, 237; healthcare and, 172; improving, 243–244; measuring results of, 237;
misunderstandings and, 236; quality of, 236; SMART paradigm and, 236–237; solutions,
243–246; styles, 89, 243
company culture, 38–39, 48–49
concierge services. See lifestyle management
confidentiality. See privacy
conflicts of interest, 189
consolidated reporting, 66–67, 81
controller, 35
converged threats, 162
COO. See chief operating officer
corporate formalities, 188
costs: data on, 295, 295–298; of lifestyle management, 89; overall operating, 295; of private
aviation, 103–105, 105; of PTCs, 266; of tax planning, 72–73
COVID-19, 304
CPA. See certified public accountant
credit cards, 64; concierge services of, 90
culture: family, 261–262; fit, 38–39, 48–49
cybersecurity: access control, 172; antispyware, 173; attacker initial entry and, 169–170;
communication and, 170; cyberthreat assessment, 169–170; data security and, 173;
governance best practices, 170–172; hacking and, 303, 303; incident responses, 172;
information security threats, 162; IT and, 77, 78–79, 161–162, 162, 168–175, 189–190;
lateral movement and privilege escalation, 170; legal advice and, 189–190; monitoring,
174–175; personnel screening and insider threats to, 172, 194, 304, 304; policies and
procedures, 171; reconnaissance and, 169; risk management, 168–175, 189–190, 194–
195, 303–307; safety and, 76–77, 161–162, 162, 168–175; sensitive data access and
management, 172–173; social media and, 168–169, 171; software updates and, 174;
“tabletop” exercises, 172; technical best practices, 172–174; training and awareness,
171; wireless security and, 173–174

DAFs. See donor-advised funds

data: on asset allocation, 293, 294; on costs, 295, 295–298; on demographics, 291–293; on
family office types, 294; healthcare, 178–179, 180; industry, 289–290, 291–307; on
investment allocations, 293–295; on risk management, 303–307; salary and
compensation, 298, 299–302; security, 173; sensitive data access and management,
172–173
deferred bonuses, 46
delegatory investing, 125
demographics, 291–293
direct investing, 127–129, 128, 130, 153–154; regulation of, 134–135
direct investments family offices, 13
directors, of PTCs, 272
directors and officers (D&O) insurance, 189
discretionary distribution, 273
Division of Banking (DOB), 266
Dodd-Frank Act (2010), xxv, 119–120
D&O insurance. See directors and officers insurance
donor-advised funds (DAFs), 198, 204–205
double bottom line investments, 141–142

education committee, 259

e-mail: BEC, 157–159, 194–195; invoices, 63
embedded family offices, 13
emergency needs, 179
emerging threats, 305–306
emotional intelligence, 140
emperors, 9–11
endowment test, 211
end-to-end module approach, 77
estate management: challenges of, 92; definition and regulation of estates and trusts, 122–
123; ecosystem of, 94; event planning and, 98, 99–100; legal advice for, 188–189;
lifestyle management and, 92–101; nine core components of, 93; operations, 95–96;
project planning and, 97–98; property and facilities management, 94–95; risk in, 98–99;
for special projects, 97–98; staffing for, 95–97; third-party specialty business providers,
100–101; understanding physical assets and personal service, 92–94. See also property
management
evacuation insurance, 181–182
evaluation forms, 40
event planning, 98, 99–100
executive assistant, 35
expectations, 90–91; leadership, 283–284, 287–288
extended service providers, 89–90
external executive search process, 41–42

