Breaking the Rules: When is a Family Office Right for You?

You will find on your screen a mechanism to ask questions. Please feel free to submit questions during our discussions and we will respond. Let's get started. What has been your experiences working with family offices? First, Ken and then .
Kenneth Drummond: Hi, I'm Ken Drummond. As Marie said, I'm the CFO of the Johnson family office. I got my start in family office probably about 30 years ago. I went to school for accounting, never really dreamed of, didn't even know what a family office was. Just thought I was going to be in a public accounting life. After a couple of years of public accounting, I got a job with Calvin Klein and I was controlling their licensing division and also managing the personal finances of Calvin Klein and his partner, Barry Schwartz.

After a couple of years there, my responsibilities morphed into more of the family office. That was my first foray into what a modern day family office looks like. After about 10 years with that company, I went five years with the Estée Lauder family office, and then for the past 15 years, I've been CFO of the Johnson family office.
MA: Thanks Ken. That was very insightful. , what has been your experiences working with family offices?
Macca: I actually spent the first 20 years of my career in tax compliance, planning and audit defense. First in public accounting with the Big Four and then with two Fortune 500 companies, Xerox and EMCOR Group. Throughout that time, I spent a lot of my time working on projects to help streamline processes, implement new technology and develop policies and procedures. Really enjoyed that aspect in that area. I decided to pivot and focus on that. That brought me to a position in the family office in Connecticut as a chief of staff, where I worked on operational strategic initiatives, ERP implementations, tax transformation, policies, procedures, and implementing new technology related to bill pay, household employees and philanthropic initiative.

Then decided to go back to my first love of public accounting and that brought me back to EisnerAmper where I lead the business transformation initiatives, focusing on enhancing our own processes and leveraging emerging technology so we can better service our clients and continue to add value to them.
MA: Thanks . Ken, what is a family office? It seems to be more of a recent term and seems to mean different things for different people.
KD: Well, there is a saying in the industry that if you've seen one family office, you've seen one family office. They come in all shapes and sizes and really depends on what stage of the family is, what generation the family is. A lot of them just start off with just bill paying. Some of them just start off with investments. Some of them asset management, household management, and some of them are basically everything for the family. They all have different shapes and different purposes and sizes.
MA: Thanks Ken. , so what does a family office mean for you?
LM: I think Ken brought up a lot of good points. A lot of family offices start off with either wealth management or bill paying services and as the number of assets and the complexity of the assets and investments grow there's a need for a more formal structure to help manage all these activities. Again, it could be an array of services, bill paying, investment management, and again, now with multiple generational family offices, help with communicating and with the family cohesion and bringing the family together.
MA: Thanks . Next question. What are the circumstances that lead a family to decide whether a family office structure makes sense for the family? Ken?
KD: I guess generally or most of the time it's either the company is growing so large that their responsibilities with the business preclude them from taking on a lot of their own personal investments and their personal bill paying duties. Some family offices are formed after a liquidation event. I guess the deciding factor is how much time do you want to give to organizing your own finances, doing your own taxes, paying your own bills, investing your own money? Are you in the business of investing or do you have an operating business?

Now you want to hire somebody to manage the cash that you're building up from your successful business. I think there's many different reasons why they start and it really can create, again, different types of family offices and what services they provide. Some families want to get into the estate planning, tax planning, tax preparation. There's a lot of different reasons and I guess organizations and structures of family offices.
MA: Thanks Ken. That was really interesting. , same question for you.
LM: I think a big factor is the need for privacy and immediate access. It's nice to have a group of people who you can immediately walk into someone's office or now call and get those answers. There's a continuity to the people and also the staff now has access to different pieces of the puzzle of the family. They understand the financial position, the goals, the preferences and the values of the family so they can really be a thought partner in those strategic initiatives. And then when needed, bring in external people to kind of complement the expertise in the family office.
MA: When setting up a family office, should it be set up as a multi-family office or a single-family office? And what are the differences between the two? Ken?
KD: I've always been single-family offices. I've known some families that have become a part of multi-family offices. I would say probably if you're just starting out and you want to save expenses, you would probably go with a multi-family office route because this way you're using the resources that have already been set up and being used by other families. If you have enough resources on your own, then you can hire your own control or you can hire your own CIO. You can hire your own tax people. Again, I agree with what says.

