Understand what the family wants and needs.
“There’s no right or wrong about it, it’s just about design and obtaining the best outcome from that design for the family in question,” says Bilal. “Sometimes families decide that they want to stay in the family business, to focus on what they know best and concentrate their efforts and capacity to invest in building or expanding the family business. Other families decide they want to serve the members of the family who are not in management, to diversify and offer other services,” he explains.
Stand-alone Investment or Family Office?
“Typically, once the principal decides they want to look at investments to diversify for the family, they may choose to focus on just one or two asset classes. I’ve seen a lot of such offices,” says Bilal. “They become expert in that particular asset and it becomes an investment office for the family more than an embedded family office. For example, some will focus on real estate, whereas another family might concentrate on logistics. Effectively, it is a stand-alone asset manager for the family,” he explains. “But, that is only achievable if there is enough scale,” he adds.
The basic and most common example is with financial assets, according to Bilal. “It’s the easiest because the providers offer support, whether a private banker, a financial institution or a multi-family office, and they are the easiest to benchmark,” he says. “If the range of the assets under management goes from a few million pounds to one hundred or two hundred million pounds, it could be done through the private banks or asset managers. The lower the level of asset – under two hundred million pounds, say, the more difficult it would be to do it in-house,” he cautions. “It would cost more and there would be less incentive for a manager to run your portfolio.
“The attraction for talent is based on reward – that’s the challenge,” says Bilal.
“Families can save on private banker or investment institution charges by doing it in-house, but then they would incur the cost of running the office and run the risk of having the bias of one manager, who could at some stage decide to leave – you have to keep that in mind as well: the succession,” he adds.
“I’ve been serving one family for twenty-plus years, but I’m not going to be around forever, so you need to think about that.”
Another aspect to consider is investment advice from within family itself. “Some families will have among their members, perhaps from the next generation or an in-law, someone who’s financially driven and has the relevant skill set,” suggests Bilal. “That might dictate the family putting the investment in-house. That comes with some risk of bias, whether conscious or unconscious, through the nature of the family relationship, and not to forget the major risk of members of the family deciding to separate from the family or divorce.” he adds.
However, it’s not only financial assets. “There’s also real estate, or venture capital, for example. A member of the family might take that on and become the asset manager. The totality of the asset allocation and the investment policy would be skewed towards the skills, or driven by the preferences of the family members. That’s something that I’ve seen a lot,” says Bilal.
A Family Office involves additional services
“As the family grows you may find you have members, or the next generation, who are not involved in the business or the investments and the question arises: what are you going to do for the rest of the family?” asks Bilal. “This is when the family has to make a decision – does it continue being a family, staying together and putting all its assets and services under one umbrella, and preferably professionalising that approach; or split and everyone goes their own way?”
According to Bilal, if the family decides to stay together, it has to ask questions such as, who is family and how do you treat the different generations, in-laws etc. “The first step is designing what the family wants, step two would look at how to deliver that to keep the family together, and then step three would go into the services required from a Family Office, or to look at outsourcing – they might decide they don’t need a family office,” Bilal suggests.
Services could include managing the financial assets, legal, tax accounting, compliance, structuring, security, lifestyle services, family education, reporting, succession planning and family governance.
Ultimately, the Family Office needs to have a strategy, a clear understanding of what the office will be delivering, to whom, and in what format, and then to have a proper business plan to share with the family.