Whether to manage wealth as a family collective is an important and complex decision. Careful consideration has to be given to the nature of the wealth, the legal structure of ownership, the roles and responsibilities of the family members, the relationships among the key constituents, and their shared and independent values, goals, and objectives, among other factors.

From reading Chapter 4, you may have come to the conclusion that managing wealth as an all‐family consortium is the only road to take. That's not necessarily the case. For some families, the best decision is for each member to manage his or her own wealth based on independent goals and preferences.

Among the myriad reasons a family might choose to go it alone are:

• Individual families within the group have differing ideas about the use of wealth, and after considerable discussion, the rest of the family doesn't appear to be flexible enough to accommodate these divergent ideas.
• Individual family members have very distinct investment objectives, time horizons, risk tolerances, and preferences and cannot find a consistent approach that meets everyone's requirements.
• Family members have local investment opportunities through their own networks that they cannot or do not want to share with everyone in the family.
• Family members have engaged trusted advisors they wish to keep and have no desire to involve another group.
• An individual family prefers privacy rather than sharing personal information with other family members who may be no closer than cousins and with whom they are only slightly acquainted.
• The family has agreed that “family” encompasses only lineal descendants of the wealth creator. In‐laws are not included, and their family‐member spouses may not appreciate the second‐class status accorded their husbands or wives.
• The family is widely dispersed across the country or the world.

However, many families with very significant resources can realize substantial benefits from managing the wealth in a centralized manner. These benefits include cost savings, relationship pricing, and access to distinctive investment offerings. In addition, they can realize economies of scale in working with outside advisors, hiring employees, and leveraging technology. The benefits families can achieve through managing wealth as an enterprise parallels the significant growth of single and multifamily offices over the last two decades. Today there are approximately 3,000 single‐family offices in the United States and about 150 multifamily offices.¹

For example, many compelling investments, particularly in the alternative investment arena such as private placement, absolute return funds, and private equity funds, require a minimum investment of $1 million to $5 million or more. Often individual family members either cannot or do not wish to invest that much in one fund or investment opportunity. However, if they spread the investment among the family—along with many types of other investments—they can enjoy the positive benefits while still managing risk through diversification.

In addition, most investment funds and managers offer a graduated fee schedule that reduces the basis points they charge on higher asset levels. Since fees can be a significant drag on investment returns, lowering them can help improve results.

Along with increasing the efficiency and effectiveness of a family's investment portfolio, sharing resources can decrease individual expenses and provide more consistency and efficiency. All family members of an ultra‐high‐net‐worth family need information management, tax planning and compliance, payment of expenses and distributions of income, financial planning, risk management, insurance protection, and property management. Each of these activities requires professional support, technology, and other resources that can be shared across the family to improve effectiveness through a centralized approach.

However, to be successful in the collective approach to managing wealth, families must work together to define the roles and responsibilities of each family member, along with any potential family employees or professional advisors. The family also must determine an effective and efficient communication plan that supports the needs of each family member. Sharing ownership of family assets can make financial sense, but sometimes can be tricky to navigate.

For example, Ken Wilson's* grandfather passed away two years ago, and in accordance with the terms of the grandfather's trust, Ken's share of his grandfather's estate was $32 million. Ken lives in Hawaii with his wife and six children, who are seventeen, sixteen, fifteen, thirteen, eleven, and eight years of age. The rest of the extended family resides in Portland, Maine. The family has chosen to manage the grandfather's wealth as a collective. Ken has opted not to.

“It just doesn't work for me,” Ken says. “I love my family. Everyone is on very good terms, but they want to have quarterly meetings in Boston and family retreats every other year, too. I have my own business to run, which involves lots of late hours and weekends, and the kids are very active in sports, music, theater, and school clubs. I can't see taking the entire family of eight back to the mainland several times a year, and if I go myself, I'll probably end up missing the kids' games and other activities. I've been so busy over the years my family has sometimes felt as if they were taking a back seat, and I'm going to make sure that doesn't continue.

