A single family office is a specialized wealth management firm that focuses solely on the financial affairs of one affluent family. It functions similar to a financial advisory firm, providing customized services for investment management, tax planning, and estate management. In contrast, a multi-family office offers these services to multiple affluent families. Although both types of offices aim to optimize wealth and achieve financial objectives, they serve different numbers of families, with single family offices dedicated to one household and multi-family offices serving several high-net-worth families.

Family offices in the USA vary significantly in size, both in terms of assets under management (AUM) and the number of people working in the office. A small family office in the USA typically manages assets ranging from $50 million to $500 million and may consist of a small team of professionals, often fewer than five individuals.

European family offices differ from their US counterparts in various aspects. While both regions have a diverse range of family offices, European family offices tend to be smaller in terms of assets under management (AUM) and headcounts. This is partly due to the historical context of family wealth in Europe, where the concentration of ultra-high-net-worth families is not as pronounced as in the USA. As a result, European family offices often manage smaller portfolios and employ fewer staff members compared to their US counterparts. It is not uncommon to find European family offices managing from $5 million to $10 million, often with just one investment professional multitasking as a portfolio analyst, risk manager, and fund accountant.

Today, we’ll discuss challenges of small to very small family offices managing a few tens of millions of dollars and usually staffed by only a few investment professionals. Despite their small size, these tiny investment boutiques invest in a wide range of assets similar to larger counterparts. These diverse assets may include alternative investments, hedge funds, private equities, as well as traditional assets like stocks, art or real estate. Such broad asset diversification across entirely different asset classes presents two major requirements and complications: the need for experts with comprehensive knowledge of all asset classes and specific risk management frameworks, and the need for a sophisticated alternative investment platform capable of managing multi-asset portfolios.

Addressing the staffing issue isn’t that simple. Typically, single family offices find themselves with a few alternatives:

  1. Stretching the budget to hire top-tier investment professionals may prove challenging due to the exorbitant costs associated with portfolio and risk managers who possess hands-on experience across diverse asset classes. Conversely, hiring separate experts for each asset class also entails significant expenses. Complicating matters further, an investment manager proficient in hedge funds may lack expertise in private equities or fixed income instruments, each demanding unique assessment methods.
  2. Opting to hire entry-level investment analysts and portfolio managers at a more affordable rate may seem like a viable option, but it comes with the risk of compromising the quality of the investment portfolio. While it could reduce immediate expenses, it may also lead to suboptimal investment decisions and limited expertise in managing diverse asset classes effectively. Balancing cost considerations with the need for skilled professionals capable of navigating complex financial markets is essential for the long-term success of the family office.
  3. Outsourcing routine office management operations and/or portfolio management. However, while there are numerous firms providing cost-effective accounting functions offshore, locating a reputable offshore company offering advanced risk management and portfolio construction services can prove to be challenging. Additionally, outsourcing these functions to established fund management firms can also be costly and may even exceed the expenses incurred by hiring in-house investment professionals.
  4. Flexible outsourcing which involves blending the capabilities of entry-level investment analysts with the delegation of key aspects of portfolio construction and risk management to a third party, often a software vendor offering analytical and portfolio management tools. This approach allows family offices to optimize their resources by leveraging external expertise while maintaining control over critical decision-making processes.

The final choice, flexible outsourcing, emerges as the most optimal solution, striking a balance between reasonable costs and high portfolio quality. By leveraging expertise from the software vendor, family offices can maintain cost-effectiveness while benefiting from the expertise of investment professionals developing the software. Certainly, this concept is effective only if the software vendor employs its own team of investment experts and does not outsource software development.

The next major hurdle for small family offices is finding an advanced yet cost-effective all-in-one investment platform capable of handling a wide range of asset classes. One challenge arises from the difficulty for family office principals to evaluate such a platform, primarily because many principals are not investment professionals. Instead, they have amassed wealth in industries such as mining, manufacturing, food processing, shipping, and others. This explains why many small family offices opt for software platforms that primarily focus on reporting functions, visually appealing charting, and general ledger accounting. However, such platforms often lack the capabilities needed to construct robust multi-asset investment portfolios. Family offices need to ask themselves a few simple questions. Can our software provide extreme event stress testing of our portfolios? Can our software optimize allocations while employing advanced models suitable for alternative investments? Can our software calculate real-time NAVs and estimate cash projections for complex redemptions? Can our software identify better investments by searching hundreds of thousands of instruments? If the answer is No to any of these questions, perhaps a more advanced family office solution should be considered.