Introducing the family office
In this article, we present a model for the stages of private wealth development of family owned businesses. We
also show how the development of the business leads to the establishment of an entity to manage the family’s
financial interests – the family office. We present highlights illustrating aspects of these institutions that
are of great relevance to managers who are working directly and indirectly with and for family owners.
Origin: Entrepreneurial dream
It all begins with an entrepreneur … The entrepreneur, the original founder and manager of what will become a
family business, controls all the power levers of the newly created business entity vis-à-vis ownership, management
and family standing. He or she provides the founding narrative for the family that captures the core family values
and a vision that can be shared across generations. The family business will play a significant role in the
dynamics of the family for generations to come. The business is in fact an integral part of the family’s daily life
and is a platform for their interactions within the family and with outsiders.
Then other family members become manager–owners …
Moving to the next generation, as both the family and business grow, we see an increased demand for other family
members to participate in the firm. They are perceived as a ready source of trustworthy talent that understands the
business. As they join the business, a degree of management control is passed on to the younger generation of the
family. Later, as the founder retires from direct involvement in the family business, siblings find it necessary to
share power and control of the business with each other. While there is a growing need to formalize some aspects of
the family business governance, this is often done in a limited way because the relationships between family
members remain close.
Next we have managers and owners …
In the later generations, not everyone in the family is, or wants to be, directly involved in running the
business – while they might all be owners, only some are managers. Some families might decide to be “just”
controlling owners, playing a role at the board level only, with no family involvement in the operational side of
the business. Whether family members become managers in the business is greatly determined by the extent to which
active efforts are made to consistently involve them in the business from an early age. Further, the greater the
generational distance from the original founder, the more it translates into a rising need for a separation of
power and control over the family’s financial affairs, including the family business.
Eventually, it turns into a family in business …
Over time and generations, the businesses tend to be the “glue” holding together the family branches that appear
after the founding generation. When the original business declines in importance over other business and financial
interests, it becomes necessary to find a “glue” other than the family business to keep the family together. The
business is part of the family’s history and tradition and it is difficult to see it simply as an investment that
forms part of the family’s overall wealth.
While the business is a family enterprise, once we get past the founder, not everyone in the family is or wants
to be involved directly in the business as a manager. In such situations, there is a clear need to think
strategically about the family’s financial position and design a new structure and a plan of action – it has now
become a family in business.
Destination: Maintaining and Growing Private Wealth
A family in business needs a platform to capture its wealth – business and financial – and to address the
broader needs of current and future generations.
But what is a family office?
A family office is an entity that takes care of the day-to-day management and administration of the collective
assets and business affairs of one or more families. Its long-term goal is to preserve and grow the wealth for
current and future generations. For the family in business a family office takes on the rallying role previously
served by the family itself.
Why are family offices established?
One of the key motivations for creating a family office is to centralize the management of a substantial family
fortune and more effectively transfer the established wealth across generations. It allows a family in business to
create a trusted environment with a maximum level of control and the possibility to reflect the personal risk
attitude as well as the long-term view of the family. It also enables families to include alternative investments
(i.e. art collections) or dedicate some of their wealth to private equity and/or venture capital activities. The
ultimate decision-making stays with the owner community and potential conflicts of interests with financial
services companies such as banks can be avoided.
To transfer assets across generations
Family offices have served as vehicles for intra-family and intergenerational transfer of assets. The most
common example for the establishment of an office is the retirement of the original founder(s). Family offices can
be established on behalf of heirs, so as to have the structures necessary to cost-effectively manage inherited
assets in common, rather than liquidating the assets and dividing the proceeds.
To improve family governance
A family office could be a strategic decision by family members to create a formal distinction of the family
wealth from the assets of the family business. Financial risk diversification is a primary motivation. Also,
separation can be done in the spirit of improving transparency and corporate governance of the family
To manage cash inflow from liquidation of family business
The third source of funds is the sale of at least a portion of the family business, leading to a sudden increase
in overall liquidity. We discovered that out of this sales, 71% results from the complete or partial sale of
the family business. In comparison, only of trade sales 4% of assets come from historical family wealth. The
remaining 15% is liquid wealth from other investments.
What determines the structure of a family office?
Our research identified four key factors shaping the structure and operations, as well as the governance and
investment allocation of the family office.
Type of clientele
The primary determinant of the family office structure and operation, as well as eventual investment decisions,
is the type of clientele it serves. Two factors characterize the clientele: the number of family members and their
“generational spread” – the distance between the latest generation of family members served by the office and the
Who is involved in the family office?