“With the distribution from my grandfather's estate, I can widen the scope of my business and hand over some of my duties to new officers. I can build the business while increasing my time with the family. Two of the kids will be going off to college soon, and I want to have some adventures with them before that happens.

“I've elected to take my share of the estate and manage it from here. I'll use the money to advance my objectives as I see fit. Some of the things my family wants to invest in, I don't. Living where I do, I have a pretty keen interest in environmental issues and like to invest in that sector. Some of the family, while socially responsible, doesn't want to put much of the family money into things I value. They offered to break out a portion of the family wealth for me and let me invest that myself, but that solution somehow felt like they were just placating me.

“I know I may miss out on some benefits of the wealth being concentrated and coordinated, but geographically, all these family meetings and get‐togethers don't make sense for me at this time of my life. I'm sure I can find the right advisors here in Hawaii. I'm very grateful for my grandfather's planning, but I'll take it from here.”

Family Offices: Will You Need One?

The Family Office Exchange notes that “the family office is a unique family business that is created to provide tailored wealth management solutions (from investments to philanthropy) in an integrated fashion while promoting and preserving the identity and values of the family.”²

A single‐family office (SFO) is an organization designed and managed to administer and oversee the family wealth management issues for one family. In an article for Forbes, Todd Ganos describes the SFO as “an organization that assumes the day‐to‐day administration and management of a family's affairs. To that end, to honestly call itself a family office, an organization needs to provide more than just the standard wealth management functions.”³

Beyond the typical wealth management activities—taxes, private banking, recordkeeping, and other day‐to‐day assistance—many single‐family offices increasingly offer what are called concierge services for families whose lives are particularly complex. In those cases, the office may handle the family's travel arrangements and sometimes even hires, or at least screens, applicants for domestic staff positions. They might manage an extensive art collection, keeping the family informed of changes in value or an opportunity to purchase a particular piece that will fill an important niche. In short, the family office handles the finances and anything else necessary to simplify or enrich life for its clients.

As a family ages, the family office involvement may go even further as members of the office are called upon to assist with delicate situations such as a family member's developing dementia or coping with other vicissitudes of growing older. The office may be involved in finding a contractor or builder to retrofit the family home with an elevator, a first‐floor master suite, walk‐in bathing facilities, or other amenities that allow family members to age in place. If this is not possible, they may join forces with the family to research appropriate alternative living arrangements. Obviously, these situations encompass both financial and social dimensions that may necessitate adjustments in planning. They also require tact, good judgment, and absolute confidentiality.

In short, SFOs can be useful centralized organizational structures for managing and transferring wealth from generation to generation and for increasing efficiency in comparison to each family member's handling these requirements on its own. As a family grows and its needs change, so do the services it requires, and an SFO may be well‐suited to help guide the entire family through the evolutions that sometimes accompany great wealth. They also offer the family the greatest control over its assets, resources, and destiny.

However, single‐family offices are not inexpensive propositions. Experts recommend that families have at least $250 million—and in some cases up to $1 billion—to make a full‐featured family office a viable option. The expenses of running the office typically cost as much as $1 million per year or more, which limits their effectiveness to most of those who are not among the world's top‐tier wealthy.

The major expenses include hiring a staff of professionals; buying, maintaining, and continually upgrading the technology necessary to support the services the family requires; providing the research tools that inform the family office team about changes to the complex issues they will oversee; gathering the resources necessary to maintain compliance and regulatory standards; and providing and maintaining office space for family office team members.

Multifamily offices (MFOs) may make more sense for those clients who wish to reduce costs and do not want the administrative responsibilities of an SFO. Multifamily offices provide financial, tax, legal, and the other family office services to a group of ultra‐high‐net‐worth families who decide not to establish a single‐family office, but still want access to specialized services. They also provide introductions to similar families for networking, sharing experiences, and co‐investing. Additionally, MFOs, because of their scale and the number of families they represent, often offer entrée to products and services that are beyond the scope of most SFOs.