FAA. See Federal Aviation Administration

facilities management, 94–95
family affairs, 248–250, 260
family assembly, 254–256, 258
family bank, 27, 224
family clients, 121, 122–123, 124
family constitution, 250–252, 251, 275–276
family council, 256–257, 258
family creed, 251–252
family culture, 261–262
family forum, 254
family meetings, 224, 227, 258
family members, 121, 122–123
family office governance, xxvii–xxviii; advisory board and, 252–254, 255; assessment of,
273–274; authority and, 262–263; best practices for, 274–275; boards and committees,
249–260; career planning committee, 260; case study on, 247–276; challenges in, 248–
250, 274–276; culture and, 261–262; cybersecurity and, 170–172; education committee,
259; family affairs and, 248–250, 260; family assembly and, 254–256, 258; family
constitution and, 250–252, 251, 275–276; family council and, 256–257, 258; future
considerations for, 276; good governance, 263; institutions, 251–257; investment
committee and, 257–259, 275; learning and, 260–263; at Left Seat Management, 229–
232; organization and, 33–34; other family institutions and, 259–260; philanthropy and,
200–202, 215–216; PTCs and, 263–273; rights and, 261; shares redemption committee,
259–260; solutions, 274–276; wealth education and, 223–224
family office partnerships and coinvesting, 131–134, 133
“Family Office Rule,” 119–124
family offices: average wealth of, 295; control of, 123–124; costs of, 295, 295–298; entity
structure of, 191; formation of, xxv–xxvi, 1–6, 9–11, 51–52; geographic locations of, 292,
293; “glue” of, 260–261; history of, 9–11; life cycle of, xxvi; objectives of, 236–237;
overall operating costs of, 295; ownership of, 123–124; regulation of, xxv, 119–124;
survey on, 293, 293; “who's” and “what's” of, 283; world map of, 292. See also specific
topics
family office services, 263; assessment and issues surfaced with, 24–28; case questions
and solutions for, 28–31; case study on, 20–31; challenges in understanding, 21–22; key
services, 23, 25–27; managing complexities and, 29; resources for, 308; what to do,
when, and by whom, 22–24, 23. See also specific services
family office types: active trader family offices, 13; administrative family offices, 12;
archetype wheel graphic for, 11; background on, 9–14; breadth of offerings, 12; case
study on, 7–19; challenges and, 8–9; classifications and attributes, 11–12, 12–14;
considerations for choosing, 16–18; data on, 294; defining, 15–16; direct investments
family offices, 13; embedded family offices, 13; family offices associated with family
businesses, 13; institutional family offices, 13; MFOs, 14, 17–18, 120, 280, 296–297;
real estate family offices, 13; risk and, 18–19; SFOs, 9, 17, 120, 295, 296–297; time
requirements for, 19; traditional family offices, 12, 17. See also specific family office
types
family reunions, 260
family unity, 202, 213, 238, 251–252, 254, 273
FBOs. See fixed-base operators
Federal Aviation Administration (FAA), 107, 110
financial awareness, 222
financial crisis, 2008, xxv
financial services, 25; accounting and bill payment, 29, 30, 58, 59–65, 80; assessment of,
79; case study on, 57–83; challenges with, 58–59; information reporting challenges and,
69; investment reporting, 65–70; issues in, 79; IT and, 67–70, 73–77, 82–83; solutions
for, 80–83; tax reporting, 59, 71–73, 82. See also investment services; tax planning
fine art, 145. See also art and collectibles
fixed-base operators (FBOs), 110, 111
flight departments, 110, 111–112
fraud: antifraud provisions and, 135; risk management and, 157–159, 193–195
fund managers, 140
“fund of funds” model, 140

general counsel, 35
generational engagement, 140, 203–204, 224, 227–228. See also next generation
GIIN. See Global Impact Investing Network
giving, as a family, 198–204, 215–216. See also philanthropy
global healthcare, 179
Global Impact Investing Network (GIIN), 142
global wealth, 292
good governance, 263
“growth capital,” 137

hacking, 303, 303. See also cybersecurity

healthcare, 157; access to, 179–180; advisory and advocacy, 176–178; best medical teams
and, 179; cataloging information on, 178–179; communication and, 172; data, 178–179,
180; emergency needs, 179; evacuation insurance and, 181–182; global, 179; medical
records, 178–179; prevention and planning, 180; principles for affluent families, 178–
180; privacy and, 180; risk management and, 175–182, 195; specialists, 179–180, 195;
travel and, 179, 180–182
hiring. See staffing
history, of family offices, 9–11

