In many cases, services such as tax work and investment oversight are handled within the family business. The decision to outsource these services is principally motivated by the need to segregate personal and business finances.
While it often sounds easy to extract the services provided to the family by either setting up a dedicated entity—the single-family office—or transitioning to outside professionals, the reality of such a move is much more complicated. Two broad-based issues tend to be at the center of the difficulties. One is defining the services in question and the other is cost.
Defining the services: It is not uncommon for family members of a thriving family business to use the various resources of the business for their own purposes. When they need to move those services outside the family business, determining just what those services are can be a problem. Once the services that are to be separated are clearly defined, the next issue is paying for them.
Cost: When the expense is borne by the family business, there is a tendency not to be especially attuned to costs or to act with restraint. However, once family members are required to pay for the services because they are no longer buried inside the family business, they become much more attentive to how much they cost.
Family members are often shocked to learn just how much they are paying for services provided through the family business. When expenses are deductible, the actual cost of services is often overlooked. Unfortunately, inflated costs do not equate to superior service. More and more astute and successful family businesses are relying on outsourced family office services providers to achieve greater control and cost savings while managing toward defined family wealth objectives.
When establishing a single-family office, the costs are usually greater due to the initial investment required to create the stand-alone business. But providing these services from within the family business is, for a multitude of reasons, becoming less appealing or even viable.
Help the owners of successful family businesses understand the family office model and subsequently provide various expertise helps advisors deliver value, build strong relationships and handsomely profit. The educational components are an essential aspect of the process. Effectively explaining the advantages of such a move, including the cost benefits, allows advisors to connect with wealthy business owners.
Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.