Family offices require a combination of internal and external resources in order to meet their day-to-day challenges. A well-balanced family office continuously strives to find the right mix of resources in the evolving investment industry. Every family office is uniquely structured based on its own goals and objectives and requires its own balance of internal and external resources. There is no one recipe for success. This article explores the various options of internal and external resources available for family offices and discusses the considerations to evaluate in integrating both types of resources.
I. Primary Universe of Internal Resources
A. CEO, COO and CIO
A well-rounded family office structure begins with filling key leadership roles, which may include a Chief Executive Officer (CEO), a Chief Operating Officer (COO), and/or a Chief Investment Officer (CIO). These leaders manage the investment strategies and day-to-day investing activities that help set and achieve the goals of the family office. Additionally, the people selected for these roles help determine the other resources needed to ensure success. These leaders set the culture of the family office and aim to make sure that the family’s ultimate objectives are achieved. It is important that these positions be filled by those who understand and appreciate the family’s objectives, all while being sensitive to various family dynamics.
B. Portfolio Management, Legal, Finance/Accounting
Depending on the size of the family office, it may be prudent to keep additional key roles within the family office in order to simplify the organizational structure. For example, according to a white paper addressing family office investment strategies from Citibank,[1] while smaller family offices may only need a CEO, one Portfolio Manager, and administrative support on the internal side, larger family offices may create internal positions for Chief Legal Officer and Chief Financial Officer and hire multiple Portfolio Managers to manage individual sectors. These positions are especially important in larger family offices where the structure includes many different legal entities. Keeping track of these entities and properly utilizing them is often an overlooked aspect of investing and is best managed from inside an organization by people who have a full understanding of the entire family structure. As more legal entities are established, whether for tax, investment, or ownership reasons, legal and regulatory requirements become more complex, and the consequences of making a mistake become more severe.
Importantly, recent actions taken by the SEC, FinCen, and other government agencies, including the recent enactment of the Corporate Transparency Act,[2] highlight the need for a family office to have internal staff constantly monitoring changing regulations and requirements to maintain the family office’s investments. Ideally, these staff members would work side-by-side with a Portfolio Manager or multiple Portfolio Managers who can develop an investment strategy within an ideal investment structure that protects the family office from violating regulations while maintaining or exceeding investment return benchmarks.
C. Tech, Cybersecurity, and Operations
Other important internal resources for family offices to consider are personnel in their office operations, including administrative or operational support and technology and cybersecurity support. For example, most family offices fail to build a sufficient cybersecurity support staff, with just 40% of family offices saying they have these controls in place, according to the 2024 UBS Global Family Office Report.[3] As privacy concerns grow due to cybersecurity incidents, a family office should be able to rely on a well-built internal team that can maintain a proper IT structure and prevent the misuse of personally identifiable or other sensitive information. The team can range from building a small staff to ensure family office operations run optimally and securely, to hiring a Technology Director or Chief Technology Officer to direct a full staff on these matters.
Family offices should also look to hiring operations support, including an Operations Manager, to help establish organizational efficiency. This can help a family office avoid over- or under-hiring in various positions, such as technology and cybersecurity, where the family office may not be knowledgeable on its needs. An Operations Manager can also help a family office streamline its internal processes and procedures. This can help a family office increase efficiency and eliminate any redundancies, ensuring the family office’s focus is on maximizing returns instead of managing wasteful practices.
II. Potential External Resources
While internal resources help establish the foundation of a family office, external resources can expand a family office’s investment portfolio and bring valuable expertise to the operations side. According to one family office report from Ocorian, 63% of family offices stated that they currently use external resources to help manage their illiquid assets.[4] In another report, close to 85% of family offices stated they were looking to expand their use of external support, whether or not they already have external resources.[5] But, before expending capital on external resources, it is critical that family offices be aware of the external resources available to them and understand which ones are best suited to their specific needs.
