What Makes for a Mature Family Office?
Tracing the five stages of growth – from inception to complete independence.
Many family offices usually get off to an impromptu start, with many almost being afterthoughts to successful, privately held businesses directly managed by first- or second-generation owners – or something similar.
That can lead to numerous twists and turns until many achieve what is generally considered to be a stable long-term objective for most: segregated, institutional continuity.
Effective Roadmap
In early April, Agreus, an industry consultancy, decided to make the situation clearer for the sector by publishing a clear roadmap for family offices.
It is also useful for new and established family offices, helping each assess what stage of development they are in – and what the next potential steps in their evolution could be.
Five Stages
Based on extensive experience working with family offices for more than 15 years, Agreus came up with a five-stage model.
The first is the embedded stage, where the wealth generated by the family and the business has not yet been divvied into an independent entity, and personal and business finances are mixed.
No Expertise
«Initial structures begin forming within the family business, but lack clear governance or dedicated wealth management expertise,» the Agreus report indicated.
The second stage is then marked by the hiring of the first external professionals to manage financial, legal, and tax issues – and it is the point where basic governance structures «start taking shape» although the entity’s operations remain «closely tied» to the family business.
Long-term Alignment
The first flush of maturity is at the third stage, when the office’s activities are further professionalized and important functions, such as investment management, are moved in-house and aligned with family objectives.
The fourth stage is the point where the family office functions as a well-structured entity with independent governance, Agreus indicated, with experienced professionals and sophisticated investment strategies. It is also here where the focus shifts to long-term sustainability.
Professional Management
The fifth stage is where the family office reaches full maturity and where governance and operations become fully institutionalized, with professional management supervising daily activities.
«The family oversees strategic direction, ensuring multi-generational wealth preservation and long-term impact,» Agreus indicated.
Growth Pains
There are some caveats to all this. As the typical family offices progresses through its five stages of development, its relationship between risk and return evolves significantly, Agreus pointed out.
In the early stages, the level of risk-taking is «naturally high» at the same time that the ability to generate sustainable returns remains limited.
Other Challenges
Agreus also pointed out the many challenges family offices typically face in their evolution.
In the third stage, for example, there may be resistance to governance changes, as some inside the family are not always prepared for formalized structures. At the same time, balancing family involvement with professional management can prove to be «tricky», as is selecting adequate technology for things like financial reporting.
Governance Fatigue
The issues typical for the fourth stage echoes the problems seen in many publicly-listed financial institutions, as many employees may start to face so-called «governance fatigue» by way of having way too many meetings and committees to go to.
There are also potential problems in scale, with difficulties in finding adequate talent, particularly if compensation packages are not competitive. Moreover, some may display a resistance to complex systems and more advanced investment strategies.
Strategic in Nature
The challenges at the fifth stage are more strategic in nature, Agreus indicated, and mainly involve clear leadership succession, family alignment and balancing the overall level of professionalism in an institutionalized entity with the family’s influence.
«Ensuring that the family remains engaged in strategic oversight without interfering in daily operations can be tricky,» Agreus indicated.
At the Apex
Last but not least, the consultancy indicated there was one step above the fifth stage of maturity.
That was the so-called Apex stage, which was only warranted for a very small percentage of family offices with the scale, complexity, and financial wherewithal to operate at an institutional level.
Globally Recognized
«These Apex Family Offices often serve multiple generations and a significant number of beneficiaries. They are globally recognized, industry-leading institutions with a comprehensive suite of services, advanced investment strategies, and multi-generational wealth management,» it said.
Still, it said that not every family office out there should be aiming for this, and that each entity needed to determine its specific level of maturity based on its own objectives.
The Virtual Choice
Agreus also pointed out the rough parameters for those who are wondering at what stage they should consider whether they should start a family office or not.
As part of that, they are seeing increased popularity for so-called virtual family offices for individuals who are at or around the first stage of development and who have wealth or assets of about $50 million.
Not Justifiable
Such families can’t quite justify the cost of a full-time team and they instead employ a project manager or personal assistant to coordinate the needed services with third party providers.
«This setup lets wealthy individuals get services like wealth management, legal advice, and concierge support without the overhead of having staff in-house,» Agreus indicated.
The Complexity Question
But it added that a virtual family office was not «the right choice for everyone», saying that a more traditional family office was potentially better for wealth north of the $200 million mark.
While a VFO offers flexibility and lower costs, it lacks the governance and depth that a larger Family Office can provide for those with more complex needs,» Agreus indicated.
