If you’re not, you can learn from them.
What is a Virtual Family Office?
A Virtual Family Office or VFO is an advisory team that you might share with a few other people. The team members may include an estate lawyer, financial planner, investment advisors, CPA, attorneys, and other consultants. And while you may already have these individuals scattered through your contacts list, the difference is that a VFO would pull them together in a more organized, responsive, and active body. The goal is to capitalize on their unique skills, so their collaboration creates a synergy that optimizes your wealth. This wealth is not just in dollars, but in physical, property, family, business, community, charity, inheritance, life, and death—for peace of mind across all your ‘landscapes,’ while the offices can be in many different physical landscapes (and thus virtual).
Advantages, Disadvantages, and Costs
The Virtual Family Office is also called a Virtual Multi-Family Office. The original family office was the “Single-Family Office.” The family net worth threshold for the Single Family Office is around $500 million. In this instance, one family would have enough assets to warrant the whole team of experts to handle their entire estate, and they may be in one office building. It sounds expensive because it is expensive. The idea behind the VFO is to share these expenses. Plus, the brainpower is pooled, too, which can produce better solutions and outcomes. The downside is that there is less privacy in the shared space.
How much is enough?
The VFO model has been especially helpful for families with a net worth of $20 million to $250 million. But people with lower estate values can learn quite a bit from studying the VFO building blocks and underlying foundational concepts.
Advantages of a VFO
With a VFO, you can outsource staff and have specialists that you only call when necessary. This model allows monthly overhead to be kept to a minimum while maintaining the resources for the family.
Another advantage has to do with a “cumulative strategy effect.” Single-family offices may have reduced their exposure to the outside world, and their outlook could become tainted or biased. Advisors can become complacent. Conversely, with a VFO team that handles multiple families, exposure to innovative strategies or ideas is spread among families in similar situations. As they solve an issue for one family, this solution can be applied to and shared with other families when appropriate. The sharing may create a broad set of solutions, but it can also be a disadvantage.
Disadvantages of a VFO
There are some downsides to the VFO model, such as service provider risk, confidentiality, and control. Cybersecurity isn’t secure. So, when you’re dealing with confidential information flowing among multiple firms, information sharing, storage, and access must follow strict protocols. Service provider risk means that your worst enemy is you. You cannot afford to be complacent, and you are wise to check in regularly with your “team.” The VFO coordinator needs to make sure that all providers are reviewed at least annually, making sure they are still a good fit for your current goals and the actual services you need. Your lives can change radically, requiring more, fewer, or different advisors every year. With a VFO, no one person has direct control over everything. At the outset, roles must be defined to ensure accountability. If appropriately structured, a VFO should counterbalance any disadvantages by providing trustworthy advice, state-of-the-art technology, and transparent pricing.
How much does it cost?
For a VFO, the costs are kept low by a large amount of outsourcing of the work to be done. In general, the major cost components of running a VFO are Investing, Governance, Planning, and Operations. The costs of running a VFO can vary widely, but the benefit of the Multifamily Virtual Office (or VFO) vs. the Single Family Office is that the expenses are shared to some degree. Some of the costs would include professional service fees for tax and legal services, investment management fees, custody and trustee fees, compensation expenses for family office employees, capital expenditures for equipment, furniture, and technology, consulting fees for outsourced services, and other operating expenses like insurance, rent, utilities, communication services, and the like. It is important to weigh the total costs against the size of the family’s asset base because these costs ultimately reduce net investment results. Loosely, the range is <1.0% to a high of 1.3% of the value of the estate and varies by how much of the VFO work is weighted toward capital-related vs. servicing-related activities.
Keeping up with the Joneses
We do not recommend VFOs to ‘keep up with the Joneses,’ but we do recommend that our clients in the >$20 million-net-worth category consider if the services of VFOs make sense for you. Further, the model can be applied in principle to families with smaller estates. The value of having your own team to review your estate (its past, present, and future) and communicate with one another makes sense in today’s world. You and your family need to have a firm handle on your holdings from all angles: legal, tax, inheritance, and more, especially as federal and state laws pass, change, and expire, and as the international climate ebbs and flows with evolving world events.
Keeping Your ‘Stuff’ Together
If you do have a healthy nest-egg, then having professionals keep track of it for you is a good cross-check. Beyond that, having people who regularly (weekly, monthly, quarterly) correspond with each other and with you about your situation can avoid mishaps that can undermine your goals and send you off the rails. Knowing where things are makes it easier to act quickly to adjust: buy, sell, re-balance, or re-trench.
If something happens to you, your family is taken care of. All the legal and financial tools are in place. The transition of your worldly estate is calm and ordered, not crazed, prolonged, and embattled.
The knowledge is in the doing
By even thinking about a VFO, you can decide if you want to try to set one up for yourself or pay someone else to manage all the elements for you. The benefits are that you begin to think about your needs mindfully. Two ‘umbrellas’ keep rainy days from ruining your estate—and they may overlap.
- Capital-Related such as asset allocation, portfolio management, securities analysis, and the like that are primarily investment activities.
- Service-Related such as accounting and budgeting, risk management, project management, estate, financial, and philanthropic planning and other catch-all activities that are not related to wealth building, but maybe protection and spending.
We are not recommending a VFO per se; and we are not suggesting that you absolutely need one. However, you might like to know there are many ways to start one, and you can at least study the philosophy behind it. Martiros Virtual Family Framework lays out five steps to starting your own Single or Multi-Family Office. There are tons more. Meanwhile, you would need to assess your desire, energy, and time to form one of these structures.
Ask yourself these questions:
- Do I know enough people to help me field the professionals I would need and to interview them?
- Do I have time to follow up on how my estate is doing against our goals, and to adjust if they’re not being met?
The Bottom Line
When it’s done right, a Virtual Family Office can provide you with not only opportunities that are in accord with your wants and needs, but also with a much broader array of high-impact vehicles and solutions. In this scenario, knowledgeable professionals are continuously working to keep you on track for the future you want to create.
With a vigorous awareness of the benefits from the single-family office model, the Virtual Family Office industry is likely to grow. We predict that some distinct and significant advantages that were once limited to the super-rich will now be made available to wealthy and successful families in the < $20 million-net-worth domain.
What to do next
Start with some research.
Then . . . Contact LSLCPAs. We can help you decide if a VFO is right for you.
Pam brings with her over 20 years of taxation and consulting experience. Pam’s areas of expertise include tax compliance for complex high net worth individuals and pass-through entities including partnerships, limited liability companies, S corporations and C corporations. She has extensive experience in providing tax planning for multi-state high net worth individuals and their closely held businesses. She also has significant experience in handling federal and state tax audits. Pam has worked with companies in a variety of industries including real estate, professional services and wholesale manufacturing.
You can reach Pam at 714-569-1000