MARK J. BLUMENTHAL, CPA, is chairman of the Family Office Services group at the accounting and business advisory firm Blackman Kallick in Chicago.

Family offices with large staffs—upward of 50 people—generally have institutionalized their procedures and practices. They employ in-house counsel, conduct annual audits and have operating manuals that explain job descriptions and authority. Fewer family offices are setting up such extended operations today, however, now that technology and a growth in service providers have made it viable and economical to outsource such functions as tax preparation, estate planning and philanthropy. There are exceptions among those with very diverse business activities that require a substantial staff to manage day-to-day operations, but otherwise the trend is toward large family offices reducing their staff, and outsourcing.

A great many small family offices, or even virtual family offices, are in need of a more formal set of practices and procedures because an overly informal atmosphere is a breeding ground for slipshod record keeping and fraud (“Who Can You Trust?” November 2005).

The president of the Jones family office, to his credit, came to us before he found anything amiss. He had established the office 15 years earlier, when the sale of a manufacturing business started by his grandfather presented a large liquidity event. A number of real estate holdings and other investments emerged out of the family business, bringing together distant cousins who barely knew each other, yet who shared stakes in these investments, which included 150 private equity partnerships and hedge funds owned through a complex structure of irrevocable trusts and family limited partnerships.

The president was 55 years old and in charge of the family’s net worth of $450 million. There were 68 surviving family members, ranging in age from 80 to some fifth-generation members still in diapers, and four primary family branches, with numerous divorces and second families to add to the complexity. In short, they were a family much like any other that has been able to sustain its wealth over five generations and concerned about what investments and strategies it will take to preserve the wealth for generations six and seven.

The Joneses set up their family office with no grand design, letting it evolve to what it was: an office employing seven people who were competent and knew the family. Some family members, noting how much this informal setup was costing them in salaries and overhead, were wondering if a family office was necessary.

Judgment Day
We started with an assessment that involved meeting the senior staff members and asking them to describe their functions in detail. This sort of interview can, of course, feel threatening to people who wonder if their jobs are at stake, but you cannot begin an overhaul without a complete understanding of what everyone there has been doing. The senior personnel in this family office were, as we quickly found out, fairly indispensable to the operations, and we were able to gain their trust. We documented cash receipts and disbursements, processes and procedures using flow charts.

The Jones family office had developed some lax habits. It had never set up a standardized system for administrative processes. Tasks such as recording cash receipts and disbursements, account transfers and check reconciliation fell to whomever was available to take care of the job when it came up. The investment transactions were not being properly authorized or consistently reported.

A makeover, like any in-depth analysis, often prods the client into making tough decisions.

Solving these problems was a matter of getting the office organized. We helped the Joneses establish a process for recording cash. We advised them to designate dual signature authority for checks or wires over a specific amount. We recommended that they develop a written policies and procedures manual, including processes to follow in case of any given individual’s absence. We suggested that they take important paper files—scattered in a room that was not fireproof—and convert them to digital files that would be protected by a password and organized for easy access.

A more serious issue was the way the Joneses were operating with the president as the only person with power of attorney over all the trusts and business entities; he simply had too much control over the family wealth. We said this authority should be divided among several people, partly because even family members should be subject to checks and balances, but also because every family office should have others who can step in if something should happen to the president. This particular family office head was not threatened by our injunction; in fact, he embraced our suggestions because he was concerned about his fiduciary liabilities.

The Joneses had an informal board of directors voting on issues, but did not have a document to clearly define its responsibilities. Nor did board members and trustees have liability insurance. Each trust had two trustees, both family members. This meant that family members with fiduciary power were making decisions for, in some cases, distant cousins, many of whom were children. Someday these beneficiaries could decide that the board and trustees had acted improperly in not preserving their capital and sue them. We recommended that they consider adding a professional trustee to each trust, get insurance for the board and trustees and, most importantly, consult their lawyers.

Toward Outsourcing
The concerns about the expense of the family office were unfounded. It was serving a number of important functions, including monitoring investments and creating economies of scale for the family so they could access otherwise unavailable investments and advisors. While most of the personnel were necessary to this effort, we did recommend that the work of two in-house accountants be outsourced. We advised the family to at least outsource tax return review and planning to a tax CPA who could provide fresh ideas, avoid penalties and communicate regulatory changes.

A makeover, like any in-depth analysis, often prods the client into making tough decisions. At other times our advice just reinforces what a client suspected all along. We recently conducted an assessment for another smaller family office with a manager who was a lawyer. The manager had been handling back-office functions, preparing tax returns and overseeing investments. He was, besides being overextended, not the best-qualified investment advisor out there; the family’s portfolios were not performing as well as they should have been. We found that this family office would be much better off outsourcing most of the functions. They took our suggestion and set up a virtual family office, with just one part-time employee to manage bill payment, social calendars and other lifestyle concerns. Instead of mediocre results, the family is now served by best-in-class investment, tax and legal professionals.

Most family offices do not start with a business plan. Family members simply get involved with various ventures and the institution evolves. I have often seen family offices that seem like a voluminous extension of the founding family member’s desk at home—full of unorganized paper. For that reason, I tell clients to refer to their family office with a corporate code name; you don’t have to make it official, but try calling it something like the Jones Family Enterprise when you talk about it with family members and employees. It is amazing how this helps you see the family office as the business organization that it is.