In the past, MFOs grew from SFOs, as the members of the single‐family office discovered the economies of scale that could be realized by allowing others into the group. Today, however, multifamily offices also have been established by banks, brokerages, and professional groups. MFOs offer a good alternative to SFOs, and many quality firms offer this service.

The First Family Office—and a Mistake

An embedded family office is sometimes the first step a family takes toward managing its wealth. The office, embedded in the family business, calls upon the talents of employees who work in the business to take over the management of financial activities that typically would be handled by an independent family office on behalf of the wealth owners.

When a business grows, thrives, and creates wealth for the founders, the owners often have both corporate management responsibilities and increasing personal wealth management requirements. It seems to make sense for them to turn over some of the duties of administering their personal finances to trusted employees who support their business, which is generally their largest asset. After all, the employees are skilled at their work and have proven their loyalty to the family. The size of the embedded office may range from one person handling financial and legal matters to several employees working on various aspects of the family's financial planning, investments, accounting, and tax issues.

Even if the family office employees are segregated from others in the company, they are still employees, and commingling family and business matters can create problems and increase risk for the family.

Jealousy can infect both employees and family. Other company employees may feel that these “family” employees have preferred status. Their reactions can range from vague feelings of annoyance all the way to passive‐aggressive sabotage. In addition, family members who don't work in the business may feel that the relatives who are part of the business have a leg up by having daily contact with these advisors.

Confidentiality is a big concern. The employees tasked with family responsibilities are privy to both business and personal information about members of the family—and people talk. Where they talk and what they disclose, even carelessly and without malice, can spread throughout the company like wildfire. Everything from a stock pick to an impending divorce can find its way onto the grapevine—and from there to other grapevines outside the company. In the world of social media, the grapevine is worldwide, and rumors that end up on the web can be harder to refute than ever before. Even if the revelation of family information doesn't prove to be devastating, private matters should remain private, and this way of managing wealth increases chances for a public airing of sensitive family intelligence.

Also, if the business is the victim of a cybersecurity breach or other fraudulent activity, both the operations and the family are affected, and untangling the interwoven financial ramifications may take a very long time.

Having a great deal of company and family information in the hands of a few people can be a knotty issue. Suppose the executive handling both corporate and family finances is lured away by another company, or worse, becomes incapacitated or dies. Who else in the company has the knowledge of both financial spheres? As the search for records and reports goes on, the result is confusion both in the company and the family—and it may take months for both to recover.

A stickier problem is whether the employees tapped for the family office are the right ones. Just because an employee is skilled in one area, he or she may not be equally conversant with another. For example, even a company CFO with major responsibilities for planning, operations, and risk management may not be the person to handle the family's portfolio of investments or even to make other wealth management recommendations and decisions. He or she may not have enough expertise in such areas as setting objectives for investments or laying out the strategy for creating, analyzing, or diversifying the family's assets. Yet, the CFO is often the person asked to carry out these duties, possibly with varying degrees of success. It takes only one major mistake to have an equally major impact on the business and the family's wealth.

It's possible that if the CFO is providing investment advice, he or she might be operating as a registered investment advisor without, in fact, being registered with the SEC or state securities authorities—and that ambiguity can cause problems if the investment activities are scrutinized.

Problems with taxes can bring business to a standstill and seriously damage or destroy a company's reputation and valuation. If one person is doing two jobs—one for the company and one for the family—the tax ramifications can be enormous. In an article for Family Office Review, Shanaz Mahmoud points out, “If you are a sole owner of a company and none of the employees have a bonus or qualified plan … all of this is fine—except you can't deduct those expenses because they are personal expenses. If you do, you are violating tax law and filing fraudulently.”⁵

In addition, if an employee is spending a certain percentage of his time working for the family and the rest for the business, the business owner must separate the two functions for tax purposes—and time lost to this additional tax compliance is wasted time that could be spent on revenue generation or other more important tasks. The greater the number of employees who split their time, the more complex the accounting becomes, the more time is required, and the greater the chance of running afoul of a state tax regulation.

