Family Office: 5 Key Questions

The decision to launch a single-family office (SFO) or leverage the scale of a multi-family office (MFO) depends on your interest and ability to invest time, money, and energy to manage the day-to-day complexity of your family’s financial enterprise. In this article, we ask five key questions:

How much wealth do you have?
What services do you need?
How much do you want to pay?
Do you want to run a business?
How complex is your life?

Your answers will help guide you towards the best path for your family. In addition, SCS Financial has extensive experience as an advisor to highly sophisticated families and SFOs as they navigate the many options available.

For wealthy families, deciding whether to create a single-family office (SFO) or to join a multi-family office (MFO) is a significant decision that will shape how the family’s wealth is managed and preserved across generations. There are more than 8,000 SFOs globally and that number is on the rise¹. Frequently, ultra-high-net worth families are choosing both an SFO and MFO to help them manage their wealth and their family. To determine which option aligns best with your family’s goals, asking the right questions is essential.

Here are five key questions to guide you through the process:

1. How much wealth do you have?

For families with less than $1 billion, an MFO is usually more effective and efficient, while families with more than $2 billion tend to create their own customized family office solution. For families in the middle, and even those exceeding $2 billion, they might choose a combination of both. Today, many ultra-high-net-worth SFOs engage with an MFO and other types of advisors to fill gaps where they do not have the level of experience, resources, or talent to provide first-rate solutions.

Consider how asset levels will impact an SFO’s ability to deliver solutions. For example, investing in alternatives provides unique challenges even for sizable SFOs. To build an investment platform that is comparable to the top MFOs and endowments, one not only needs to hire very experienced (and expensive) teams but also requires sufficient scale to optimize the investment platform fully. In private equity, for example, a 20% allocation of a $2 billion SFO would only amount to a $400 million allocation. Assuming that a minimum of 20 funds would be necessary to create reasonable diversification across LBO, growth equity, and venture, the small commitment size per manager would preclude meaningful co-investment and potentially lead to sub-optimal investment outcomes.

It is also important to note that constructing a high-quality private equity portfolio would typically require 7-10 years of thoughtful capital deployment to be fully invested. Given these dynamics, the investment team would need to have deep experience and a differentiated network of relationships to have the capability to source, diligence, and consistently monitor a robust portfolio across domestic and international markets. Securing this level of access often takes years to cultivate and is challenging with relatively small pools of capital.

While creating a customized family office solution might seem alluring, before proceeding, families should ensure that their asset levels will allow them to meet their desired level of rigor, scale, and performance. Even at very significant asset levels, an SFO may not be the best solution if investment performance is a high priority.

2. What services do you need?

Before making any decisions, it’s essential to evaluate the specific services your family needs. Family offices are more than just investment managers; they handle estate planning, tax strategy, succession planning, charitable giving, concierge services, bill pay, and more. MFOs typically offer a wide range of services to several families but might not offer every service a family needs. In contrast, an SFO can be highly personalized to pursue the exact needs of one specific family, offering an unmatched level of customization, but building a family office is often more expensive and laborious to curate. In addition, once built, an SFO requires a long-term commitment given the costs and effort to establish. If a family ceases to need or want the SFO, the exit process can be similar to winding down an operating business.

For hybrid models – families who have their own family office but use a variety of providers, including an MFO – the family should consider what is most important to them and where they have unique expertise. For example, a family with significant real estate holdings might want to hire and oversee professionals to manage their real estate but use a wealth management firm or MFO to manage their other investments. It is very hard to build an SFO to do everything well so focus on what your family values most and where you can use existing talents to create a high-quality personalized offering.

3. How much do you want to pay?

When it comes to creating a family office, costs can be significant. An SFO demands substantial investment in infrastructure, including technology, security, and operations, as well as highly compensated professional staff, leading to high operational costs. According to the Morgan Stanley 2023 Single-Family Office Compensation Report, median total compensation for CEOs is $800,000, while it exceeds $900,000 for CIOs – often multiples of these amounts are necessary to attract top-tier talent². Moreover, salary increases in SFOs have outpaced the broader market, and the majority of SFOs report recruiting challenges. In short, top talent is expensive and difficult to attract and retain.

In addition to hiring a talented team, other expenses can bring the total costs to run an SFO to an estimated $3 to $10 million annually, depending on the scale and scope of services offered. According to the 2024 J.P. Morgan Private Bank Global Family Office Report, SFOs with $1 billion or more in assets have average annual operating costs of $6.1 million³. Even for the wealthiest families, ongoing operating costs for their own family office are a considerable undertaking.

On the other hand, in MFOs the shared costs among multiple families can make them much more financially efficient in providing access to highly experienced professionals, secure systems, risk-aware operational infrastructure, and curated high-quality investment offerings. Understanding the fee structure, however, is a key to making the right choice for your family. Ask for full transparency related to how an MFO is compensated, including embedded fees, third-party fees, and commissions, so that you understand all the ways in which the firm makes money. At SCS, we take pride in our straightforward and transparent fee structure and the alignment it creates with our clients.

4. Do you want to run a business?

A family office is a family business. Even though the focus is often not on the entity’s bottom line, many of the same challenges exist, such as governance, leadership succession, family employment policy, and compensation practices. Especially for families who have not run an operating business, managing a single-family office might consume too much time and energy.

For example, management transitions are a natural part of any family enterprise. Succession planning must be done thoughtfully so that these transitions do not impact the continuity of the wealth strategy. For a single-family office, leadership typically resides with one individual or a small team, and CEOs tend to have contracts with three-to-five-year terms, giving both the family and the CEO an opportunity to move on. In MFOs, some turnover is inevitable; however, an established MFO should have plans in place for leadership succession and relationship continuity, ensuring that your wealth strategy remains uninterrupted no matter what human capital changes occur.

Does your next generation want to run a business together? If not, your family office might not persist beyond the current generation. If this is the case, the structure, resources, and experience of an MFO may be especially valuable. While an SFO offers more opportunity for family engagement, it also requires intragenerational family governance to be successful over the long term.

5. How complex is your life?

Complexity often drives the decision to establish a family office. Families with significant wealth and relatively simple investment and lifestyle needs likely do not require their own SFO and can more efficiently obtain the investment and wealth advice they need from an existing MFO. While families with major complexity – either in the style of their investing or their day-to-day lives – might benefit from a truly customized solution.

One of the most common reasons for creating an SFO is to have a vehicle for an extended family to invest together in illiquid holdings and even operating companies. A family-owned and controlled family office streamlines the process of commingling family assets and investing together. Another common reason for establishing an SFO is that families want their day-to-day needs taken care of by their own employees – from processing paperwork and bills to ensuring their homes are well maintained. These bespoke lifestyle needs can often be managed by a small staff and do not require a complex SFO, which might mean the family leverages both an SFO and MFO.

Next steps: Making the right decision for your family

While these five key questions can help you gain a clearer understanding of whether an SFO or MFO will best serve your family’s unique needs and long-term goals, wealthy families should step back to consider what they care most about – investing, family harmony, philanthropy – and which option would serve those purposes best over the long term.

The considerations involved in creating a family office are extensive, and what we’ve covered here is just the beginning. If you are considering setting up a family office or exploring whether an MFO is right for your family, SCS Financial can support you in this decision-making process. We serve as an advisor to highly sophisticated families and SFOs and have extensive experience helping families navigate the many options available to them. To begin the conversation, please reach out to us.