Family offices play a pivotal role in preserving and enhancing the financial and personal well-being of families. While much attention is given to formal family offices, which typically have established legal structures and clearly defined missions for the families they serve, the informal family office typically gets less attention. Often emerging organically, these informal arrangements lack the formal legal structure of their counterparts. This article discusses the role of informal family offices, exploring their formation, function and the critical role they play in managing families' investments and other affairs.
The informal family office may take on any of the responsibilities of a formal family office. The informal family office, however, lacks a separate legal structure and typically lacks the clearly defined mission of a formal family office. The informal family office may arise in several ways:
The people described above encompass a broad range in terms of education, professional experience and competencies. The characteristics informal family office employees tend to have in common are a close rapport and trusting relationship with members of the family as well as a willingness to take on broader roles.
This informal arrangement can often be positive for all involved. The family has people they trust handling their affairs, and the employees enjoy an expanding set of responsibilities for a family with whom they have a rapport.
The informal family office typically evolves over time — as the family's wealth grows and their needs increase, the employees find themselves adapting and expanding their skills in order to fulfill those additional needs. They may come to focus primarily or exclusively on the informal family office roles.
While the informal family office may serve the family well for years, or even decades, there are a number of issues to watch out for, some of which may assert themselves gradually and some very suddenly. While the inflection point may be difficult to detect, there often comes a time when the informal family office no longer serves the family's needs.
A family that finds it is utilizing an informal family office should take stock of its current operations and consider alternatives. The family could take the following steps:
The family should then compare the status quo to alternatives. In many cases, key employees can form the core of a formal family office. A formal family office may offer an opportunity to better define roles, engage in succession planning and upgrade systems to ensure confidentiality. It may also offer tax savings with proper structuring. In other cases, moving to a multifamily office or outsourcing to outside professionals may be the answer. If the informal office is retained, at least the family will have a clear understanding of the risks and rewards as well as an opportunity to make up for any shortcomings that are discovered.
Informal family offices play a crucial role in managing personal and financial matters, often growing organically with the family's needs. However, as families evolve, so too should their approach to managing these offices. Regularly reviewing and potentially formalizing these arrangements can ensure that family offices continue to serve their intended purpose efficiently and effectively. Evaluating alternatives, embracing formal structures when necessary and preparing for future challenges are essential steps for securing a family's legacy and wealth.
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