Family offices, a once shrouded and sleepy corner of the investment world, have emerged as formidable participants in global capital markets. The number of family offices globally grew by 38% from 2017 to 2019 and today they collectively control $6 trillion in assets, according to Campden Wealth, a membership organization. In 2021, family office-backed deals accounted for 10% of the entire deals market, according to PwC. That’s an unprecedented level.

That said, the term “family office” describes a very heterogeneous set of organizations—ranging from an overworked accountant and a harried assistant booking private jets, to venture funds, to fully operational asset managers. Some of this dispersion is by design, but mostly it’s because family offices tend to be “built” around what already exists (teams, assets) rather than “designed” from best practices as conventional businesses would be.

The families these offices are built around often have an intense desire for privacy, so the teams running the offices are often in the dark about the best practices used by their peers and they end up working in a vacuum. This lack of shared learning can lead to vastly different outcomes: from the multi-generation success of the Rockefellers to the financial-market-roiling downfall of Archegos Capital Management, the office of investor Bill Hwang.

Family offices have a unique potential to earn returns and effect positive change in society. They benefit from having multi-generational time horizons and a concentrated set of stakeholders, as well as a combination of financial and social capital from the owners. The advantages let the organizations fund projects that would be untenable for other institutions. For example, three of the most notable companies in the race to privatize space travel—SpaceX, Blue Origin and Virgin Galactic—were initially funded by family offices. And Bill Gates’s organization Breakthrough Energy, which aims to fund innovations that will lead to net zero emissions by 2050, was started by a select group of private investors.

It’s important to reduce the chaos and improve the efficiency in this space if family offices want to do more than provide investment returns. But where does this transformation start?

The key is to start treating family offices as businesses rather than extensions of an individual or family. The teams running the offices need to use the same care that created the wealth in the first place when they set the strategy, design operations and measure success. It is important that founders, families and their teams take time to think through these factors both at the outset and at critical inflection points if the true potential of each individual family office and the industry is to be realized.

Creating The Scaffolding Of The Family Office
It’s important for these firms to keep a number of things in mind:

They must set their mission, vision and purpose. Too many family offices jump straight to deploying capital without having a North Star. They have to start out with key “existential” questions: Why does this business need to exist? Is the goal to maximize returns? Is it to invest in industries where the family already has strong connections and heritage? Is the office’s mission to drive societal change? It’s import to their success that they have a crystal-clear view of their goals.

Teams can’t neglect family governance. To manage the expectations of family members, every family office should have a constitution, employment policies, in-law policies and spending policies. This allows for clarity of expectations and a framework for conflict resolution. Collectively, these policies will promote a stable foundation for day-to-day operations.

It’s important for the family to determine which members will play a role in leadership, investing, giving and governing. And they must set guidelines for what each of these roles mean, assess who is capable of filling them, and describe how the founder or family members should interact with the business. Without a clear definition and behavior to match, family office teams can become paralyzed by the owners’ meddling and the unclear lines of authority.

Teams can’t neglect corporate governance either. Like any business, family offices should have formal governance and clear decision-making processes. An investment policy statement should clearly specify the areas where the team can make decisions autonomously, and where decisions need to be elevated to a “higher power.”

For more formal periodic reviews, or to make decisions on investments and opportunities “outside the norm,” families should strongly consider structuring a board or investment committee with qualified independent directors who can bring a fresh perspective on outside best practices, help the business see around corners, and fill in gaps in expertise that the family and the team in place don’t possess.

Offices have to be thoughtful about insourcing and outsourcing. The remit of a family office is vast: No organization can have unique competitive advantages or cost efficiencies in all the things they do, so the family and team must be deliberate about what should be both insourced and outsourced. There should be a focus on outsourcing commoditized functions, while the office should build unique capabilities to advance the in-house part of their mission.

They need to get the team and incentives right. Since trust and privacy are so critical and recruiting can be challenging, family offices often enlist “trusted stewards” (accountants, friends or longtime employees) to work in them. But if these are not the right people to lead the team or pursue the mission, it can cause problems down the road.

They have to measure what matters. It can be difficult to define and measure (and capture) success. Frequently, family offices measure it in investment returns, and the governance is aligned with that. But these are multifaceted organizations, and the metrics should reflect that. The office also has to look at risk, returns, liquidity, transparency, efficiency and progress in its the mission.

While these steps seem to simplify what’s actually a complex industry, it’s shocking how many family offices don’t address these basic aspects of business management.

But the number of family offices is set to continue its dramatic expansion, and regulatory scrutiny will only increase, so the industry must mature with its growth. Every family office should be thinking of itself not only as an “office,” but as a “business”—and with that, there is a need for good business management. By using the best practices for strategy, governance and education, these offices will be poised to maximize their investment returns while effecting positive change in society.

Liza Truax is a partner at family business and family office advisory firm Wingspan Legacy Partners.