A lot of families just like the fact that the family office is usually set up within the business, if there's an active business. So the CEO, the principal of the family, instead of having to make a phone call and wait for that call back, they just can walk into your office at any time and have that access to you. I think that's very comforting for somebody and usually high-net-worth individuals that they have you anytime they need you. They don't have to wait for your call back. The multi-family office again probably would be for somebody just starting out and more as a cost savings, not have to hire many different people or have one person and have different consultants. It's a one-stop-fits-all scenario.
MA: Thanks Ken. That was really interesting. , what would you say about family offices? Multi-family offices versus single-family offices?
LM: I agree with Ken. I think one of the biggest factors for a single-family office is privacy. Moving to a multi-family office is to leverage when you want to make investments and the breadth of services that are included in that family office. I agree with Ken on that.
MA: Thanks . Ken, how is your family office structured?
KD: Well, being there 15 years, the family office has evolved, has grown. When I first started, I was actually part of the succession planning and I was bringing the family the initial family office members because the family office has been in existence probably since the 1980s. I joined in 2006 and I was the next generation of the officers of family office. From that point, we've really grown a lot. When I think I started, there was six. Now we have 22. The biggest change that we had, really came from diversification of our portfolio. In 2012, we hired an investment team. We hired a CIO. Before that mainly collecting a dividend and investing in some private equity deals. In 2012, we diversified and our investment platform became a lot bigger. We hired a CIO and an analyst, and as the investments grew so does your need for more investment analysts, and the more entities and more investments you're in the accounting team grew. We also have the administrative staff, the philanthropic staff and then the household staff that maintains different properties. That's how we have all those under one roof.
MA: Thanks Ken. , you were in several family offices. How would you describe the family office structure that you've been working with?
LM: Similar, larger family offices where there's the typical CFO, COO, CEO and also property managers, accountants, bookkeepers. Also, what's becoming more important I see is project management teams to help implement all these initiatives and also educational unit to help educate and mentor future generations.
MA: Thanks . I agree with the family offices that I work with. The structure is very similar. What I've noticed is actually some interest in setting up these private trust companies as a potential way of restructuring. What a private trust company is, is a state-chartered entity that provides for a fiduciary. So it's a higher standard than a typical family office professional, but it's a fiduciary under state law and it provides more privacy and control.

Because a private trust company is set up for one family, you have a permanent trustee who gets to know the family and there's more privacy, as I said before. Also, you have the ability to integrate the next generation administration of the family enterprise through involvement in committees and board meetings. I've seen some interest in that type of structure recently, but most of the other structures that you described is also what I'm seeing.

Next question, who would you hire for your family office? I know Ken, you mentioned some of the professionals with specific skill sets that would be involved. Can you elaborate further? Follow-up question with that? Do you outsource any of these services?
KD: Well, I guess again, repeating what I said in the initial stages, you would say our CIO role was outsourced and we eventually decided to bring that in-house and add an investment team. There was talk of do we want to include a trading desk within the family office? but we ultimately decided against that. I think what we do, I mean, we've worked with EisnerAmper for many years now as our tax accountants, as our accountants. What we do is with the growth of the entities and the structure that we've had, we try to balance the need for outsourcing.

We've hired more tax people so this way we can prepare a lot of the work papers and get the smaller tax returns done and then have EisnerAmper give the blessing and then prepare the larger returns. Even we'll still prepare the work papers and then send them out and work with Eisner on the larger stuff. Really it's a balancing act on how many entities and how much work do you want to keep in-house? Whether it makes fiscal sense to outsource it, or just hire another person if the work gets too much and you're just going to be generating lots more professional fees at a higher billing rate.
MA: Thanks Ken. , do you have any additional comments on who would be hired for the family office and the use of outsourcing?
LM: I think again, there's an increased focus on technology, so more on the IT staffing, analyst and people with more expertise in cybersecurity. To Ken's point, there's always a discussion and a balance of what services you outsource and what services you keep in-house. A lot of family offices decide that they really don't have the resources to keep up with the latest tax law and planning so they like to outsource that tax work. Legal work, they might have their own legal staff in-house, but when it comes to a specific area or transaction, they work with outside legal resources to complement their inside expertise.
MA: , why is there an increased focus on technology by family offices?
LM: Well, I think there's a few reasons. The pandemic obviously put a big spotlight on technology. Collaboration is key. A lot of our interactions now are remote. I don't think that's going to go away with the pandemic. I think there's going to be people who go back full-time, return to office, there are going to be hybrid models. Whatever model you choose, you need to be prepared to work remotely. Your infrastructure, your technology, your cybersecurity has to account for this.

I'd also say that, to Ken's point, as family offices grow, investments, assets, regulations become complex, just multi-generational families, so they're trying to get more efficient in reporting and doing that day-to-day transactions. They want to automate those labor-intensive manual tasks so their staff can really refocus and really focus on strategic initiatives and doing more analytical work.
MA: Ken, any thoughts on the increased focus on technology?
KD: Yes. Absolutely. What I failed to mention before, the IT is a crucial part of the family office at this point, because if your principal has a computer problem, needs to get information, needs to log on to something and you have an outsourced IT team, how quickly can they get this done? Usually, when it gets to the principal and they need something, it's usually a critical decision and you want to really have your I team and your IT in good shape and have a good team that has easily accessible to handle any problems very quickly.

