Families setting up a family office should first decide what the office must achieve, and only then choose which services to run in-house or hand to outside providers, says Brown Brothers Harriman’s Mike McGrann. Even when tasks are outsourced, responsibility stays with the office.

In the seemingly endless quest to define family offices, one theme is the split between tasks done in-house and those outsourced to an external provider.

Another, related distinction that matters is between “services” and “capabilities,” according to Mike McGrann (main picture), managing director at the Center for Family Business at Brown Brothers Harriman.

“Services describe what a family office does. A capability is something a family enterprise wishes to accomplish as part of its longer-term family enterprise goals,” he told Family Wealth Report in a recent interview.

“For example, wealth management is a service. Teaching the next generation to serve as stewards of wealth is a capability. Investment reporting is a service. Maintaining financial transparency across generations is a capability. Organizing family meetings is a service. Building family alignment is a capability. Preparing tax returns is a service. Managing family risk is a capability,” McGrann continued. “When families focus on capabilities first, they are much more likely to build a family office that supports their long-term strategy rather than simply replicating someone else’s organizational model.”

McGrann, who is also an adjunct professor at Columbia Business School in New York, said that while parts of the wealth management system are being commoditized, and are now feeling the impact of AI, families continue to need deep, in-person communication. This shapes the case for keeping functions in-house or outsourcing them.

“What is not changing is the need for advisors to develop deep, authentic relationships with their clients, their clients’ spouses and the next generation of business and/or wealth inheritors,” he said. “In some situations, this might mean building certain capabilities internally; in other situations, the family office, together with the family it serves, may decide to outsource certain services.”

There are 8,030 single family offices worldwide, according to Deloitte Private’s Defining the Family Office Landscape, 2024. With estimated wealth rising in regions such as North America, the Middle East and parts of Europe and Asia, demand for family offices is continuing to grow. Unsurprisingly, large banks and other financial services firms, such as BBH, are keen to position themselves as sources of guidance to win a share of the market.

Family offices were once an obscure sector that deliberately shunned the limelight. They tended to be relatively small organizations, and they avoided large numbers of professionals in gleaming offices. However, the explosion of wealth since the 1980s, with its occasional pauses, has changed the game. Family offices are professionalizing; there is more data available about how family office (FO) staff are paid, for example. Rising costs, such as those of regulation and technology, also add to the “should I outsource or do this in-house?” debate.

What to provide
McGrann kept returning to the distinction between services and capabilities.

“Many families begin by asking what services a family office should provide. While understandable, this approach often leads families to adopt a standard menu of family office services without first determining whether those services support the family’s objectives,” he said. “Instead, strategy should drive capability requirements, and capability requirements should determine which services are ultimately delivered. The family office therefore exists to build, or coordinate, the capabilities necessary to help the family enterprise achieve its long-term objectives.”

Outsourcing and where the buck stops
McGrann also stressed that even if a family office uses third-party providers, it cannot outsource its legal responsibilities.

“In my experience, the families that do this most effectively have two layers of oversight of external service providers,” he said. The two layers are the family office management team and the FO board of directors.

In the case of the management team, “the employee(s) of the family office typically fulfill some form of oversight role of outside service providers. This ‘oversight’ can span the continuum from simple coordination with the family office board to a deep integration with the outside service provider via regular dialogue, discussion, performance evaluations, etc,” he said.

The board of directors, meanwhile, has ultimate accountability for everything that happens in a family office. A strong board, made up of family and non-family members, should oversee outside service providers; scrutinize the FO president; ensure that the family office serves the family’s long-term goals; and make sure there is an effective succession plan.

Definitions
Defining what makes a family office isn’t academic. Because regulators might, at some point, want to tighten controls on financial activity, clarity matters. (See Edward Marshall’s analysis, “There Is No Such Thing As A Family Office – Part 1,” Family Wealth Report, January 2024.) The “Family Office Rule,” adopted by the US Securities and Exchange Commission in 2011, is a case in point. In adopting the rule, the SEC described family offices as entities “established by wealthy families to manage their wealth and provide other services to family members,” and said they “generally serve families with at least $100 million or more of investible assets.” Under the rule, a family office may serve only “family clients,” must be “wholly owned by family clients,” and must not hold itself out to the public as an investment advisor.

Another way to think about the issue is through the attributes a family office should have, McGrann said. Core attributes include managing the complexity that arises where family and wealth meet, which can involve tax, accounting, estate planning and wealth management; supporting the education of the next generation so that they become stewards of wealth and not just inheritors; and helping families hold regular forums that build the “family glue” that keeps growing families together, he said.

Rising interest
McGrann said that over his career he has seen family offices gain a much higher profile than they had decades ago, including in academia.

“Look at forty years ago, when the study of entrepreneurship was just starting. Now, such programs are ubiquitous. We are now seeing the same trend in the world of family offices,” McGrann said. “More and more business schools are offering classes in family office management… I would expect its growth to mimic what we have seen in the growth of entrepreneurship programs over the last several decades.”

For BBH and its family office and wealth business, there is an “enormous growth trajectory,” he said.

“Most firms now recognize that wealth management is a commodity. The role of a family office may be to simply manage a family’s wealth or their estate plans, but the broader opportunity is to help a family clarify their long-term goals for social and economic wealth creation… and then figure out how best to support the family’s goals,” he said.