Rather than shut their doors, most small single family offices are finding ways to adapt and evolve, according to research by Chicago-based Family Office Exchange.
Small SFOs are improving sustainability, finding more cost-effective means of delivering services and identifying ways to respond to immediate challenges such as economic and regulatory issues.
FOX, which partnered with Okabena Company for the study, surveyed and interviewed more than 50 small SFOs. It defines small SFOs as those having seven or fewer full time staff, Karen Neal, managing director of consulting for FOX, told Family Wealth Report.
Highlights of the findings provided to FWR by FOX indicate that while the economic and regulatory environment are intensifying the perennial challenges faced by small SFOs, the real drivers of structural and operational change continue to be well-established triggers.
Participants rated their level of concern with five sustainability factors.
Small SFOs are most concerned about the cost of providing family office services (84 per cent). As a result, many are stretching to do more with less money and/or resources.
Long-term dilution of family wealth is the next greatest concern (78 per cent), with family growth in each generation making the buying power of family assets often difficult to sustain.
Family leadership is an issue for 73 per cent, who express concern or are experiencing difficulties in finding and transitioning leadership. Several participants described the challenge of identifying members of the next generation with the skills, interest and bandwidth to lead.
Two-thirds (67 per cent) are concerned about family cohesion, with many calling it an issue that requires constant management.
Family office leadership and succession is a concern for more than half (59 per cent). In most cases, executives have unique skill sets and institutional knowledge that is difficult to transfer.
Service Delivery Challenges
Managing manual reporting processes, complying with an increasingly complex tax code and cash flow management are most commonly cited as service delivery challenges. Most are resource issues ultimately tied to the cost of the office, whether related to lack of in-house capacity, expertise or technology.
Small family offices can be nimble, and most are finding that changes to the service delivery model or structure of the office are the most effective ways to address sustainability and maximize efficiency, according to FOX. While changes often are triggered by generational succession and other transitions, the most successful small offices are proactively seeking solutions in advance.
Three themes are driving the models that small family offices are investigating, the research found.
Offices are assertively engaging the family in conversations that align their mission with their services, costs and resources to ensure long- term sustainability. This proactive approach results in close scrutiny of long-term processes rather than short-term focus on the annual budget, and is shaping the service delivery models, particularly as it relates to the mix of in-house service delivery versus outsourcing.
Those taking this approach are considering using specialty service providers for unique or non-core services and expanding or changing their selection of services.
Others, meanwhile, are realizing that remaining solo may no longer be realistic. They are considering becoming a client of a MFO or collaborating with other SFOs to fill service gaps.
Small SFOs are also looking to increase scale or revenue. They are looking for ways to leverage excess capacity, generate revenue or share costs among more clients.
Offices taking this approach are considering becoming a MFO or taking on investment clients (SEC regulated). They are also considering creating a private trust company.