Obviously with the pandemic, everybody has been working remotely and I think we adapted to that pretty quickly, given the IT structure we had in-house. We quickly moved to getting laptops to everybody. We had been online with our banking, our investing, but we would still mainly work off the paper statements, but I guess it went a lot smoother than I thought by switching everything to remotely and getting our statements online. There was no need to open up the envelopes anymore.

Everybody can get their statements online, could download activity on time online. The systems and software programs that we had, had the capabilities of importing information. So I think IT has really actually helped keep the business going seamlessly and smoothly during this pandemic. And I think, again, going back to in early stages, I was always like, "No. I don't want to use the cloud. I feel more secure with my information on my mainframe in my office."

With our IT and how things have changed, I've actually changed and adapted to things probably are safer in the cloud and more secure in the cloud because whether your mainframe is sitting in your office, it still has wires. It's still connected to the internet. It's basically in the cloud itself.
MA: So, what are the technology trends for the family office and what exactly is a bot or RPA? ?
LM: I get asked about the bot probably on a daily basis. It's not as scary as it sounds. Probably the simplest way I can explain it is it's really just a software program that automates and mimics repetitive human tasks. And that is one of the trends that we're seeing in the family office. Just to give you a couple of examples. One of the areas that bots and technology has really helped the family office is in the tax space. Just gathering information for the tax return and help in filing. You can have a bot extract all the information from a K-1, consolidate it and upload it into your tax return.

Another, a lot of family offices need to file, submit fees to states. Just to give you an example, New York has an IT tool for very labor-intensive, very manual. We have family offices and we use this internally at Eisner. You can set up a template with a list of entities and the amount due. A bot can open up that template, take that information, log onto your tax software, complete the forms, qualify those forms for filing. Download those forms into your document-managed system.

Another trend is automating tasks. When you think about data entry and account reconciliations in treasury, a lot of family offices have bookkeepers who will gather bank statements on a monthly basis and try to reconcile that to their cash position on their balance sheet. You can now have a bot that looks at those bank statements, extracts the information, and does a comparison to your cash position so we can come in the morning, get a report and you'll see an exception report, or that it ties.

Probably the biggest area, which is a service line familiar to a lot of family offices is bill pay. When you think about the number of invoices, hundreds, sometimes thousands of invoices that family offices are receiving especially now with the pandemic, a lot of it is online or email to you, technology exist. And again, we see family offices taking advantage of this, as a bot can extract that information, go into your email.

A lot of those vendors send the invoices with similar subject lines, can open up those emails, open up the invoice, extract that information, tie it back to a purchase order in the system, book the entry, prepare the invoice for payment and actually send out a payment. It all depends on what kind of controls you want to put in place and where you want a human to review things. And I actually was on a call with a friend who works at a family office and he has a reputational bot than he actually named Bruno, who scans the internet with news regarding him or his family members or investments.

When he logs in, in the morning he gets a report on any kind of news related to his family. That's like process automation. I think another piece that we're looking at is with rising generations, there's a need for real-time data, live data. Family members want to know what their financial positions are, what assets they hold, what exposure they have, how they're performing against the markets and to be able to make those decisions very quickly.

So there's been a big push to have integrated platforms that can slice and dice information and provide personalized reports for family members.
MA: Thanks . That was amazing. Ken, thoughts on technology trends?
KD: , I think we need to spend a lot more time together because those bots sound really pretty fantastic with the bill paying. In the initial stages of the pandemic, we would still have one person that went into the office and went and collected all the invoices. We're only now trying to get all of that online. That person that lives in the city, it was easy for them. We're really trying to get that more automated and more online like everybody else who's been working remotely from home. I think the trends are the families like to see the real-time information.

