Cavanaugh says his primary goal was to establish a mechanism for investing and accounting for family assets. His secondary aim was to provide administrative and management support for the philanthropic foundation the Russells had established two years earlier. “We’ve always been driven by a desire to work together and give together,” he says, adding that the family office was a perfect way to make that happen.

The Russell family’s relatively simple initial plan, however, had an unintended dividend: It meant that setting up and launching the office took only a few months. This is not always the case in multigenerational offices, where different generations may have different agendas, says Douglas Freeman, an attorney and chairman of IFF Advisors, an Irvine, Calif., consulting firm that works with wealthy families. “The founder’s goal may be, ‘It’s my money, give me all the cash flow,’ while the second generation may want growth.” As a result, families planning more elaborate offices can spend a year, or even two, firming up arrangements.

The Right Staff
Over time, Cavanaugh expanded his family office’s services—and the number of employees—considerably. “As family needs and wants became apparent, we explored whether it was feasible to meet those needs internally,” he recalls. His first hire was Kristen Powers, who works as the chief business development officer in the Russell family operation. It seemed clear to both Cavanaugh and Powers that family members needed investment advisory and accounting services, so they recruited an investment advisor and administrative assistant. Over the next two years, they added six accountants, including a tax specialist, and two additional investment advisors. 

Cavanaugh and Powers also hired nonfinancial employees. Because some family members owned powerboats, hiring a person to oversee watercraft made sense. When the family decided to erect a new building to house the family office and foundation, they hired a construction manager. They also added an employee to coordinate family travel and retreats. Following the death of Cavanaugh’s mother-in-law, Jane, the family hired a photo archivist to work with the family’s photo albums and other memorabilia. All of these new employees now work under the umbrella of the family office, Powers explains.

TOP VIEW To meet both personal and business needs, many of us have established formal family offices with permanent staffs of advisors and administrators. Though they can be costly to establish and maintain, these offices enable us to retain direct control over our business and personal affairs, in an atmosphere of complete confidentiality.

At the same time, Cavanaugh decided against some services that other family offices provide. For example, he nixed the idea of bringing in a money manager. “We knew it didn’t make sense to hire somebody to walk the dog,” says Powers. Cavanaugh also chose to work with only outside attorneys, choosing best-of-breed lawyers as needed.

Not surprisingly, salaries are the largest expense in family offices. At the Russell family office, salaries amount to approximately 60 percent of total costs. To pay for the services, Cavanaugh considered several approaches. In most family offices, the senior generation has considerably more money than younger members. Some families agree that each member pays based on the percentage of assets managed by the office, or members of the senior generation simply pay more than younger relatives. Cavanaugh opted for a two-pronged approach: Costs for such basics as investment advice and accounting—services all 10 family members wanted—were split equally among the five households, based on the amount of assets. For other services, families were charged an amount based on the estimated cost, because some family members tended to use certain services more than others.

The number of staff in most family offices varies due to a variety of factors: the number of family members, the services they require and the type of investments they pursue, among others. “A family whose main asset is in commercial property in multiple states would have more staff than one primarily investing in securities,” says Ellen Perry, managing partner of Wealthbridge Partners in Washington, D.C. “A family with 20 members and many services needs a larger staff than one with five members who only want money management and tax preparation.” On the other hand, what McCarthy calls “compliance offices”—offices that simply handle bill paying or tax preparation—require just one or two people.

Families should have least $75 million to $100 million in assets to justify even a simple office. For more ambitious, fully staffed operations, the figure rises to $250 million.

McCarthy recalls a family office started by a patriarch and his four children. Because their primary goal was investment management for the family, they only needed a small staff. They hired an accountant who was a veteran of the financial services industry. His role was to monitor the family’s investment managers and work with an investment consultant. Because family members were actively involved in the office, they found no need for additional staff, and outsourced legal and tax preparation work.

Family Governance
Of course, Cavanaugh did not unilaterally make all goal-setting and hiring decisions. He turned to the office’s board of directors, a governing council composed of adult members of all five family households. That group actually started meeting informally about 10 years earlier to make financial, estate planning and philanthropic decisions. But about a year after launching the family office, they formalized the structure and introduced regular quarterly meetings. While the board does not manage day-to-day decisions, it does supervise a wide range of activities, from approving financial statements to endorsing budgets and performing annual compensation reviews. As in many other family offices, the Russells also have committees to oversee such areas as client services, existing investment and new investment.

When the Russell family meets, each household is given one vote. Other families do it differently, however. For example, the older generation may have more votes than the younger. Decisions might be made in such a way that the current senior generation retains control, and then, over time, transfers it to the next generation, says John Duncan, a Chicago attorney with Duncan Associates, which sets up private trusts. “They’re creating a mechanism so the younger members can take over during a five- to 10-year period.”

An equitable system for counting votes and approving decisions is a strategy for alleviating the myriad issues related to personal relationships and conflicting needs within the family. While Cavanaugh contends there has not been a serious dispute in his family, other offices are not so lucky—especially when sibling relationships are involved. Freeman recalls a family office in which two brothers worked. One was highly competent, the other was not. “The one brother was mad because his brother was getting paid for doing nothing,” he says. When their father died, the first brother attempted to oust the other from the job. Lawsuits were hurled back and forth, and the matter was ultimately settled out of court.

The biggest challenges, however, commonly result from poor communication. “If you don’t quite understand what’s going on, mistrust rears its ugly head,” explains Lee Hausner, a psychologist and vice chairman of IFF Advisors. In fact, that is why the Russell family introduced both a series of scheduled emails with family updates and quarterly mailings, sent out before meetings. It took serious work to devise the best way to communicate important information, however. Consider financial reports. Some family members wanted more detail than others. Determining a reporting form that met everyone’s idiosyncrasies took several months. “As with any business, you have to be constantly flexible,” Cavanaugh adds.

“Offices change over time, reflecting how the family is changing,” McCarthy adds. And the Russells are changing. According to Cavanaugh, his office recently embarked on yet another round of change. In January, the family decided to turn the operation into a multifamily office, called Threshold Partners, further formalizing administrative support around specific family goals. Of this continual evolution, Cavanaugh observes, “Starting a family office has had all the surprises, complexity and satisfaction of starting your own small business.”