Challenges and Solutions for Small Family Offices

A single family office is a specialized wealth management firm dedicated to handling the financial affairs of a single wealthy family. It operates like a financial advisory firm, offering personalized services for investment management, tax planning, and estate management. On the flip side, a multi-family office extends these services to several affluent families. Despite both aiming to optimize wealth and achieve financial goals, they cater to different numbers of families, with single family offices serving one household and multi-family offices handling multiple high-net-worth families.

When it comes to family offices in the USA, there’s a significant variation in size, both in terms of assets under management (AUM) and the number of staff members. Small family offices in the USA usually manage assets ranging from $50 million to $500 million and may have a small team of professionals, often fewer than five individuals.

European family offices differ from their US counterparts in various aspects. While both regions have diverse family offices, European ones tend to be smaller in terms of AUM and staff. This is partly due to the historical context of family wealth in Europe, where ultra-high-net-worth families are not as concentrated as in the USA. Consequently, European family offices often manage smaller portfolios and employ fewer staff members, sometimes managing as little as $5 million to $10 million, often with one investment professional handling multiple roles.

Now, let’s delve into the challenges faced by small family offices managing a few tens of millions of dollars with only a handful of investment professionals. Despite their small size, these boutique investment firms diversify their portfolios across various assets, including alternative investments, hedge funds, private equities, stocks, art, or real estate. However, managing such diverse assets presents two major challenges: the need for experts with comprehensive knowledge of all asset classes and specific risk management frameworks, and the need for a sophisticated alternative investment platform capable of managing multi-asset portfolios.

Addressing staffing challenges isn’t straightforward. Single family offices often find themselves with a few options:

1. Stretching the budget to hire top-tier investment professionals can be challenging due to the high costs associated with experienced portfolio and risk managers.

2. Opting for entry-level investment analysts and portfolio managers at a more affordable rate may compromise the quality of the investment portfolio.

3. Outsourcing routine office management operations or portfolio management can be challenging, as finding reputable offshore companies or established fund management firms can be costly.

4. Flexible outsourcing, combining entry-level investment analysts with delegating key aspects of portfolio construction and risk management to a third party, often a software vendor offering analytical tools.

Flexible outsourcing emerges as the optimal solution, balancing reasonable costs and high portfolio quality. By leveraging expertise from the software vendor, family offices can maintain cost-effectiveness while benefiting from the skills of investment professionals developing the software.

The next hurdle for small family offices is finding an advanced yet cost-effective all-in-one investment platform capable of handling a wide range of asset classes. Many family offices opt for platforms focusing on reporting and accounting but may lack the capabilities needed for robust multi-asset investment portfolios. Family offices need to assess whether their software can handle stress testing, optimize allocations for alternative investments, calculate real-time NAVs, estimate cash projections for redemptions, and identify better investments by searching through a vast range of instruments. If the answer is no, considering a more advanced family office solution may be necessary.