Founder, CEO of Blue Lake Capital LLC. Helps passive investors grow wealth through real estate. Podcast Host: REady2Scale.
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Over the past several decades, there has been substantial growth in family offices. Throughout my career as a real estate syndicator, operator and investor, I’ve seen firsthand how family offices work and invest. They handle wealth and investment management for wealthy families or individuals, generally in amounts of $100 million and higher in investable assets.
In addition, some family offices handle the wealth management of multiple families that aren’t related. Their only connection is that they put their resources together and access the professional talent that runs them. Their main goal is to grow the wealth that’s already been created and transfer the wealth across multiple generations.
I’m often asked about family offices and when to consider creating one, but there’s no easy answer. While an individual or family might not have the need for a family office at the moment, there are some basics to consider when you do feel that the time is right to establish one.
The Two Types Of Family Offices
There are basically two types of family offices: a single-family office and multifamily offices. A single-family office manages the wealth of one individual or multiple family members. On the other hand, a multifamily office handles the wealth and investment management of multiple families that want to collaborate together. They often don’t individually have the wealth of $100 million or higher, but by aggregating their investable assets, they meet the criteria of having a family office in place to manage their wealth as well as save costs.
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Steps To Creating A Family Office
The first and most important step in creating a family office is to define the goals of individual or multiple family members and create an organizational structure. Creating a family office is very similar to establishing any other business entity, in which developing an organizational structure is the first move.
Involve CPAs and attorneys in the process to provide input on how to structure the family office, as there are many legal and tax issues involved. The next step is to determine whether you want to establish the family office in house or have a third party create the structure, hire personnel and provide and maintain basic services.
Once that determination is made, the next step is to decide which assets will be managed by the family office, and which ones will be managed by one or more of the family members. Many times, family members want to continue investing on their own aside from the investments of the family office.
Scope And Costs Of A Family Office
As with any new entity, the scope of the operation and the associated costs need to be assessed prior to deciding to open one. There are many different sizes of family offices, ranging from small to very large, and the size will be dependent on the amount of wealth requiring management as well as the types and diversity of assets that the money is invested in.
Generally speaking, a small family office would have about six employees and would cost anywhere from $1 million up to $2 million to operate annually. A medium-sized family office would require 15 people to operate, with an annual operating budget of $3 million to $4 million. A large family office would need approximately 25 employees with an annual budget of $8 million to $10 million. When considering a very large family office, you’d be talking about 40 to 50 employees with an operating budget of $14 million to $20 million.
A cost analysis must be done to determine the amount of income generated each year versus the costs of operating the family offices. Additionally, you should be aware that the number of employees includes both professional staff as well as household staff. The professional staff will be in place to not only help retain the wealth that’s been created, but also to grow the wealth. Also, the support staff of a large family office might include household staff, such as drivers, security, personal attendants or even a yacht crew, if needed.
So, while the number of employees may seem high, they often include a lot of ancillary services. There is no one size fits all, and if you looking to start a family office, knowing the first steps and estimated costs will help you make an informed decision.
Summary
Like building any other entity, a family office starts with defining goals and developing an organizational structure. There are two types of family offices: single and multifamily. Often, several unrelated families aggregate their investable assets in order to meet the criteria needed for a family office.
Before deciding on what type and scope of family office to establish, a cost analysis must be conducted to determine the amount of income generated each year versus the overall operating costs. There is no one-size-fits-all, and if you’re looking to start a family office, knowing the first steps and estimated costs will help you make an informed decision.
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