identity, wealth, 221

impact investing, 118, 153; challenges in, 144; definition of, 140–141; frameworks for, 142–
144; GIIN and, 142; MRIs and PRIs, 143; “opportunity zones,” 143; overview of, 140–
144; philanthropy and, 141–142, 199
incentives, 44–45, 46
income tax charitable deductions, 209–210
income tests, 211
“incubators,” 136
industrialization, 10
industry data, 289–290, 291–307. See also data
industry events, 139; networking conferences, 305–306, 306
industry resources, 289–290, 308
information security threats, 162. See also cybersecurity
information technology (IT), 54; cloud computing and, 74, 75, 173; cybersecurity and, 77,
78–79, 161–162, 162, 168–175, 189–190; data security and, 173; end-to-end module
approach to, 77; evolution of, 67, 68; financial services and, 67–70, 73–77, 82–83;
flowchart, 76; information reporting challenges and, 69; information system
management, 73–79; infrastructure strategies, 76–77, 82; investment services and, 67–
69, 67–70; ledger reporting and, 81; leverage specialization for, 78–79; risk and, 68, 76,
77; SD-WAN and, 77–78; sensitive data access and management, 172–173; software
updates and, 174; technological protocols, 75–76; third-party service providers, 75;
topology, 77; trends in, 73–76; wireless security and, 173–174
inherited wealth, 221–223, 226; self-esteem and, 223
insider threats: to cybersecurity, 172, 194, 304, 304; safety and, 172
institutional family offices, 13
insurance: coverage types, 182–183; D&O, 189; evacuation, 181–182; risk categories, 183;
risk management and, 159, 182–185, 194–195; types of insurable risks, 182–183
internal selection process, 41
international travel. See travel
internet, 77–78
internet of Things (IoT), 77
interviews: behavioral, 40; staffing, 42; structured, 40
investable universe, 127, 128
investigative advisory security, 163–164
Investment Advisers Act (Advisers Act) (1940), 119–120, 187–188
investment allocations, 293–295
investment analyst, 35
investment committee: governance and, 257–259, 275; objectives of, 257; responsibilities
of, 257
investment services, 26; active-controlling investing, 125–126; alternatives to private equity
firms, 130–131; antifraud provisions and, 135; for art and collectibles, 118, 144–150,
153; assessment of, 150–151; asset test and, 211; best practices for, 125; case study
on, 117–154; challenges in, 117–119; club deals and, 132–134; consolidated reporting
and, 66–67, 81; consultants for, 70–71; delegatory investing, 125; direct investing, 127–
129, 128, 130, 134–135, 153–154; due diligence and, 139; family office partnerships,
131–134, 133; “Family Office Rule” and, 119–124; fund managers and, 140; general
investing, 124–127; hybrid approach to, 126, 151–152; impact investing, 118, 140–144,
153, 199; importance of, 126–127; important questions regarding, 131; income test and,
211; information reporting challenges and, 69; investment adviser exemptions, 120;
investment decisions and, 21–22, 117–119, 151–154, 234–235; investment reporting
and, 65–70; IT and, 67–69, 76; at Left Seat Management, 52–53, 230; legal advice and,
187–188, 190, 191; management and, 29–30; networking and, 139–140; private
company investing, 127–135; registration for, 134–135; regulation of, 119–124, 134–
135, 187–188; reporting challenges, 66–70; resources and capabilities, 129, 131;
solutions for, 151–154; systems and, 65–66; vendor selection for, 69–70; venture capital
investing, 135–140
invoices, 63
IoT. See internet of Things
irrevocable trusts, 123
IT. See information technology