A. External Investment/Portfolio Management
One of the most important ways a family office can expand their investment capabilities with external resources is by using external investment managers. Outsourcing some or all of the investment management function can provide a family office with specialized expertise in unfamiliar or exclusive sectors that may be inaccessible to an internal team due to lack of knowledge or a lack of sourcing capabilities. This strategy is picking up momentum, with 44% of family offices in the 2024 UBS Global Family Office Report stating they have outsourced investment research, and 27% stating they split investment management between their internal and external teams.[6]
B. Legal and Other External Resources
Another external resource commonly used by family offices is outside legal counsel. Outsourcing legal matters can be very helpful to a family office when it comes to specific areas of the law its internal legal team may be unfamiliar with, or when there are substantial legal tasks that require a sizable legal team. Additionally, regulatory matters may need to be outsourced due to the complexity of specialized areas and/or the wide range of compliance issues that may arise with a growing family office. Depending on the family office’s investment strategies and size, it may also make sense to outsource certain tax planning tasks to outside legal counsel, who may have the experience of creating different solutions for different family offices. This perspective may lead outside counsel to be the preferred choice for certain complex matters.
Family offices are not limited to outsourcing just investment strategies and legal and regulatory tasks. Depending on the size of the family office, it may be helpful to outsource certain information technology tasks, administrative support, or even privacy and cybersecurity roles. According to a recent article from Bank of America, it may be easier to keep a family office’s information technology systems up to date through the use of an external staff, rather than maintaining an entire staff in-house, depending on the size of the family office.[7] Additionally, focusing on an external technology staff can allow a family office to create its own custom technology system from various providers, rather than being confined to one system that may not meet all of the family office’s needs. Using external resources for these matters can help simplify the responsibilities of an external team, while providing flexibility for a family office who may be looking to grow in the near future.
III. Determining the Balance of Internal and External Resources
Finding the right balance and structure of internal and external resources is essential to a family office’s short-term and long-term success. Combining internal and external resources for investment decisions can provide a family office direct control while also providing the capability to invest in sectors outside of its core area of expertise. Additionally, a family office may hire certain internal positions that may be especially important to its unique situation, while utilizing external resources when needed rather than maintaining certain internal positions full-time. However, family offices should keep in mind that relying too heavily on an internal staff for investment decisions may prevent them from diversifying their investment portfolio due to the limited expertise and exposure to different asset classes. These same principles apply in connection with staffing operational roles.
Every family office will have different structures as to its internal and external balance. For example, small or new family offices may think about relying heavily on external resources. According to the 2024 UBS Global Family Office Report, the cost of external resources remains low, with just 7% of the cost of maintaining a family office utilizing external resources.[8] The low cost and flexibility would provide the ability to expand or limit a family office’s use of external resources as it undergoes any expansion or growing pains. However, every family office should have at least its key internal leadership positions filled, so that the internal team can guide its external resources to informed and appropriate decisions, further reducing external costs in time and money. The benefit of blending these external resources with an internal staff is having a full-time in-house support team who understands and focuses solely on the needs of the family office while guiding the external support.
The use of a balanced approach can also mitigate costs when engaging in new investment sectors. External resources help avoid the high expenditures that occur when internal resources handle the research and expansion on their own. Family offices may also seek out independent sponsors or other family offices to find additional opportunities, such as engaging in a direct investment as co-investors, further mitigating costs and risks while diversifying their investment portfolio. However, while external resources reduce costs, they should be used to inform a robust internal team who can then make the appropriate investment decisions for the family office. While the balance may look different for each family office, it is essential that both internal and external resources are used collaboratively in order to achieve long-term goals.
Conclusion
Family offices achieve their success when finding their unique balance of internal and external resources. While internal resources provide control and continuity, external resources can provide specialized assistance and cost-beneficial support.
As family offices review their structure, they should be cognizant of opportunities to expand their external and internal resources. If you have any questions about this article, please contact Yehuda Braunstein at 212.573.8029 or via email at ybraunstein@sadis.com.
