Three Benefits and Three Downsides of a Virtual Family Office

By Richard Wilson, Hedge Fund Blogger | Tuesday, April 5th, 2016

A virtual family office is a lean single family office that uses a high level of outsourcing to keep the staff as low-cost and flexible as possible. A virtual family office and single family office are essentially one in the same, but the former model is most typically used by families with just $20M-$200M in assets under management, where a customized model is needed but not all of the overhead and support of a fully-fledged single family office.

Virtual family offices first gained modest popularity in the 1990’s, particularly in London, Zurich, and New York, as wealthy families heard about the benefits of having their own single family office and desired the direct control that can be designed into such a structure. As the family office industry has expanded over the past 20 years, this term has become more common and will likely gain traction in the future as families continue to seek out customized, affordable family office solutions.

Three Benefits of a Virtual Family Office

One might wonder why a family would set up a virtual family office rather than hiring a multi-family office or establishing a full-fledged single family office. Here are the three benefits of a virtual family office that are most often cited by families:

Direct Control & Flexibility: If you don’t like one person on the team, you replace them; if you want to reshape your team, your portfolio, etc., you can do so swiftly at your own discretion. If you hire a multi-family office or wealth management firm instead of a virtual family office, you may feel “stuck” with the team that is assigned to you and have little flexibility to pursue a different wealth management approach. Many families have recently wanted to conduct more co-investments and club deals, for example, and a team may be re-built around that need very quickly.

Diverse Investment Perspectives: If you hire a Chief Investment Officer (CIO) to only manage your family’s wealth, they may soon lose track of what other families are investing in and techniques they are using. Inside of a virtual family office, however, you could use a multi-family office asset management service or outsourced CIO. You could negotiate the management of liquid assets or additional areas of your investment portfolio to be administered by a leading multi-family office and they would gladly accept your business.

In my experience, this is not common practice but it can be a tremendous benefit for families that use this strategy. Most virtual family offices hire an outsourced CIO who helps hire and fire investment fund managers, reviews deal flow, helps manage real estate investments, and is responsible for the overall investment portfolio design and risk management. In either case—hiring a multi-family office or outsourced CIO—you get the benefit of using the best practices collected from serving multi-family offices, but within the structure of a single family office. Yes, you can gain this perspective as a traditional single family office, but likely at a higher price point, which leads us to the next benefit.

Cost: In theory, your gross costs of running a single family office are reduced if you select highly-experienced outsourced partners. For example, a $20 million dollar net worth family often does not require the full-time employment of a portfolio manager or trust and estate professional. By outsourcing most functions, the monthly overhead can be kept at a minimum, while still meeting the family’s investment mandate and retaining benefits #1 and #2 above.

Downside of a Virtual Family Office

As many of you likely know, virtual family offices are the exception, not the rule, when it comes to family office structures. There are certainly disadvantages that you should consider when contemplating whether to set up a virtual family office compared to a multi-family office, single family office, or alternative wealth management structure for your family. Here are some of the main disadvantages and objections raised by those questioning the virtual family office model:

Service Provider Selection Risk: Since most of operations and the investment team are outsourced, your ability to select the right service providers at the right price is critical. In my work with families I always try to make sure they have their “Family Office Compass,” or a vision that guides what the mission of the family office is and what the ultimate objectives are for the family. I believe that families are more likely to make sound decisions if they have really invested time in charting their course.

In addition to having a compass, having the right experienced and well-connected advisory board constructed helps ensure that you can review the most well-qualified service providers instead of the ones who live in your city, or are family friends, etc. Still, there is real risk of making poor decisions as you select your service providers—a risk that some families may find too great no matter how much they try to mitigate.

Speed: Since most of your team is outsourced while operating a virtual family office, you may be disappointed in having to wait a half day or more for a reply from a provider when a critical event such a sale of an asset, end of a tax period, public offering, natural disaster, or death in the family has occurred. If someone works exclusively for your single family office, they are required to get back to you immediately during business hours. That clear, dedicated attention of someone worried only about your portfolio is an advantage that is sometimes worth the cost.

Confidentiality: Naturally, when everything you invest in is reviewed or managed by outside partners, there is a higher chance of others seeing your investment portfolio and benefiting from that knowledge. They may see you acquiring companies in a certain industry, or have access to potentially damaging facts about your financial situation or solvency. This is not a large worry of most families who vet their service providers thoroughly, but it is something that should be considered. The Southeast Asian families who I have worked with in Indonesia, Malaysia, and Singapore have been the most concerned with this downside of operating a virtual family office.

As I noted in the beginning of this piece, the virtual family office concept is still a relatively new one. The cost efficiencies and simplicity of the virtual family office model make a lot of sense to families that prize the direct control of this stream-lined solution. I see this model growing in popularity as more families continue to adopt a more customized solution than what has been traditionally offered by banks and wealth management firms.