jet cards, 103, 105, 105

“key employees,” 121–122

“key man” risk, 73
“know your customer” (KYC) requirements, 191

lawyers, 186–192. See also legal advice

leadership: by CEO, 36, 37; by CFO, 36, 37, 283; challenges in, 285–288; by CIO, 36, 38;
expectations, 283–284, 287–288; focus and resources for, 283, 287; insights, 281–284;
motivations and, 281–282, 286–287; perspectives relating to, 284, 286; servant, 282;
staffing and, 33–50; succession and, 281–284; through teaching, 282, 286; transitions
in, 278–280
learning, 260–263; problem-based, xxvi. See also wealth education
ledger reporting, 58–59, 67, 81
Left Seat Management, 5–6; CEO of, 51–53, 52, 278–279; family governance at, 229–232;
financial service solutions for, 79–83; formation of, 51–52; growth of, 229; investment
services at, 52–53, 230; organization of, 51–55, 53; organization of, updated chart, 231;
philanthropy and, 54–55; property management and, 53–54; staffing at, 51–53, 52, 156–
157; succession and leadership at, 278–279, 285–288; tax planning at, 82. See also
Thorne, John Oskar
legacy, 140–142, 198, 232, 235
legal advice: on art and collectibles, 148, 149; aviation law and, 106, 107; conflicts of
interest and, 189; corporate formalities and, 188; cybersecurity and, 189–190; for estate
management, 188–189; on family office entity structure and funding, 191; in-house
versus outsourcing, 185–186; investment services and, 187–188, 190, 191; lawyers and,
186–192; on philanthropy, 192; privacy and, 190; for PTCs, 191, 271–273; regulatory,
187–188; risk management and, 185–192, 194; services and, 185; for special assets,
190; tax planning and, 186–187, 188–189; for wealth transfers, 188–189
leverage specialization, 78–79
liabilities. See risk
life journeys, of wealth, 221, 226
lifestyle management, 25; assessment of, 112–113; case study on, 84–115; challenges in,
85–86; communication style and, 89; cost and fees of, 89; credit card concierge services
and, 90; estate management and, 92–101; expectations of, 90–91; extended service
providers, 89–90; needs assessment, 88; for next generation, 222; outsourcing services,
113–114; overview of, 86–87; personality matching and, 88; private aviation and, 101–
112; recreation committee and, 260; solutions for, 113–115; staffing and, 87–88; third-
party providers of, 88, 89–90; types of providers of, 88–89; types of services provided
by, 86–87
limited liability companies (LLCs), 65, 148, 149, 191, 266
liquidity events, 21, 117, 137, 279
LLCs. See limited liability companies
loans and lenders: lending art, as collateral, 149–150; private aviation, 106–108
long-term incentive (LTI) compensation, 39, 45–46, 46

MAC. See media access control

managed service providers (MSPs), 74
media access control (MAC), 174
MFOs. See multifamily offices
milestone events and celebrations, 98–99
mission-related investments (MRIs), 143
mistakes, service delivery, 287–288
misunderstandings, 236
motivations: leadership and understanding of, 281–282, 286–287; for next generation, 202–
203
MRIs. See mission-related investments
MSPs. See managed service providers
multifamily offices (MFOs), 17–18, 120, 280; classifications, 14; commercial, 14; costs of,
296–297; traditional, 14; VFOs, 14, 18
multiple payments, 63

National Business Aviation Association (NBAA), 106

NDAs. See nondisclosure agreements
needs assessment, 88
networking: investment services and, 139–140; risk management conferences, 305–306,
306
new construction, 97–98
next generation, 27; assessment of, 225; case study on, 217–228; challenges relating to,
218–220, 225–228; engagement of, 140, 203–204, 224, 227–228; family meetings and,
224, 227, 258; family office roles and participation, 227–228; financial awareness and,
222; five challenges of wealth inheritors, 222–223; lifestyle management for, 222;
motivating, 202–203; personal security in, 223; philanthropy and, 202–204, 213, 214–
215, 222–223; self-esteem in, 223; solutions for, 225–228; trust in, 223; wealth
education for, 220–228; wealth origins and, 221–222, 226
nondisclosure agreements (NDAs), 100, 159, 190
nonprofit organizations, 123
nonqualified deferred compensation (NQDC), 45

