Imagine having a top-tier team of non-overlapping, objective advisor’s / service providers located in multiple countries and acting as a trusted fiduciary for your family’s global financial affairs. “Sounds interesting” you say, “but having such a set-up would cost a bundle for sure?” Not necessarily, thanks to the emerging growth of the Virtual Family Office (VFO) model.
Please note, my brief discussion of VFOs is by no means an attempt to undermine the significant benefits of a family establishing a full-service Single Family Office (SFO), or partnering with a cutting-edge Multi-Family Office (MFO). In my experience, each family office is completely unique to the family that sets them up; so to suggest a VFO is what an average family office should construct, is an exercise in futility.
Rather, with the increasing advances of technology, if a family has a lower threshold of complexity, assets, business interests, and / or needing less frequent advisory services (barring any catastrophe), exploring the establishment of a VFO model is worth the time in the due-diligence process. With that in mind, I’ll list some of the benefits and limitations of utilizing a bespoke VFO.
There’s always exceptions, but as a general rule, VFOs tend to operate at the smaller end of the family office spectrum in terms of assets, generally with an AUM of under $200M. From the metric’s and discussions I’ve had, establishing and running a full-service, 24/7, single family office with actual brick-and-mortar offices, employee benefits, salaries + carry, etc., at the $200M level and below can be quite costly. Hence, the first benefit of a VFO (assuming all the outsourced advisors and providers are conflict-free, experts) is having a customized model to meet the current and evolving needs of the family without the level of overhead costs and liabilities of a SFO or growing a MFO. Consisting of all the family’s specialized advisors, the VFO works together to create a holistic approach, aided through a well-defined structure and governance process. Where this can go awry, is if the specialized advisors are not fully-collaborating with each other, ultimately leading to unwanted gaps in planning, tax, investment, risk management, etc.
Control and flexibility is another benefit of utilizing a VFO model. While no one can predict the future, if a family partners with an MFO, or even a boutique division of a large wealth advisory firm, they may end up with a “mismatch” on advisors and related team members in terms of personalities, professional experience and outlook, concierge service requirements, etc. Under the VFO approach, if a family finds they’d rather work with another professional, etc., they have virtually (no pun intended) unlimited options of global talent to choose from, vs. being “fixed” with the team assembled in the MFO or wealth advisory boutique. Moreover, if a key professional, or other primary advisory members within an MFO are lured to a competitors “greener pastures”, the families applecart can get upturned as well. Having an ad hoc advisory panel to assist the family with sifting through the many pools of talent and providers may help mitigate this, by ultimately selecting a “best fit” from the beginning.
The potential for broader investment viewpoints is also a positive of the VFO model. For example, by outsourcing the chief investment officer component via a VFO model, the outsourced-CIO (who’s also working with other select family offices) will invariably come across a larger pool of investment opportunities for consideration, and be more on the pulse of best-practices, vs. only working for one family in a vacuum. This is not to say that a full-time CIO for a SFO will be less opportunistic or effective than an outsourced-CIO or venerable MFO. Rather, the chances of being exposed to how other families are allocating, the terms involved, unique co-direct investment options, etc., may be less prevalent.
While the above advantages of utilizing a VFO model are sound reasons to consider, there are also some limitations with opting for a VFO model in lieu of a SFO or MFO structure. The first disadvantage is the promptness of response to a family’s various financial inquiries, and / or crucial events needing swift attention (i.e., responding to a death in the family, the timely disposition of an asset, an immediate legal concern, etc.) may be delayed since the advisor / provider is not on an exclusive relationship with the family.
One of the outcomes resulting from the dot-com bubble, and 2008 financial crisis, has been families becoming ever more sensitive to the capitalization and risk profile of “too large-to-fail” financial institutions. As a result, another potential downside of opting for a VFO is picking a provider whose capital base and/or fiscal performance is more susceptible to a serious downturn. Independent boutiques and MFOs are not impervious as well, so hyper-vigilance on each outsourced component of the VFO is critical.
Another conceivable drawback of integrating a VFO model is a the chance (albeit low) of a family having their confidentially breached. As a result of more remote “spokes in the wheel” via the VFO structure, the chance for information leakage may increase, which could ultimately lead to the family having to withstand undesired coverage in the press and media, and / or even irreversible reputational loss, etc.
Overall, the rise of families opting for a VFO is likely going to increase as technological advances enhance the cost-effectiveness and innovation within such a model. Moreover, as existing family offices transition to another generation, and new, highly-affluent families continue to pop-up globally, especially in the emerging nations, a viable option for a family’s planning, investment, business, and legal and tax concerns can be fulfilled through the virtual family office structure.