The purpose of a family office is to organize and centralize the management of a family’s personal and business financial affairs, and to maintain the financial house in as good an order as that of a well-run public company. 

The origin of the family office concept came from extremely wealthy families, with net worth in today’s money of more than $250 million. The family office was often a separate entity, with employees ranging from a CEO or CFO and a chief investment officer, to a staff of bookkeepers and personal assistants that could do everything from monthly financial statements through booking travel and personal care appointments.

In a traditional family office, no service or calling is beyond the scope of the office’s services. Employees may be called upon to pick up a car from the auto dealership or bail out a troubled family member facing a precarious situation. 

Many of these wealthy families have made their money from success in business. The family office staff is separate from the business financial staff and will not be involved in the operations or even the accounting for the business. 

They will, however, be extremely familiar with the business as it relates to the family. The family office will stay on top of business matters as they directly relate to family wealth, with issues such as loan guarantees, cash management, timely reporting to shareholders and the family office, dealing with tax planning or other benefit planning as it relates to family members, obtaining current valuations of the company and ensuring that the value of the business is enhanced by smart family and succession planning. The family office may also assist with acquisitions and sales of various business entities via the lens of the family estate plan, capital resources, investment objectives and the best use of talent and resources.

Answering the eternal questions

Clients, no matter how wealthy, always want to know the answer to this question: “How am I doing”? The right family office set up can answer that question from a financial and a personal perspective. What’s surprising to me, however, is that many entrepreneurs cannot really tell you the IRR or CAGR of their closely held business interests. To me, this is an important benchmark that a family office should provide.

The family lawyer or accountant may be suitable to sit in the chair of the executive of the family office. Clearly it is a role for an educated, well-versed financial executive, and not a salesperson. This person should be knowledgeable in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes and risk management. 

EMIR KLEPO/Myvisuals – stock.adobe.com

In addition to their own personal experience and knowledge, this person should be able to build a team of subject matter experts in any area to support the family’s needs. For example, some family offices own property, businesses, alternative investments or investment accounts overseas. The traditional family office may or may not actually manage the financial assets. It is worth noting that asset oversight is different from asset management. Oversight typically involves coordination and working with investment advisors and money managers, and not actually selecting individual investments. The family office may perform due diligence on investment managers and consultants, but not oversee the actual day-to-day management of the assets. The family office plays a vital role in the independent calculations and evaluation of performance — for each portfolio individually and for the entire portfolio collectively. 

Family offices that do get involved with day-to-day asset management are typically those whose fortunes were built by managing investments and those that are so large (typically north of $1 billion) that they have built or acquired their own investment management staff.

The common tasks that a family office may oversee include:

• Comprehensive oversight of family assets.
• Contemporaneous recordkeeping of all financial assets.
• Daily management of property and other real asset holdings.
• Preparation of financial reports showing cash flow, income, gains, losses and statement of assets and liabilities.
• Coordination of the advice and services received from all the clients other professionals.
• Being responsible for implementation and ongoing management for each matter under oversight.
• Offering personal concierge services to the family members for personal or business matters.
• Family and entity governance and carrying out the wishes of the family matriarch or patriarch.
• Oversight of philanthropic activities, foundations or gift trust accounts.

Each family has its own set of unique issues, and each family wants to delegate some or all these matters. But in the traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interests or other profit-making activities. The entity’s sole purpose is service to the family. 
All in the families

The type of family office services that could be provided by a CPA firm is known as the multifamily office. The MFO is a professional services firm that delivers family office services for more than one family. The origin of the multifamily office comes from traditional family offices where the family decided to use their team to help others for a fee. But beyond a traditional family office that decides to serve others, many for-profit private enterprises have flourished in the multifamily office model, including progressive law and CPA firms.

The multifamily office frequently serves families less wealthy than the single family office, but performs many of the same critical functions with respect to the financial side of family life. For the CPA firm with clients whose net worth exceeds $50 million or so, this model offers the opportunity to deliver a very personal and important service for the right CPA firm. The right firm is likely to be already deeply involved in many families’ financial matters and often has a strong personal relationship with the founding or senior members of the family who may have created the wealth.

Of course, the accounting firms that serve these types of clients are frequently larger firms with old-school partners who want nothing to do with matters beyond accounting and tax. This is another matter that falls into the practice management category. But fortunately, as aging partners retire, the younger generation sees the benefit of delivering elevated levels of service to the firm’s better clients.

A multifamily office is intended to be a for-profit entity. And as such, before you as an individual or CPA firm decide to offer these services, you must carefully document your services, compensation methods and the required licenses, if any. You would also want to be sure that your E&O insurance policy provides adequate protection. 

Smaller firms also service clients whose net worth exceeds $50 million, yet most seem “too busy” to elevate their services to the level of family office for their best clients. This is a lost opportunity to serve one of the firm’s best clients at the highest level, and deepen the relationship like no other service. If you still do not want in, at least help your client find a firm that is already set up to serve in this capacity.

Getting paid — and licensed

Many CPA firms are still tied to the hours and rates economy and will track their time and simply send bills each month based on the time spent. While this can work, it is not the most common method of compensation. More common than hourly would be flat fees for a list of covered services. 

Some firms will also add fees for assets under management or oversight and help to interview and select the actual asset manager. If your firm also intends to offer asset management, consider segregating your fees for AUM versus traditional family office services. If the asset management division becomes significant, a separate entity may also make sense. 

Be careful with the asset management part. You do not want to detract from the significant role of the basic family office and drag the relationship down to the less personal and significant commoditized services of asset management. 

Whether your family office fees are based on hours or flat-fee billing, the issue of licensing will still apply. CPAs can avoid registration as an investment advisor if their investment advice or financial planning advice is merely incidental to the practice of public accounting, and not advisory in nature. 

Naturally, this is a very subjective standard and many CPAs that I talk to do not register. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel as to whether registration as an investment advisor would make sense. 

Do not let the name “registered investment advisor” fool you: The registered investment advisor license and registration is the same license that covers all financial planners. You may be deemed by regulators to be practicing investment advice and financial planning to the extent that you get involved in matters such as shaping goals and objectives and providing advice that is more than incidental to the practice of accounting for the family wealth. 

Registration as an investment advisor will also subject you to the same rules about compensation, marketing and audit as other financial services firms registered as RIAs, requiring a compliance professional or consultant. To the extent that you can move client money, have logins to financial accounts or have check-signing authority, your registration level will need to be upgraded to that of a custodian.

Some multifamily offices do oversee or manage assets for their family office clients. Offering these services is easier if you are already a larger investment advisory firm with experienced asset managers on staff. This often is not the profile of the typical CPA financial planning shop, and these are not the types of clients where you should be cutting your teeth in the investment advisory business. A model that makes sense here is to use your intelligence to oversee other managers and critically evaluate their offerings in terms of the criteria that you are looking to fill. 

Whether your CPA firm has a vibrant wealth management division or not is irrelevant when it comes to offering family office services. The family office role for a CPA firm is just like outsourced CFO work, except for a family rather than an entity. Call it CAS for the wealthy family entity. As that outsourced CFO, you will also rely on other outside subject matter experts and coordinate their efforts so that nothing falls through the cracks.

Should you choose to work with another firm that calls itself a multifamily office, be careful. In my experience, I have seen many financial advisors — from the largest well-known name firms down to small shops who want to move upmarket — simply call themselves a family office without the experience, desire or services to warrant that title.