Setting up a family office: build one or partner with one

Families asking how to start a family office have two options once they have decided the model is right for them:

Key takeaways

• Starting a single-family office means forming an entity, hiring a leadership team, and establishing systems, at a cost of nearly $1 million a year even for the smallest offices, which is why families who start their own almost all hold several hundred million dollars or more.
• A single-family office that serves only its own family operates outside adviser registration under the SEC's family office rule; a multi-family office registers and files publicly.
• A family that engages a multi-family office skips the hiring and operational requirements of starting a firm, and onboarding takes only weeks.

1. Build a dedicated single-family office by hiring a team inside an entity the family owns, or
2. Partner with a multi-family office that already employs the team and operates the systems.

A family that builds its own office controls the office's governance and scope of services, but bears the full costs. A family that partners with a multi-family office can get set up in weeks and bears only a fraction of the cost that a single-family office requires. The complete guide to family offices explains how the family office model works; this article covers how to implement it.

What it takes to start your own family office

Building a family office means forming and operating a company whose only client is the family. A single-family office setup covers six parts of the family office structure:

• Entity and ownership. The family forms a legal entity, typically an LLC, that employs the staff and holds the contracts with outside providers. The operating agreement states which family members own the office, which members it serves, and how it divides the costs among them.
• Governance. A family board or investment committee holds decision authority. Governance documents define who directs the office, how the family approves major decisions, and who takes over when the founder steps back.
• Regulatory standing. An office that serves only family members and is wholly family-owned qualifies for the SEC’s family office exclusion and does not register as an investment adviser. Serving anyone outside the family, even informally, can end that exclusion.
• Staff. Most offices build their leadership around a chief investment officer, a chief financial officer, and increasingly a chief technology officer, supported by accounting and administrative staff. Hiring takes the longest because the candidates a family wants usually hold institutional positions.
• Investment framework. The family writes an investment policy statement covering objectives, allocation ranges, liquidity needs, and permitted investments, and the office establishes custody relationships and selects managers.
• Systems and outside providers. The office needs accounting and consolidated reporting software that covers every custodian and entity, document management, cybersecurity, and a wire approval process that requires more than one person. Outside firms handle audit, most legal work, and tax preparation.

Key considerations when setting up a family office

A family building its own office must decide four matters early on, and each one determines how the office operates for years afterward.

• Entity and ownership: The family decides who owns the office, which family members it serves, and how it allocates the costs among them. These choices determine whether the office qualifies for the SEC’s family office exclusion, which requires family ownership and family clients only; an office that serves a non-family member, even informally, can lose the exclusion.
• Governance: The family’s governance document states who directs the office, how the family resolves disagreements, and what happens to the office when the founder dies. Families who settle these questions at the start avoid settling them during a dispute.
• Investment policy statement: This written mandate sets the office’s objectives, allocation ranges, liquidity requirements, and permitted investments. It gives the family a standard to hold the office to and gives the office a standard to point to when a family member questions a decision.
• Scope: The family decides which functions the office handles itself, such as investments, reporting, and bill pay, and which stay with outside professionals, such as audit and most legal work. Audit always stays outside the office so that no one reviews their own work.

Common mistakes when building a family office

Families that start their own office and later close or shrink the firm tend to say the same thing: they formed it without fully understanding what it would take to run it.

Here are some of the top mistakes families make when starting a new office from scratch:

• Hiring for investments first. Administration, reporting, and tax coordination make up most of an office’s daily work, so families who hire only an investment lead often find that work piling up.
• No succession plan. An office built around the founder’s preferences, with no plan for who directs it afterward, can struggle when the founder steps back.
• Underinvesting in systems. Spreadsheets work at first, but an office without proper accounting and reporting software struggles to produce accurate consolidated reports or get through an audit.
• Staffing only for routine work. An office staffed for ordinary months can be overwhelmed by an estate settlement, a business sale, or a divorce.
• Skipping the governance document. Families who get along at the start sometimes skip it, and then have no agreed way to resolve a disagreement when one eventually comes up.

What partnering with a multi-family office involves

A family that partners with a multi-family office follows a vetting and onboarding process rather than building one from scratch.

1. Evaluation. The family reads each candidate firm’s Form ADV and Form CRS, which state its services, fees, assets, and disciplinary history, then meets the team that would serve the family and asks how many other families that team serves.
2. Discovery and document collection. The firm holds a structured meeting covering the family’s goals, time horizon, liquidity needs, and risk tolerance, and collects the family’s statements, tax returns, estate documents, and beneficiary designations, along with trust instruments and entity operating agreements. It also records the family’s legal, tax, and insurance advisors so it can coordinate with them from the start.
3. Agreement. The family and the firm sign a service agreement that states the scope of work, each party’s responsibilities, the fee, and how the two will communicate.
4. Accounts and transfers. The firm opens accounts at its custodian for the family’s individuals, trusts, and entities, which requires identity verification under federal know-your-client rules and the governing documents for each trust and entity, then transfers assets from the family’s prior custodians and reviews the tax impact of any changes before trading.
5. Investment policy and reporting. The firm drafts an investment policy statement with the family, obtains authorizations from outside custodians so data from accounts it does not manage flows into its reporting system, and produces the first consolidated report covering the accounts and entities the family has brought in.
6. Coordination and review schedule. The firm introduces itself to the family’s CPA and estate attorney, agrees on how the three will share information, and schedules the first review and the year’s regular meetings. Because the firm’s staff and systems already exist, onboarding usually takes weeks rather than the months that a new single-family office build-out requires, and the family’s work from then on is limited to the decisions themselves.

Build or partner: the deciding factors

Once a family knows it needs the family office model, they will need to consider four factors to help decide whether they’re better suited for building a family office, or partnering with a multi-family office:

• Cost. A dedicated office carries a fixed cost for staff and systems, so the larger the family’s assets, the smaller the share of returns that cost takes. Families with the largest asset bases sometimes build for the control it gives them. Most families below that find that sharing a team through a multi-family office delivers the same services for a fraction of what a payroll would cost — in fact, one family that built an office and later shrank it to a small core with outside investment partners has cut costs by more than half. How much money you need for a family office covers this in more depth.
• Control. Both models follow the family’s own investment policy and preferences. A family that builds also chooses and manages the people and systems behind the office, which some families value. A family that partners receives the same individual attention, while the firm handles hiring, staffing, and systems, which suits families who prefer to focus on decisions.
• Privacy. Both models keep sensitive information in a small group of hands. A single-family office holds it within an entity the family owns, and a multi-family office holds it under a regulated firm’s legal obligations and a contract. Either can be highly private; the built office relies on the family’s own safeguards, and the partnered office draws on the systems that a regulated firm maintains.
• Continuity. A built office continues as long as the family funds and governs it, which gives the family full say over its future, though a small staff means each departure matters. A partnered office comes with an established firm’s succession plans and coverage when someone leaves, so the family’s service continues regardless of any one person.

Choosing between building a family office and partnering with one

Starting a single-family office gives a family complete ownership of its staff, systems, and decisions. That ownership comes with the cost and work of a dedicated team.

Partnering with a multi-family office gives a family the same services and individual attention through an existing team, at a fee rather than a payroll. The family keeps its own investment policy and its own decisions, and shares the team’s cost with other families. Families with the scale and the desire to own their firm should choose to build, while families who want access to services without the business of operating one should partner with a multi-family office.

Yale Capital Corp provides family office services to ultra-high-net-worth families, including multi-generational families who want the office without the build. A conversation about which path fits your family is confidential and costs nothing.