Introduction
Creating an SFO to fit your family’s specific needs and circumstances requires considerable thought and preparation. Families considering forming an SFO should put together a motivated group of family leaders and trusted advisors to lead the planning effort, with input from outside specialists, as necessary. The following, while not totally comprehensive, serves as a helpful checklist to get started:
Mission Statement
Families planning an SFO should take time at the outset to consider the purpose of the SFO and its role within the family. A critical early task in setting up an SFO is defining the mission of the family office. Developing a concise, focused mission statement to guide the work of the SFO will help to avoid ‘mission creep’ in future years. The founders should avoid drafting a mission statement that is vague and short on specifics. A consultant can help a family mold its vision and values into a practical and useful tool to guide the work of the SFO for generations to come.
Needs and Objectives
There are three critical questions to be addressed early in the planning and development phase of creating your family office:
1. Who are the clients?
Defining which individuals and entities will be served by the SFO is a critical activity. A comprehensive list should include all individuals and entities to be served, including family branches, investment entities, businesses, trusts, trust companies and foundations. The design of the SFO will need to consider each client’s unique needs and requirements.
2. What assets will be managed?
Once the clients have been identified, a list of all the assets the SFO will be responsible for managing is needed. This will include marketable securities, hedge funds, MLPs, direct investments, oil & gas leases, operating businesses, residential real estate, commercial real estate, farms/ranches, collections, aircraft, yachts, horses, sports teams, etc. The SFO will need to hire or outsource the specific expertise needed to oversee and manage the assets.
3. What services are needed?
Families with extensive investments, or with liquid capital to be invested, will need investment management services, including an investment policy statement and asset allocation plan, manager due diligence, and investment reporting. All SFO clients will need comprehensive and accurate performance reporting, accounting, and tax-return preparation. Coordination of risk management – such as insurance, security, and reputation management – will also be needed. Development and coordination of estate and tax planning, possibly including management of a private family trust company, is another obvious need for multigenerational families, but can be equally critical for a first generation entrepreneur who wishes to perpetuate the family’s long term legacy. Other possible services include property management and staffing, bill payment and concierge services.
The adage of “shirt sleeves to shirt sleeves in three generations” is well known. It has been documented throughout the world, across numerous countries and cultures. It is one of the driving reasons why many families of wealth recognize the need for proper family governance and family wealth-planning strategies during the lifetime of the family wealth creator. However, even after implementing a family governance system during the design phase of an SFO, families must constantly refine and re-evaluate their values, vision, and mission as their SFO adapts to the changing needs of the family and the global environment.
Business Plan & Budget
Once the clients, assets and needs have been identified, a business plan can be developed that outlines the services to be provided, a short and long-term timeline, employee and outsourced talent required, service partners required (for example, custodians, tax counsel, security services) and technology needs.
A key objective in developing a business plan should be determining the budget. SFOs are not inexpensive to operate. However, when compared with the expense of managing the family’s assets via an outsourced or third-party solution, taking into consideration all costs, fees and expenses, the expense of an SFO will likely be lower. Certainly, because the SFO will be custom-tailored to the family’s needs, the return on that expenditure will be much higher.
Typically, SFO budgets are defined as a percentage of assets under management. SFO operating costs vary widely, with smaller SFOs, or those managing complex assets, costing more to operate than larger SFOs, or those managing a simpler portfolio, because there are fewer economies of scale to exploit. The budget of an SFO managing an extensive portfolio of alternative investments and commodities for three generations of family members, all of whom also share a passion for modern art and house their collections in multiple homes around the world, will necessarily be larger, both as an absolute number and as a percentage of assets under management, than the budget of an SFO managing a portfolio of publicly-traded securities for a single family unit. The budget will drive the creation of benchmarks to set expectations for SFO performance.
An SFO serving the needs of a multi-generational family must consider how the costs will be allocated and charged to individual clients of the SFO. Future conflict between family office clients or between the family and the office can be avoided if the method of allocating expenses, determining the expected contributions by each client, and collecting fees is made explicit from the outset.
Leadership and Staffing
The plan should identify the expertise required to meet the specific needs of the SFO’s clients, given the specific assets to be managed and the available budget. The plan should also specify whether such expertise will be provided internally or outsourced. Once staffing needs are determined, the issues of location, office space needs, technology, security, administrative support etc. can be addressed.
Finding the right talent is generally the most challenging aspect of setting up an SFO. Ideally the CEO candidate should be identified first (if this task has not already been completed). Because the CEO of an SFO must work closely with the family, the office staff and with a wide array of outside service providers, the CEO must have excellent organizational, management and people skills. Choosing a CEO purely because of his or her technical expertise in investing, or in accounting, or in tax planning, is generally a mistake. Often, families will give this important position to a trusted advisor or the controller of their operating business who has been loyal for many years. This can also be a mistake if the trusted advisor or controller is not scalable into the CEO role. Because the CEO carries out a high-level executive function and serves as the family’s face to the outside world, candidates should have proven experience leading, managing, and communicating successfully in a wide variety of complex situations. It is a critical role to fill, since once identified and hired, the SFO CEO will take on the role of carrying out the buildout of the SFO in accordance with the plan.
