A virtual family office is a progressive evolution of the single family office. It aims to tackle some of the issues that single family offices face by outsourcing a large amount of (principally operational) work, helping the family office to remain adaptable and economically viable. A VFO and SFO both operate on the same premise, being the effective management of a family’s assets (in a fiduciary capacity, rather than as a ‘service provider’), wherein all the different components are brought under one roof to maintain control, confidentiality and insight over a person’s assets.
SFOs started to gain popularity during the 1990s. In this time, families with a large amount of wealth, in particular from London, Zurich and New York, began to understand the benefits that single family offices could offer them. As property and salary costs soared, VFOs came into existence some time later as a leaner, more adaptable, and less expensive model of a single family office.
For anyone considering appointing a virtual family office to support their lifestyles, there are some pros and cons to think about. We have put together this brief article so that you, or your client, may weigh up the options and consider whether enlisting the services of a VFO is the right decision. Before we begin, if you are still unsure as to what these services entail, we encourage you to read this article that answers the question, ‘What is a virtual family office?’
As with so many elements of life, economic viability has a large part to play in decision making. A VFO is increasingly favoured over a traditional, full-time SFO in that by outsourcing many of the roles within a traditional family office, the gross operating costs are reduced. To put this into context, a family may not have enough assets to justify the employment of a portfolio manager full-time. To employ one to work at less than 100% capacity, therefore, would be a waste of money. Through outsourcing, VFOs can reduce this sunk cost.
An additional saving comes in that a traditional single family offices will often require a physical office space. This comes with its own set of overheads that need to be accounted for. If the work is outsourced, all of these premises costs can also be avoided.
By bringing all your, or your client’s, assets under one department, management of the diverse areas becomes more effective and concise. Coordinating the various assets takes less time and effort, because the multiple factions are already aligned and in communication. This allows the advisers to take a more holistic view of the entire operation, rather than operating in compartmentalised silos.
Generally-speaking, a Virtual Family Office will offer more flexibility/adapdability. An example of this is if the principal decides that they wish to pursue a different investment avenue, or their operational requirements change (say, through the acquisition of a substantial physical asset like an additional estate, yacht or aircraft) a specialist team can be mobilised quickly to implement the new venture or manage the new project.
Any company, or family office, has to adapt with the changing times. Traditional models of a family office are sometimes at risk of being insular, with the people responsible for them not always benefiting from exposure to the wider world of investments or to other clients’ learning opportunities. By comparison, VFOs by their very nature are always dealing with and working on a variety of projects. It helps them stay current and learn from the latest news, and clients benefit from lessons learned by other clients served by the same VFO.
VFOs can offer an extremely effective service. Above we listed three positive reasons for choosing a VFO, but this is by no means exhaustive. That being said, there are of course other aspects to consider when deciding on a family office solution – a virtual family office isn’t for everyone. Below are three potential downsides to a virtual family office model.
The nature of a VFO means, because they are not necessarily ‘on-site’, there is less scope for direct supervision of your family office team. This can generate anxiety and may cause clients to fear that their affairs are not being handle efficiently. For this reason, it is vital to properly vet the service provider you decide upon before agreeing any retainer. Similarly, you should insist that your VFO provider itemise and explain their confidentiality, security and data protection policies to you in adequate detail to assuage your (or your advisors’) concerns.
Well-run VFO’s will render themselves completely indispensable. This dependability and reliance can become a further source of anxiety, however. While large organisations always have a ‘fall-back’ supplier for core services, it is not always possible to find a back-up VFO. For this reason, you should choose a VFO which is happy to work for you on a fiduciary basis (operating from ‘within’ your unit), rather than as a service provider; the distinction is subtle, but extremely important. As a fiduciary provider, your VFO will ‘build in’ succession plans, alternatives and ensure that there can be continuity of the service you have come to rely upon.
The real test of the fiduciary nature of a virtual family office is how long it wishes to ‘tie you in’ for – a truly fiduciary VFO will operate on a ‘request’ basis, without any handcuffs, so that they are always kept keen to ensure that they deliver the very best service.
For all the potential up-sides that a Virtual Family Office can offer, including making savings on the overheads of a full-time traditional Single Family Office, if your requirements are such that you are likely to require full-time support, outsourcing this may prove an expensive route.
A well-established VFO will be able to offer a range of pricing and retainer options to suit your requirements and will keep you appraised of the anticipated, and actual costs, of all that you ask them to do.
The concept of a Virtual Family Office is still a comparatively new one, which over time looks to keep growing in popularity. The simplicity it offers, alongside the savings on cost, time, and space make it extremely attractive to high net worth individuals, entrepreneurs and their families.
If you would like further information on how virtual family office services could help streamline your affairs, please do contact us.