They want to see it in different ways. We can slice and dice it in different ways. We call them buckets. They'll compare what my children are doing, the second generation, what's my generation doing? What's my brother's generation, my sibling's generation? Charitable trusts? We have a huge portfolio and I think the trend is definitely for much more reporting investment performance and being able to slice and dice it the way the principals want to see the returns.
MA: I know you've mentioned a few, but what are other interesting practical applications of technology for family offices?
KD: Marie, I would say, I mean, definitely during the pandemic, it’s the technology. The ability to get the job done and to be able to work remotely is the primary use right now for technology. I guess, going back a little before the pandemic, the trend was more for reporting and communicating with the principals of the family because they're not necessarily all in the office. They want to see their performance of their investments. They want to see the costs of their properties. It's really just being able to get this information to the family and have them look at it on their iPad, instead of generating the reports, mailing them reports, faxing them reports. It's more for information reporting as well as just the compliance work that you have to do with all your tax returns and the government agencies that you have to deal with every year to handle these needs. That's where I see the trend of technology going towards.
MA: , same question.
LM: Again, it's how do you get the information and how do you collaborate with the family and even your advisors? I think there's something comfortable about Excel and email. And not just family offices, but a lot of other companies are hesitant or uncomfortable with change and leaving that. I think that's where the trends are – how do you collaborate with your advisors? You're not sending information through email anymore. You'll be able to collaborate live on a platform together. Again, to Ken's point, people want to access things on the go, so how do you facilitate that? When you usually think about it, all this information is coming from different places: your general ledger, your fund administrators, your custodian feeds. And combining that with market information. Really the integrated platform, I think is one of the biggest trends. Again, just looking at your process, a lot of family offices are going through process reviews where they go from start to finish: how do they operate, not just bill pay, but human resources, philanthropic efforts, reporting? Really looking at how you automate that process through bots or through machine learning?
MA: I would like to briefly address cybersecurity for the family office given that everyone is working from home these days. What are the concerns with respect to cybersecurity? ?
LM: Definitely. I think it's an area that a lot of family offices haven't invested in before. I think for obvious reasons, they are a prime target. There's significant wealth. There's people trying to capitalize on privacy concerns and reputational damage. I think a lot of family offices, again, haven't invested in IT professionals, policies and procedures, educating their staff on best practices. One of the two biggest access points where these attacks occur are phishing scams where people send emails and a person on the other end opens up a link and that link downloads malware.

Also, interestingly enough its patches. So, when Microsoft or whatever software you're using sends you a patch and it's not done timely, that's where the access occurs. It's really trying to take precautions in simple ways. Changing your Wi-Fi password, using VPN, using a firm-issued laptop; taking those precautions, especially as we're working from home. To give you two examples, I think in the past year, a company was compromised through a senior family member. His son was on Facebook, accessed another website through a link and downloaded the malware.

He was using the home Wi-Fi at some point and I think it resulted in like a $10 million breach. Another case which was interesting, I think, was someone had accessed a company email and server. Basically watched the email chains going back and forth for several months, waited for that executive to go on vacation overseas, sent an email that looked like it came from that executive to the person inside the family office, and said, "Hey, I saw a piece of artwork. I want to buy it. Can you please wire this money to this bank account?"

The person did it. Within three minutes of that money being transferred, it was transferred to another bank account and it was gone. That's a combination of having the cybersecurity protocols in place and also procedures in place so that that doesn't happen. I think it's really making it a time to make an investment in education for your staff, having the internal protocols, the testing that needs to be done on a regular basis. There's people purposely trying to hack their own systems to see where the vulnerabilities are. I think family offices are starting to realize that and starting to make that investment.
MA: Thanks . Ken, do you have any brief comments on cybersecurity?
KD: I agree with , absolutely, a hundred percent. I think cybersecurity really should be on the forefront of everybody's thinking. With all of us working remotely, we all access any network files through a VPN. We have the firewalls, we have the spam filters. We actually even have a company that will generate phishing emails and send it to our employees. Then I get a report on which is the person that opened it and which is the person that clicked on it. Then we just remind those employees that you shouldn't be doing that. We also have in place that no employee can open an executable file without an IT approval, an admin approval. I think with those procedures in place and I think we try to keep it very safe, but definitely it's crucial to have those procedures in place, those policies.
MA: Thank you both. We are just about out of time, I would like to ask each of you any final thoughts on what families should consider if they are contemplating formulating a family office. First Ken, then .
KD: I guess the key point you want to think about is how much control, how much privacy, how much interaction and how much direct contact you have, and also what your budget is. How much do you want to allocate as a percentage of your portfolio? What do you want to spend on the family office? What things are more important to you to have kept private? When we have family office members and employees, everybody signs a confidentiality agreement. Really, it's weighing how much you want to spend, how much access do you want to have for these people? How much privacy and what tasks do you want them to do for you?
LM: I think just the importance of having technology have a seat at the table, literally and figuratively. When you form the family office and as it continues to grow, it's important as you implement those strategic objectives to keep technology at the forefront and to have a plan and have phases. It doesn't have to be a lot of cost upfront. There are small things that you can do to help automate, make you more efficient, that has a high ROI that aren't as costly.
MA: Well, we are out of time. I want to thank Ken and for all of their insights on this relevant topic. We will review the questions you have submitted, and we'll respond to you offline. Thank you all for attending our panel discussion. Enjoy the afternoon and back over to Diane Wasser.