In addition, various state or federal workplace regulations are affected by how the employee's time is divided. If an accounting error is made, even innocently, the penalties could be significant. Regulatory problems also can open up the company to further audit and scrutiny to determine how the business is being run. Some of those with a vested interest in the results of the investigation may be the family members who are outside the business but believe they are being damaged by the decisions of the family members inside the business. Unfortunately, sloppy governance of the operating business can be the opening salvo in a bloody, years‐long internecine war.

Another reason embedded offices are not the most effective approach is that the employees chosen to work for the family are concentrating almost exclusively on money; that is, they are performing the tasks of tactical wealth management. They may be aware of problems with family and business dynamics, but in all probability, they have neither the training nor the power to address let alone solve them.

The ultimate solution is to separate family wealth management from the management of the business that generated the wealth in the first place—and to integrate strategic and tactical wealth management into a holistic program that addresses not only the assets but also the family who holds them. This separation keeps things cleaner, and the family is free to choose not only advisors with expertise in the tactical areas but also those with vast knowledge of the strategic dimensions. They may choose to set up a family office of some type or select a group of wealth management advisors who work together as a cohesive team to seek the best solutions for all the conundrums that attend extensive holdings and great wealth.

Even if the family has chosen advisors wisely, the duties of strategic wealth management must be split between the professionals and the family. It is the family, not an outside consultant, who must decide on the model it wants to foster today and in the future. Family members also are ultimately responsible for making critical decisions about stewardship and how the next—and succeeding—generations will be prepared for family leadership. The advisors have the resources at hand to help the family accomplish what it's set out to do, but the family must chart the course.

The family knows the strengths and weaknesses of each member better than anyone else. For example, Todd Mitchell* and his brother Christopher* built a very successful regional shopping mall that was bought out several years ago by a large real estate developer for more than $500 million. The second generation includes Todd's children, Edward* and Lauren,* and Christopher's son and daughter, Jerry* and Alix.* The brothers live in the same town and remain very close. Their children grew up more like siblings than cousins; they are still friends today, and the entire family is remarkably free of discord.

Todd and Christopher invested wisely, but are now thinking beyond immediate needs. Although they gave their children large cash gifts when the buyout was concluded, they now wish to be more intentional about the future. They have hired an advisory firm to help them plan for successful wealth management and transfer in an effort to create a sustainable family legacy.

To the outside advisor, Jerry seems to be the most financially savvy member of the second generation. Charismatic and charming, he talks a good game, but the first generation of wealth builders knows he's only been following the advice of his cousin Lauren, who's a thoughtful, successful investor. She has built an enviable portfolio that allowed her to weather the Great Recession of 2008 with little damage to her personal fortune.

Although his investment success and gift of gab might make it appear that Jerry is the logical choice to convey information to and from the investment advisor, the family prefers Lauren because they know the backstory. Although she may be less verbally adroit than her cousin, the family selects her for this important role.

In the course of discussion with the advisors, other roles are sorted out. Alix, for example, is a domestic relations attorney and brings negotiating skills to the table. Jerry, it turns out, loves research, and would be happy to search the family history back beyond his father and uncle, while Edward is a teacher who can assist in bringing the eleven members of the third generation into the process as they become old enough.

Obviously, the Mitchell family is lucky. The wealth creators are close, the cousins love and respect one another, and the family members all still live within an hour's drive of each other. It's a tight‐knit unit, eager to work together. They have similar goals and little conflict.

It's not always that way. Sibling rivalries and grievances can be intense, making the second generation prone to distrust. Even if they agree on wealth management concepts, day‐to‐day cooperation can be hard to achieve. If these conflicts are carried over into the third generation, things can fall apart rapidly—shirtsleeves to shirtsleeves. The tendency can be exacerbated by the fact that families, who in the past often lived in the same town, now live in different states or even different countries. The distance between them can loosen the family bonds considerably.

Each generation models behavior for the next. If previous generations have kept the family story alive, engaged in civil discussion of critical and sometimes difficult issues, encouraged consensus building, and identified the factors that all—or at least most—family members hold in common, then the chances for success are improved.