onboarding plans, 43
on-demand charters, 103
open-source intelligence (OSINT), 169
operations managers, 38
OSINT. See open-source intelligence
outsourcing, 25–27; accounting, 61–65; legal advice, 185–186; lifestyle management
providers, 88, 89–90; lifestyle management services, 113–114; private aviation, 102; risk
management vendors, 305–306, 306; tax services, 72–73; third-party IT providers, 75;
third-party specialty business providers, 100–101
ownership: of family offices, 123–124; private aviation and aircraft, 102, 103, 105, 105; of
PTCs, 268; rights and, 261

payment approvals, 60
payroll, 58
PBL. See problem-based learning
performance management, 43
personal identifiable information (PII), 169
personality matching, 88
personal security, 223
perspectives, differing, 284, 286
philanthropy, 33, 50; assessment of, 201, 212–213; asset test and, 211; as burden, 203–
204; case study on, 196–216; challenges with, 197–198, 215–216; charitable entities
and, 204–212, 213, 216; charitable trusts and, 123, 206; DAFs and, 198, 204–205;
family governance and, 200–202, 215–216; family unity relating to, 202; funding, 216;
getting started with, 198–199; giving, as a family, 198–204, 215–216; guidelines for
giving and, 199; impact investing and, 141–142, 199; implementing, 201; income tests,
211; Left Seat Management and, 54–55; legal advice on, 192; mission statements for,
199; next generation and, 202–204, 213, 214–215, 222–223; planning for, 200, 213–
214; positive impacts of, 201–202; researching opportunities and organizations, 199–
200; services, 27; solutions to, 213–216; support for, 200–201; supporting organizations
and, 205; tax planning and, 199, 204, 206, 209–210
physical and investigative advisory security (P&IAS) practices, 163–164
physical assets, 92–94. See also estate management; property management
physical security, 164–168
P&IAS. See physical and investigative advisory security practices
PII. See personal identifiable information
planning: assessment, 240, 242, 245–246; best practices, 241–242; building sustainable
plans, 238–239; in career planning committee, 260; case study on communication and,
233–246; challenges with, 234, 245–246; defining goals and, 240; events, 98, 99–100;
healthcare, 180; implementation, 241, 245–246; project, 97–98; road maps, 240;
solutions, 243–246; strategic planning process, 239–242, 240, 241, 245–246; tracking
plans, 241. See also tax planning
portfolio manager, 34
POs. See purchase orders
poverty, 197
power, xxv–xxvi
practitioners, resources for, 308
principals, 15–17, 308. See also family office governance
PRIs. See program-related investments
privacy, xxv, 31, 77–78, 96, 160, 291; healthcare and, 180; legal advice and, 190; NDAs
and, 100, 159, 190
private aviation, 157, 181, 286, 287; acquiring aircraft, 106; acquiring business aircraft,
106–109; aircraft management companies, 110, 111; alternatives to, 102–103; aviation
law and, 106; cost and fees, 103–105, 105; cost-comparisons, 104–105; FBOs, 110,
111; fixed costs, 103–104; flight departments, 110, 111–112; fractional aircraft ownership
and, 103, 105, 105; full aircraft ownership and, 102, 105, 105; jet cards and bulk
charters, 103, 105, 105; lenders, 106–108; lifestyle management and, 101–112;
management and operations, 110–112, 115; on-demand charters, 103; options for
accessing “lift,” 102; outsourcing, 102; shared aircraft ownership and, 102, 105, 105;
staffing, 110–112; tax planning and, 107, 109–110; team approach to, 109; variable
costs, 104
private company investing: alternatives to, 130–131; committed club structures and, 133–
134; family office partnership and, 131–134; overview of, 127–135; regulation of, 134–
135
private foundations, 206; advantages of, 208; income tax charitable deduction limitations,
209–210; income tests for, 211; operation of, 209, 210–212; organization of, 208–209;
overview of, 207; presumption of status of, 207–208; restrictions and regulation of, 209
private trust companies (PTCs): advantages of, 264–265; concerns and challenges
regarding, 270–272; costs of, 266; decision-making in, 270–272; description of, 263–
264; directors of, 272; formalities of, 270; formation of, 266–267; governance of, 263–
273; jurisdiction selection for, 267, 268, 270, 271–272; legal advice for, 191, 271–273;
LLCs and, 266; other considerations for, 273; ownership structures, 268; PTC chart,
269; regulation of, 267, 268, 270, 271; shareholders of, 272; situs requirements, 268,
270; structuring of governance in, 272–273; tax planning for, 272
problem-based learning (PBL), xxvi
professional standards, 73
program-related investments (PRIs), 143
project planning, 97–98
property acquisition, 94–95
property management, 30; for commercial property, 94; estate management and, 92–101,
122–123, 188–189; facilities management and, 94–95; Left Seat Management and, 53–
54; for new construction, 97–98; special assets and, 190
property managers, 35, 49
PTCs. See private trust companies
purchase approvals, 61
purchase orders (POs), 58, 61

