Setting up a family office is a significant undertaking. Without careful planning, it can lead to several challenges and mistakes. Here are seven common challenges to avoid when setting one up:
Too much, too fast
Setting up a family office requires careful planning and execution. It is crucial to define the scope of the family office’s activities and the services it will offer. However, one common mistake is attempting to implement everything at once without sufficient consideration for the long-term goals of the office. This approach can result in rushed decisions and a disjointed approach to structuring and implementation.
To avoid this mistake, it is important to focus on the core mission and key priorities of the family office. A clear understanding of the family’s goals and objectives can help determine the services the office should offer and prioritize. It is also important to consider the capabilities and resources available to the team. This way you can create a plan that can be implemented gradually over time. Taking a gradual approach will help the management build a solid foundation. In turn this can support its long-term growth and success.
Lack of structural flexibility
When setting up a family office, it is essential to think in terms of both near-term and long-term objectives. The decisions made today to nurture the office will prepare it for longevity and evolution. To achieve this, the company must be structured in a way that can accommodate changes in the future.
However, many families overlook the importance of structural flexibility, which can lead to challenges down the line. As the family’s circumstances and needs change, the family office must be able to adapt to accommodate these changes. The lack of structural flexibility can limit the family office’s ability to pivot, resulting in missed opportunities or lost time and money.
To avoid this mistake, the family office must take a proactive approach to planning for the future. It is essential to consider potential scenarios and develop contingency plans to ensure the family office can adapt to any changes. By doing so, the family office can maintain its relevance and value to the family over time.
The family office is not treated as a business
Setting up a family office is not just a matter of pooling the family’s resources and hiring staff to manage them. It requires a professional and structured approach that treats the family office as a business. A lack of professionalism can lead to financial losses, errors, and mismanagement of family assets.
To avoid this mistake, the family office should be operationalized like any other business. It should have well-documented policies and procedures that are followed consistently by all staff members. The management should also establish specific KPIs that measure its performance against its original goals and objectives. By doing so, the family office can have insight into how it is performing and take corrective measures if necessary.
Inadequate focus on data security and other risk management protocols
In the past, families often assumed that their privacy was protected if the office did not carry the name of the family or publicly discuss their affiliation. That has changed. Today, the family and the family office should take the time to develop and implement policies around information protection. This includes sensitive, private, and confidential data handling.
Inadequate communication and transparency with family clients
Often, the decision to start a family office rests with one, or just a few family members. As a result, decision-making and communications may be highly centralized and not socialized with the broader family. Using clear communication with the family will ensure longevity of the family office.
Casual hiring practices
Another critical aspect is to hire staff with the right qualifications and experience. The hiring process should be formalized, and job descriptions should be well-defined. This ensures that the right people are in the right roles. Regular performance reviews can help ensure that staff members are meeting the family office’s expectations and can identify areas for improvement.
Key drivers for establishing a family office are the need for confidentiality, privacy and centralizing the “business of family” with a team of trusted staff. However, some offices do not perform even basic background or reference checks on new staff. Lack of formalized job descriptions and performance reviews can be another challenge. Creating well-defined hiring processes and staff performance management practices will be critical for a professional office.
Hesitancy to leverage advisor relationships
Families often silo their advisors by aligning them to specific topics or decisions and not leveraging their expertise and awareness of leading practice in other areas. They may also isolate advisors from one another, not allowing direct communication between their selected advisors. Encouraging your advisors to work as a collaborative team can often result in the best thinking and implementation for families.
For example, according to an article by Financial Advisor Magazine, “family offices that work with a collaborative team of advisors can take advantage of different perspectives and avoid potential conflicts of interest.” Leverage advisor relationships and focusing on data security and risk management protocols are critical factors to consider.
Conclusion
In conclusion, setting up a family office requires a strategic and long-term approach, with a focus on the core mission and key priorities. By avoiding these common challenges and mistakes, you can ensure that your office operates efficiently and successfully for generations to come. A gradual approach, focus on structural flexibility, and treating the family office as a business can all help set the stage for success.