Do You Need And SFO, MFO Or VFO?

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Everyone, families and individuals, needs to deal effectively with multiple financial and non-financial needs and goals. The difficulty of having a detailed and comprehensive view increases sharply when the level of family assets, both liquid and liquid, exceeds $5 million. Coordinating mentoring, maximization of products and services and a portfolio of lifestyle services requires a much higher level of customization than what commercial asset management, accounting, legal and other firms offer. Without this adaptation, there is a high chance that you will lose some degree of control over the family property. This is the reason why some families end up using the family office.

Traditionally, a family office is created when you hire professionals and staff to provide a comprehensive and comprehensive view of personal, professional, business and investment matters; and, providing access to investment planning and oversight; Administrative services and monitoring of succession planning, lifestyle services and risk management. There are two types of family offices: Single Family Office (SFO) and Multi Family Office (MFO).

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SFOs, as their name implies, are service firms that are hired specifically to serve a family. Some are branches of administrative services used in a private operating company, some are created by the family directly hiring one or more professionals, but in any case, they are the pinnacle of control, privacy and exclusivity.

MFOs are created either from SFOs or from a commercial service firm to generate profit through commoditization and economies of scale of proprietary service or investment products. It is aimed at families who are unwilling or unable to build their own single-family office, but want access to similar services and products. For elite brokerage firms, boutique professional service firms and private banks with multi-family offices, it is a way to “upscale” their retail services and products to attract or retain wealthy clients.

However, there are significant drawbacks to both SFO and MFO.

The main drawback of SFOs is that they are expensive to install and maintain. family office exchange It is estimated that a single-family office costs a minimum of $1 million to set up and between $1 million to $2 million to operate annually. In addition to cost, SFOs often have an influential personality – sometimes the founder and sometimes a hired professional – and become likewise, or myopic. They are cut off from dealing with diverse customers and can therefore lose touch with what is going on in the industry. In the end, hiring and removing people in an SFO is as difficult as it is in any business, leading to lengthy or deferred decisions on whether to invest, manage or change direction on services.

MFOs and commercial offices are less expensive, typically charging a minimum fee of $15,000 and an annual fee of between 1.0% and 1.5% of assets under management. The main drawback of MFO and commercial family office is the lack of direct control and flexibility. Once you rent an MFO or commercial family office, you are limited to the team, services and products that the firm has to offer. Since these are, to a greater or lesser extent, commoditized, any flexibility comes at a significant additional cost, if at all. Also, these commoditized services, especially investment management services, are pre-selected. This is especially true when you are looking at alternative investments such as private equity, co-investments and direct investments. Finally, there is a lack of feedback. Since the staff isn’t just dedicated to you and your family, you may find yourself waiting hours, if not days, for a response, unlike an SFO.

As technology has evolved, and firms have adapted to serve more demanding clients, a third option has developed – the virtual family office (or VFO). VFOs use a virtual structure to integrate professionals who are highly skilled, hiring experienced specialists for a specific project or process, where there is a high level of customization as a “one-off” situation. With. The VFO can also access financial, banking, insurance, accounting, legal and other regular and back-office services where more customized services are not needed (eg tax preparation, investment reports, as they are repeated annually or more frequently). Is).

The benefits of a VFO are:

Direct control and flexibility: If you don’t like a person on the team, you replace him/her; If you wish to reshape the team, portfolio, etc., you can do so rapidly at your discretion. If you hire a wealth management firm you may be “stuck” with the team that has been assigned to you, with little flexibility to use a different wealth management approach, such as co-investing and club deals, for example.

Diverse perspectives: If you only hire one person or firm to manage your money, they can afford to keep track of how each professional integrates into the overall family goals. Inside a VFO, you can negotiate the management of liquid assets to have equity managed by a major asset management firm, use an EFT or not use a manager at all; And, the VFO will gladly accept his business. Additionally, you can invest the time to coordinate with the management of real estate and private businesses. In my experience, this is the biggest benefit to families using this strategy. You get the benefit of using best practices gathered from serving others but within your own structure.

Cost: Your overall cost is reduced without reducing the level of your services as you select highly experienced, outsourced partners for routine tasks, therefore keeping monthly overhead to a minimum. This is typically one-half to one-third of the cost of the multi-family office rate, as you are taking out a profit on commodity services.

Disadvantages of VFOs include:

Service Provider Selection: Since most of the operations and investment team is outsourced, your VFO has the ability to select the right service. A vision that guides what the mission of the family office is, and what the ultimate objectives for the family are, is important to avoid being distracted by purchasing products or services that are all “bling” but not gold. Experienced and well-connected independent consultants help you review the best-qualified service providers for your goals and not just those in your city, family friends etc.

privacy: Naturally, when everything is reviewed or managed by external partners, electronically, you are more likely to see your investment portfolio and benefit from that knowledge. They can see that you are acquiring companies in a certain industry or gain access to potentially harmful facts about their financial solvency. This is not a big concern for families who check their service providers thoroughly, but it is something that should be looked into. For families living with the intrusions of an authoritarian government, as in Asia, privacy and mobility have been a very real concern.

When family assets exceed your ability to manage all the different personal, professional, business, investment and investment issues, things become increasingly more complicated than you can handle. When this happens, a family office is a great solution but what type of family office is now, a virtual family office in addition to a single family office or a multi-family office.

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