The Art Of The Family Office: Effective Oversight

They have sprung up all over the world, sometimes small and low-key, sometimes large and public facing. They have been given significant mandates from the world’s wealthiest individuals who, with an eye on future and current generations, give the office a simple instruction: “Feed my sheep”.

Managing dynastic wealth as a single family office (SFO) comes with great responsibility. How does one decide on the investment strategy? How does one decide how the family’s business or investments are to be structured? How does one manage the competing interests of different generations? How does one handle family members who may be at odds on investment strategy? Or how does one deal with those families where litigation looks likely, or who are already litigating?

Then there is the internal management of the SFO: how does one recruit talent? If an SFO is instructed to manage institutional sized AUM, are families willing to remunerate their SFO executives on market terms? How does one deal with remuneration and carry? Where does one situate the SFO (if indeed there is to be a physical base at all)? How can one ensure the family office does not “arrange deals” or “advise on investments”, or carry out other activity which would leave them at the mercy of financial regulators?

Family offices face a litany of challenges. They have become, like the major private equity houses and family businesses of the world, power bases in their own right. The question, then, is how should that power be governed and regulated within the broader family framework?

Who Pulls The Strings?

A burning question in all family offices relates to decision making: who is really pulling the strings on investments and how those investments are held?

Within SFOs, the research suggests that family members remain in control of key decision making. When it comes to decisions regarding investments, almost 90 per cent of SFOs report that family members are closely involved in investment decisions, with nearly half saying that investment decisions are made by the family principal.[1] Indeed, only seven per cent report that decisions are made by a Chief Investment Officer (CIO) who is not a family member.[2]

For families where decision making has not been truly outsourced to the SFO, conflict can arise. Where the original wealth creator is acting as the true decision maker, and as long as they are robust and have capacity, this normally ensures cohesion for the time being. Wealth creators have natural authority, but when they are gone there is a vacuum. In certain cultures, the eldest son may assume natural authority. In some cultures, the strongest character will assume authority.  Sometimes cabals form within families, with one contingent obtaining the keys to power, which can be dangerous.

Bringing The Broader Family Into Decision-making

Whoever holds decision-making power, the primary job of the family’s lawyer is to ensure that those outside the inner circle are not ostracised and are given a voice. That is the optimum way to avoid disputes. This process – one might call it democratisation of SFO decision-making – must be done in a way that allows the SFO to be run efficiently, whilst ensuring there is a line of communication and accountability between the SFO and the family members on whose behalf the SFO are ultimately investing.

One solution is to set up an ‘Investment Committee’, on which a broad range of family members sit. Investment Committee is a loose term. It can refer to an entity (which could be a corporate body or an unincorporated committee) who have formal powers, for instance as an Investment Manager to a trust appointed by a trust deed, or an Investment Manager to a company under an IMA (Investment Management Agreement). Investment Committees, whether having formal or informal competence, can be an effective way to give a voice to disparate family branches. They can, however, create a new forum for disputes, and for this reason we would urge families to ensure they are created with formal (legally enforceable) powers and responsibilities within a trust or corporate structure, to ensure there is proper governance, and effective mediation and dispute resolution provisions. Otherwise, it all becomes a bit Hobbesian.

Another solution is to divide responsibility over the investment portfolio, so that, for example, one set of cousins have responsibility over real estate, another over illiquid assets (ie PE/Hedge Fund), and another over joint ventures and start-ups. We find this often happens naturally, without lawyer input, as family members gravitate towards the sectors in which they hold expertise or conviction. But legal arrangements must still be put in place – appropriate delegation and management agreements, with proper indemnity and liability provisions – if disputes are to be avoided when investments go bust.

Structuring And Oversight

The reality remains that SFOs are set up for a reason: to centralise resources and build a common investment strategy across a growing family group, rather than the fragmented approach described in the previous paragraph. SFOs are increasingly run like endowment funds, with Yale style endowment models, and this requires overarching strategic thinking. It may well be that different family cabals can manage different ‘pots’ (real estate, PE, public markets etc), but asset allocation powers still remain with the SFO. Beyond this, some SFOs are much more than asset allocators, putting together direct equity deals, or having execution-only arrangements with banks. Such SFOs are truly dominant over a family’s wealth.

Asset allocation and/or direct investment competence may be the greatest powers of SFOs, but equally important are the powers they often wield over how the wealth is held, whether via trusts, corporate structures, funds, partnerships, or a combination of the above. At this point, SFOs become bankers and lawyers rolled into one.

With decision-making being increasingly centralised in SFOs, as global UHNW families continue to ‘professionalise’, we now ask the question: what oversight should the broader family have over the SFO, if disputes are to be avoided?

Around the world, family offices are invariably set up as companies. One solution is to appoint a broad range of family members – perhaps a member of each family branch – to the board, thus ensuring a democracy within the family. This is a nice enough idea, but does not always work in practice, especially in larger families. For an SFO to be effective, someone needs to hold decision-making power on a day-to-day basis. SFOs often deploy very active investment strategies or are dealing with a wide range of complex legal, tax and structuring issues. They need to have a chief, and cannot be run like a Parliament on a day to day basis, when quick decisions are required. In any event, as directors, the broader family will not have the time for day-to-day management of the SFO.

A more elegant solution, therefore, may be to create an oversight entity. If the SFO is structured as a company, the SFO shares could be held in a trust or a foundation. For a foundation, the broader family members could sit on the council of the foundation (or elect one of their family branch to sit on the council). For a trust structure, family members could sit on the trustee board (if the trustee of the trust a private trust company), or else they could be protectors of the trust (or enforcers of a purpose trust). Any of the above solutions can be made to work.

In this scenario, the role of the shareholder trust and foundation is not to interfere with SFO day-to-day decision-making, but to provide oversight and accountability. There could be a private agreement between the SFO and its shareholder in which the level of oversight, and the rights of the broader family, are established. For instance, should the SFO seek shareholder approval on major investment decisions? Or on changes to the SFO board? Or on major legal and structuring matters? Or on questions relating to remuneration (and carry) of SFO executives? Or should there simply be a level of quarterly reporting to ensure the broader family at least have a legal right to information on the SFO’s activity, but are otherwise passive.

We find, ever more, as SFOs become major power bases, that their powers require regulation and oversight. Some families eschew this suggestion, preferring instead a fluid organisation structure based on informal channels of communication – family members whispering in the ear of the CIO. This may appear fine, until the whispers become contradictory or resented by other family members who are out the loop. If disputes are to avoided – and such disputes could go to the heart of the family’s wealth holding structures – governance is required.

Priorities

Many SFOs around the world are grappling with succession of the family’s assets, as they deal with the ‘great wealth transfer’. That said, the governance of the SFO itself should be considered as part of this exercise. As SFOs become important power bases, it is becoming increasingly vital for their powers to be overseen, held accountable, and sometimes even moderated, by the broader family whose interests they represent.

[1] 2024 Global Family Office Report, J.P. Morgan, p.3

[2] 2024 Global Family Office Report, J.P. Morgan, p.40

James Brockhurst
James is a Partner with the firm, specialising in trusts, estate planning, UK tax and cryptoassets.

Claris Bell
Claris is a Trainee Solicitor who joined Forsters in September 2023 who will qualify in 2025. She has a Theology and Religion degree from Oxford University. She later completed her GDL with City University, followed by her LLM with BPP University.