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.