The decisions you make at the outset will define your family office for years to come. Outsourcing is a common practice for businesses and organizations of all sizes, and family offices are no exception. With the many demands placed on a family office, it can be tempting to consider an outsourced family office with certain tasks to third-party providers. If you are unsure about outsourcing your family office the following ideas might help.
Focus on Costs
Often the first benefit that comes to mind is cost. Outsourcing can potentially save money by allowing the family office to pay for only the services it needs, rather than hiring in-house staff. I say ‘potentially’, because in practice outsourcing comes with its own costs and challenges. Those with experience outsourcing know that first hand. If done poorly, you spend as much time managing your external providers and consultants as you would with in-house staff.
Outsourced family office providers are generally more expensive than in-house on a per-hour basis. This is because you are contracting another firm or a freelancer who naturally builds in a profit margin into their services rendered. Since per hour costs are higher, the outsourced function must provide services in fewer hours than full-time staff. Therefore look at the total cost over a fixed period. This can be monthly or quarterly to get a fair average. If your service is irregular or part-time, outsourcing may be for you.
Also consider the all-in costs when comparing employees versus outsourced solutions. Freelancers and third-parties may charge value added tax, while employees may have additional social costs. These can be quite high particularly in Europe.
Specialisation
Outsourcing also gives the family office access to specialized expertise and resources that may not be available in-house. An in-house lawyer must be a generalist, while an outsourced legal firm will provide access to many specialists ranging from tax, trust, corporate, litigation, land and more. Similarly, in-house investment professionals may need to be skilled at multiple asset classes. Outsourcing to a bank, for example, will allow the family office’s investments to be managed by a team or department. This can span across specialists in multiple asset classes.
However both have their advantages and disadvantages. In-house professionals have a better understanding of the clients needs and the ‘big picture’ in terms of the family assets. Many family offices are increasing their investments into alternative investments like private equity, private debt and hedge funds. This is causing a radical shift in the needs and expectations of the clients.
For lawyers, this often means a careful and detailed understanding of the clients needs when negotiating terms or structuring deals. It also requires knowledge of the clients existing legal tools and investment structures or vehicles. When outsourcing investment management services, alternative asset classes often cannot be custodied at a bank. Banks investment mandates may exclude these asset classes, hindering their ability to oversee once coherent multi asset allocation.
Alignment of Interests
Another challenge of outsourcing is alignment of interest. Outsourced third parties seek profit for their own account or shareholders. This can play out in various ways. Regulation and the law often ensures that professionals must put their clients interest first. But in practical matters they may not prioritse the family office amongst their other clients and commitments. Lawyers may overcharge for time, a common complaint, and notoriously difficult tot track. The downside of presenting oneself as a family office is the impression that you are not sensitive to price or careful with costs!
Outsourced investment management will naturally result in your family office having to fit into the third parties internal processes. They may not wish, or be able to, advise certain investments. They are not independent and may favour internally managed funds and products that are more profitable. Or they may standardise your investment management services into pre-defined and generic portfolios.
Quality and Communication
This can be especially concerning when it comes to the quality and timeliness of the work being done. Communication can also be a challenge when working with an outsourced provider, as extra effort may be required to ensure clear communication and understanding of expectations. In addition, outsourcing may raise concerns about the security and confidentiality of sensitive financial information.
So, what should a family office consider when deciding whether to outsource certain tasks? One factor to consider is the size and complexity of the family office. Larger and more complex family offices may have more to gain from outsourcing certain tasks, as they may have a greater need for specialized expertise and resources. On the other hand, a smaller family office with fewer resources may be better off handling certain tasks in-house.
In-house Expertise
Another factor to consider is the availability of in-house expertise. If the family office already has qualified staff capable of handling certain tasks, it may not make sense to outsource. However, if the family office lacks the necessary expertise in-house, outsourcing may be a good option.
Finally, the family’s priorities should also be taken into account. The family may prioritize maintaining control over their financial affairs, or they may be particularly concerned about the confidentiality of their financial information. In these cases, outsourcing may not be the best option.
Types of Outsourced Family Offices
There are several outsourcing options available to family offices. One option is full outsourcing, where all family office services are handled by third-party providers. This can be a good option for family offices that don’t have the resources or expertise to handle certain tasks in-house. There are many multi-family offices who specialise in this. In addition, many international banks, private banks, and asset managers have begun competing for this business. However, it’s important to carefully vet any potential outsourcing provider. You must ensure they have the necessary expertise, can be trusted with sensitive financial information, and avoid the conflicts outlined above.
Another option is partial outsourcing, where only certain tasks are outsourced to third-party providers. This can be a good option for family offices that want to retain control over certain tasks while outsourcing others. And outsourcing certain tasks can allow the family office to focus on its core competencies and potentially increase efficiency. For example, outsource family office services may include concierge, legal and tax advice while retaining investment management and philanthropy in-house. Some have outsourced family office services the other way around, with an external CIO and investment manager and in-house legal advisors.
Finally, a hybrid approach, combining full or partially outsourced services with in-house staff, can be a good option for some. This allows the family office to retain control over certain tasks while still benefiting from the expertise and resources of third-party providers. For example, an in-house lawyer may be hired to coordinate with external lawyers. This is a common approach that is growing in popularity amongst smaller family offices.
Conclusion
In conclusion, outsourcing family office services can offer a range of benefits, including cost savings, access to specialized expertise, and increased efficiency. Increased adoption of technology will drive more family offices to consider outsourced solutions. However, it’s important to carefully consider the pros and cons and weigh them against the family’s priorities. The pay off is summarised best as between specialisation and generalisation. A fully outsourced family office, a partially outsourced one, or a hybrid approach may all be viable options depending on the needs and resources of the family office. Its important to carefully vet any potential outsourcing provider to ensure they can become long-term partners. For more information about family offices see our post What is a Family Office?.