Family member involvement in itself can be a goal embedded in the establishment of the family office. Generally,
more entrepreneurial individuals prefer to be more involved either in running the office or in the investments
undertaken. In several of our cases, the family office had become a new “family business” for family members to
Connection to family business
The fresher the experience or involvement of family members in the business the more they are involved in the
family office. For example, they are more involved when they are still holding significant portions of the
business, participating in its corporate governance, and/or part of the day-to-day management team. However, in
situations where the business is a distant memory, there tends to be less interest from family members in being
involved in the family office and more demand for lifestyle management. However, many families want to retain an
entrepreneurial spirit within the family and encourage individual family members to run their own businesses. Some
families, as a group, invest in or acquire businesses often related to their origin. We have also encountered
families that have come to regret the sale of the family business as they find little excitement in managing the
financial assets. The key issue here is to distinguish between the “dream” of a senior generation that has fond
memories of the family business in the past, and the aspirations of the next generation who may have very different
preferences and objectives.
Family background and circumstances
The establishment of a family office is often the result of a transitory phase in the history of the family and
the family business. While reassessing their current circumstances, families may discover that they are very
different from those before them who put the current governance arrangements in place. Thus they find it necessary
to reconfigure their link to the family business and with each other. One of the family offices interviewed sold
off a minority portion of their family business specifically because they felt that running the family business was
becoming “burdensome and did not give us the managerial autonomy we cherished.” Thus, they undertake investments as
a family for “fun” in order to realize their “entrepreneurial will as a family.”
What types of family offices exist?
Up to now, the main classification of family offices has been according to the number of families they serve and
the amount of assets under their belt – i.e. single vs. multiple family offices whether they serve one family only
or whether they serve more than one family – thus single vs. multiple family offices. Our research changes the
categories based on two of our key findings – the full financial extent of the original founder’s family office and
the distance of the latest generation served by the family office from the original founder. Both are extremely
indicative of investment appetite, risk tolerance and interest in financial matters. Based on this new criteria
view, we outline five categories of family offices.
1) Single-member family office – Founder/ Controlling Owner Stage
The first type of family office is the single-member family office, and generally includes the original
entrepreneur and owner/manager of the family business, or the controlling owners in subsequent generations. This
type of office thus corresponds to the mindset of a manager–owner in a family business. Here the principal is
greatly involved in the decisions of the family office – the family office in fact tends to become the new family
2) Limited-membership single family office – Sibling Stage
The second type serves a limited number of family members, generally the first heirs of the founder or
controlling owners of the family business. In these offices, greater attention is paid to issues related to
governance and the use of formal channels for review and communication. However, because there is still little
generational distance between the current members of the family office and the original principal (the source of
the wealth), the family members remain quite entrepreneurial and business savvy and therefore tend to be more
involved in the family office than would family members in later generations.
3) Multi-generation family office – Cousin Stage
The third model of family office is the multigeneration family office, which in the words of one of the
interviewees was characterized as “a single family private bank.” The distinguishing feature from the previous two
categories is that there is increasing distance between the founding principal and the office’s clientele. Further,
members served by an office of this type tend to be much less familiar with the family business. Because of the
relatively larger number of clients there tends to be even more attention paid to formalizing decision-making and
governance. The increase in clientele also means that there is a large discrepancy in terms of the members’ stage
in life, and in turn, of their investment needs and horizons. Therefore, capital allocation has to be rearranged so
that it will provide current income for older generations and plan long-term for younger ones
4) Multi-family offices and 5) Family Office Services
Our research revealed two other models to complete the taxonomy presented here – multifamily offices and family
office services. A multiple family office manages the pooled wealth of members of different families, allocating
funds into investments either in aggregate or per family. The last model is composed of the family office services
offered by banks for ultra-high net worth individuals that mirror those provided by a multi-family office.
What does it all mean?
Private wealth is difficult to create and to manage sustainably over generations. The easiest part is losing it!
Today we have a better understanding of how families can effectively manage and pass on businesses and private
wealth to current and future generations. This involves a clear understanding of the role of the family as a whole
and as individuals, as well as the appropriate application of strategies and governance structures over two or
three generations. The family office can be the right supporting structure or that helps families remain focused
and manage their wealth to meet the varied needs of different generations. Leading a family office goes beyond the
pure management of a financial organization; it is about a comprehensive, responsible and inclusive way of steering
the family wealth with a sustainable, trans-generational and long-term vision. It involves building a family vision
and governance structures that address the diverse needs of founders/controlling owners, siblings and cousin
generations. Its key objective goes beyond pure financial profit maximization and management to serving what a
family in business wants and needs both now and in the long-term future.
Related Program: Leading the Family Office is a
program that helps families of wealth determine the best and most appropriate structure and governance model to set
up and sustainably maintain their own Single Family Office. During the program, you and your family
- Create a sustainable platform with the
capacity to preserve and pass along your family business wealth, values, philosophy and history to future
- Gain insights on how to make informed and
educated choices regarding the structure and objective of your Single-Family
- Develop competencies and expertise to
manage your wealth in a sustainable and preserving manner.
- Build family unity through a shared vision
and jointly develop long-term objectives for the family, the wealth and the business assets.
If you plan to set up a Family Office, please
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