quality of life, 29

real estate: commercial property and, 94; estate management and, 92–101, 122–123, 188–
189; management of, 30, 53–54, 92–101, 122–123, 188–190; property acquisition and,
94–95; property managers and, 35, 49
real estate family offices, 13
reconnaissance, 169
recreation committee, 260
recruitment, 41–42, 49, 278; open-ended questions, 40
recurring payments, 62–63
regulation: antifraud provisions and, 135; of art and collectibles, 148, 149; of direct
investing, 134–135; of estates and trusts, 122–123; of family offices, xxv, 119–124;
Investment Advisers Act and, 119–120, 187–188; of investment services, 119–124, 134–
135, 187–188; legal advice on regulatory issues, 187–188; of private foundations, 209;
of PTCs, 267, 268, 270, 271; Rule 506(b) of Regulation D, 134; SEC and, 119, 120, 124,
134–135, 188
Renaissance, 10
research: advice and, 28–29, 50; for philanthropy opportunities and organizations, 199–200;
staffing, 41–42, 48, 50
resources: for family office services, 308; industry, 289–290, 308; for investment services,
129, 131; leadership, 283, 287; for principals, 308; for students and academics, 308
revocable trusts, 123
rights, 261
risk: addressing and monitoring, 184, 184–185; analyzing, 184, 184; categories of, 183;
dimensions of, 160, 160; in estate management, 98–99; evaluating, 184, 184; in event
planning, 99; family office types and, 18–19; identifying, 183, 184; IT and, 68, 76, 77;
 “key man,” 73; liabilities and, 18; management services, 26; tail, 304, 305; tax planning
and, 73; types of, 161
risk management, 26; for art and collectibles, 147–148; assessment of, 192, 304–305;
biggest obstacles to, 307, 307; case studies on, 155–195; challenges in, 156–159, 193–
195, 307, 307; cybersecurity, 168–175, 189–190, 194–195, 303–307; data on, 303–307;
emerging threats and, 305–306; fraud and, 157–159, 193–195; future considerations for,
195; healthcare and, 175–182, 195; insurance and, 159, 182–185, 194–195; insuring
against risks, 159, 182–185; introduction to, 159–160; legal advice and, 185–192, 194;
mitigating tail risk, 304, 305; network conferences for, 305–306, 306; process, 183–185,
184; safety and, 160–175; solutions, 193–195; survey on, 303–307; third-party vendors,
305–306, 306; travel and, 167, 167–168
Rockefeller, John D., 11, 160
royalty, 9–11
Rule 506(b) of Regulation D, 134
Rybat Manufacturing, 33, 117, 218; background on, 1–6; formation of, 1–5; sale of, 4–5, 51