SFOs often hire investment team members with extensive prior experience at private banks, investment houses and hedge funds. Such talent is highly sought after; candidates often demand investment rights or bonus compensation based on investment performance. The SFO should take care in structuring such arrangements, particularly considering the Dodd-Frank Act’s requirement that family offices comply with RIA registration requirements unless they fit a very narrow exemption. SFOs, both new and established, should seek advice of experienced counsel when bringing on new investment team members or adding new benefits such as carried interest.
All staff members, at every level, should go through a background check and sign non-compete, non-solicitation and non-disclosure agreements. Whether the SFO is large or small, it should have an employee policy manual. The manual should be reviewed and updated at least annually by knowledgeable counsel.
The SFO should be overseen by a board of directors, which will meet regularly and be responsible for setting strategy and overseeing the CEO. Most families control the board of their SFOs, to ensure strategy is in line with the family’s wishes. Many SFOs are following the lead of private businesses and bringing independent advisors onto the board to provide outside perspective and expertise.
Contingency Plan
Planning for the SFO should include development of a contingency plan that outlines procedures to be followed in the event of a natural disaster, extreme volatility in the financial markets, theft, or technology breach or failure. At the most basic level, the contingency plan should include provisions for ensuring the safety and security of the family, its critical information and tangible assets, safety of the SFO staff, off-site backup of all information, and a plan for re-establishing critical office activities off-site as quickly as possible.
Frequently Asked Questions
How do you create a single family office from scratch?
Creating a single family office starts with gathering a motivated group of family leaders and trusted advisors to lead the planning, with outside specialists brought in as needed. The work then moves through a series of steps: defining a mission statement, identifying clients, assets and services, building a business plan and budget, sorting out leadership and staffing, and creating a backup plan.
Why is a mission statement important when setting up a family office?
A mission statement matters because it sets out the purpose and role of the family office and guides its work for generations, helping it stay on track in later years. Founders should write a short, focused statement rather than one that is vague and thin on detail. A consultant can help shape a family's vision and values into a practical, useful tool.
What three questions should families address when planning a family office?
Families should answer three key questions early: who are the clients, what assets will be managed, and what services are needed. Defining clients means listing every person and entity served, including family branches, investment entities, businesses, trusts, trust companies and foundations. The list of assets and services then decides what expertise the office must hire or outsource.
How much does it cost to run a single family office?
Single family office budgets are usually set as a percentage of assets under management, and running costs vary widely. Smaller offices or those managing complex assets cost more to run than larger offices or simpler portfolios because there are fewer savings from scale. Even so, an SFO is likely cheaper than an outsourced option once all costs are counted, with a better return on that spending.
What qualities should a family office CEO have?
A family office CEO should have strong organizational, management and people skills, because the role means working closely with the family, office staff, and many outside service providers. Picking a CEO only for technical skill in investing, accounting, or tax planning is usually a mistake, as is defaulting to a loyal trusted advisor or operating-business controller who cannot grow into the role.
Do family offices need to register as investment advisers under Dodd-Frank?
Family offices must meet Registered Investment Adviser registration rules under the Dodd-Frank Act unless they fit a very narrow exemption. This matters especially when hiring investment staff who want investment rights or performance-based bonus pay. Single family offices, both new and established, should get advice from experienced counsel when adding investment talent or new benefits such as carried interest.
Should a family office have a board of directors?
Yes, a single family office should be overseen by a board of directors that meets regularly and is responsible for setting strategy and overseeing the CEO. Most families control the board of their offices to make sure strategy matches the family's wishes. Many offices follow the lead of private businesses by adding independent advisors to the board for outside perspective and expertise.
Why does a family office need a contingency plan?
A family office needs a backup plan to spell out what to do in events such as natural disasters, extreme market swings, theft, or a technology breach or failure. At a basic level, the plan should keep the family, its key information and physical assets safe, protect office staff, store off-site backups of all information, and offer a way to restart critical office work off-site quickly.
About the Author
Marc J. Sharpe is the founder and Chairman of TFOA, an organization formed in 2007 to provide a forum for education and networking and to serve as a resource for single family office principals and professionals to share ideas and best practices, pool buying power, leverage talent and conduct due diligence. Mr. Sharpe also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at SMU Cox School of Business. Contact: marc@tfoa.me
About TFOA
The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info
Disclosures
The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.
Frequently Asked Questions
What professionals do you need to create a family office?
Core professionals typically include a managing director or CEO, a chief investment officer or investment analyst, a CFO or controller, and legal and tax counsel. Many families engage external consultants to advise on setup before committing to full-time hires.
What is the biggest mistake families make when creating a family office?
The most common mistake is underestimating operational complexity — treating the family office as a part-time advisory function rather than a professionally managed entity. Families frequently hire too late, underinvest in technology, and fail to establish clear governance policies before operations begin.
Should you create a family office yourself or use a consultant?
Most families benefit from engaging an experienced family office consultant during the setup phase, particularly for entity structuring, regulatory considerations, and compensation benchmarking. The consultant relationship typically concludes once the permanent team is in place.
What is the first decision to make when creating a family office?
The most fundamental decision is whether to build a single family office (full in-house control) or engage a multi-family office (shared infrastructure, lower cost). This decision depends on asset size, desired privacy, complexity of the family's holdings, and the family's appetite for managing a professional organization.