safety: challenges to, 160–162; converged threats, 162; cybersecurity and, 76–77, 161–
162, 162, 168–175; insider threats and, 172; monitoring for, 166; personal security and,
223; physical security and, 164–168; physical security best practices, 166; physical
threat assessment, 165; P&IAS practices, 163–164; point solutions, 168; in practice,
168; responses, 167; risk management and, 160–175; threat types and consequences,
162, 164; 360-degree security program for, 164, 165; training for, 166; travel and, 167,
167
salary: bonuses and, 44, 46; compensation plans and, 44; data on compensation and, 298,
299–302; incentives and, 44–45, 46; LTI plans and, 39, 45–46, 46; NQDC and, 45;
staffing, compensation, and, 39, 42, 44–46, 298, 299–302
screening, of personnel, 172, 194, 304, 304
SD-WAN. See software-defined wide area network
SEC. See Securities and Exchange Commission
Securities Act (1933), 134
Securities and Exchange Commission (SEC), 119, 120, 124, 134–135, 188
sensitive data access and management, 172–173
servant leadership, 282
service set identifier (SSID), 174
SFOs. See single-family offices
shareholders, of PTCs, 272
shares redemption committee, 259–260
single-family offices (SFOs), 9, 17, 120, 295; costs of, 296–297. See also traditional family
offices; specific family office types
situs requirements, of PTCs, 268, 270
small and medium-sized enterprises (SMEs), 74
SMART paradigm, 236–237
SMEs. See small and medium-sized enterprises
social media, 168–169, 171
socially responsible investing, 143. See also impact investing
software-defined wide area network (SD-WAN), 77–78
software updates, 174
special assets, 190
special projects, 97–98
spreadsheets, 67
SSID. See service set identifier
staffing: of accountants, 35; assessment criteria, 40; assessment of, 47; assessment
process for, 39–41; assessment tools, 40–41; background information on, 34–46;
bookkeepers, 35; case study on leadership and, 33–50; of CEO, 34, 36, 37, 278–279,
299; of CFO, 35, 36, 37, 301; challenges in, 33–34, 156–157; of CIO, 34, 36, 38, 300; of
controller, 35; of COO, 35, 302; culture fit and, 38–39; defining “key employees,” 121–
122; development plans, 42; for estate management, 95–97; for event planning, 99–100;
of executive assistant, 35; expectations, 90–91; external executive search process for,
41–42; failures in, 39, 41; of general counsel, 35; hiring for fit and function, 36–46, 48–
49, 58; ideal candidate profiles, 38–39; incentives and, 44–45, 46; internal selection
process for, 41; interviews and, 42; of investment analyst, 35; at Left Seat Management,
51–53, 52, 156–157; lifestyle management and, 87–88; onboarding plans, 43;
operations managers, 38; performance management and, 43; personality matching and,
88; of portfolio manager, 34; position specifications, 37–38; private aviation, 110–112; of
property managers, 35, 49; recommended solutions to issues in, 47–50; recruitment
and, 41–42, 49, 278; replacements and staffing gaps, 96–97; research, 41–42, 48, 50;
roles and responsibilities, 34–35, 34–36; salary, compensation, and, 39, 42, 44–46, 298,
299–302; screening and, 172, 194, 304, 304; succession and, 278–281, 285–286; of tax
manager, 35; tax planning and, 73
structured interviews, 40
students, resources for, 308
succession, 232, 249; assessment of, 284–285; case study on, 277–288; challenges with,
278–279, 285–288; determining path forward, 280; leadership and, 281–284; overview
of, 279–280; process of, 280–281; solutions, 285–288; staffing and, 278–281, 285–286;
transitions and, 278–281; trust and, 279
supporting organizations, in philanthropy, 205
support test, 211
survey: on family offices, 293, 293; on risk management, 303–307

“tabletop” exercises, 172

tail risk, 304, 305
tax planning, 29, 33, 53; for art and collectibles, 146–147; costs of, 72–73; evolution of, 72;
income tax charitable deduction limitations, 209–210; large tax service firms, 73; at Left
Seat Management, 82; legal advice and, 186–187, 188–189; managerial issues, 73;
outsourcing, 72–73; philanthropy and, 199, 204, 206, 209–210; private aviation and,
107, 109–110; proactive, 72; professional standards in, 73; for PTCs, 272; risk and, 73;
staffing and, 73; tax advisers and, 72; tax managers and, 35; tax reporting and, 59, 71–
73, 82
teaching, 282, 286
technology. See information technology
Thorne, Emilia, 218, 219, 249
Thorne, Isabella, 218, 249
Thorne, John Oskar: background on, 1–6, 8–9; challenges for, 21–22; communication and
planning by, 234–235, 243–246; family office service for, 28–31; family office type for,
15–19; financial service solutions for, 79–83; governance by, 248–249, 273–276;
 investment decisions by, 21–22, 117–119, 151–154, 234–235; Left Seat Management
and, 5–6, 51–55; lifestyle management challenges for, 85–86, 112–115; next generation
and, 218–220, 225–228; philanthropy and, 197–198, 213–216; risk management for,
156–159, 192–195; staffing issues and, 47–50, 51–53; succession and, 278–279, 285–
288. See also Rybat Manufacturing
Thorne, Olivia, 218, 219, 248
Thorne, Philip, 218, 219–220, 248
Thorne, Sofia, 3, 8–9, 50, 54–55, 197–198, 213–216, 218
Thorne family, 248; tree, 3, 3, 230. See also specific topics
time: management, 29, 31; requirements, for family offices, 19
Tolstoy, Leo, 309
traditional family offices, 12, 17
traditional multifamily offices, 14
transitions, 278–281. See also succession
travel, 156–159, 218, 248, 286, 287–288; evacuation insurance, 181–182; healthcare and,
179, 180–182; preparations list, 167; risk management and, 167, 167–168; safety and,
167, 167. See also private aviation
triple bottom line investments, 141–142
trust, 47–48, 273; in next generation, 223; succession and, 279
trusts: charitable, 123, 206; definition and regulation of, 122–123; PTCs, 191, 263–273;
revokable and irrevocable, 123

ultra-high-net-worth (UHNW) families, 130–131, 191, 292. See also specific topics
Uniform Standards of Professional Appraisal Practice (USPAP), 148
United Nations Sustainable Development Goals, 142
UPSAP. See Uniform Standards of Professional Appraisal Practice

values, 199, 202, 251–252

venture capital: accelerators, 136; best practices for investing in, 139–140; early stages of,
136–137; growth stage of, 137; “incubators” and, 136; investing through capitalization
table, 138; late stage of, 137; overview of investing in, 135–140; ways to invest in, 137–
138
virtual family offices (VFOs), 14, 18
virtual private network (VPN), 171, 174

wealth: acquired, 221–222, 226; average, of family offices, 295; global, 292; identity, 221;
inherited, 221–223, 226; origins, 221, 226; preservation, xxv–xxvi, 150, 168, 202;
transfers, 141, 188–189; of UHNW families, 292
wealth education, 27; for acquired wealth, 221–222, 226; education committee, 259; family
bank and, 224; family meetings and, 224, 227, 258; family office governance and, 223–
224; five challenges of wealth inheritors and, 222–223; future considerations for, 228;
how family offices help with, 223–224; importance of, 225–226; for inherited wealth,
221–222; learning and, 260–263; life journeys of wealth and, 221, 226; for next
generation, 220–228
wireless security, 173–174
wire transfers, 64–65; wire fraud and, 157–159, 193–195
world map, of family offices, 292