A virtual family office may be anything from a lightly staffed operation that outsources selectively to a fully virtual structure where outside firms handle nearly everything. The structure can be tailored to the needs of the family, and it offers advantages in cost, talent and technology. But virtual family offices along all parts of the continuum face challenges as well, particularly in coordination and reporting.
Those who work with virtual family offices see the range of possible configurations. “A virtual family office is the snowflake of the single-family office domain: It means a lot of different things depending on where you sit,” says Kirby Rosplock, founder of Tamarind Partners.
Rosplock commonly sees virtual family offices driven by one or two family principals to support their family groups. They may have a non-family executive, though not necessarily full-time. Sometimes this executive is supported by a coordinator who helps organize third-party providers: tax, estate planning, trust, compliance, financial planning, investments, philanthropy, concierge services.
Ed Drake, an outsourced family office executive, sees this model in the families he serves as a part-time family office executive. “They have very few, if any, professionals on staff that are employed directly by the family. Typically, we’re utilizing their law firms, investment advisors or other people from their team of advisors to operate and run the virtual family office for these families,” Drake says. “My job is to get all these advisors — none of whom work full-time for the family or only for the family — to be focused on working collaboratively on the family’s behalf.”
Justin Huang, director of family office advisory for Wingspan, sees a trend toward virtual family offices where a family member has investing experience and manages the capital, outsourcing almost all other functions. “These family offices tend to mostly focus on investing, and they tend to be younger families – just one or two generations,” Huang says. “There’s a lot of capital that hasn’t really been professionally managed, or it has been managed by external service providers, and the next gen has interest and the right experience to be allocating capital.”
Advantages: economics, people and tech
Cost, competition for talent and the need to stay on top of technological developments are all reasons family offices may consider outsourcing some or all of their functions. “For smaller family offices, it’s really difficult to operationalize the whole family office footprint,” Rosplock says.
Hiring full-time employees and paying for technology for all the family office functions could cost millions of dollars per year. “And when it comes to recruiting, are you going to get the best talent in every one of those spots, when you’re a single family office and there’s really no career path?” Drake says. “There’s really no upside for those professionals. In many cases, you’re hiring somebody who has retired and just wants this role to keep themselves busy. Then, five years down the road, they will retire, and you’re constantly in that spiral of replacing people.”
Even when a family office finds the right person for a specialized role, if there isn’t enough challenging work to keep them engaged, they may not stay. “With a virtual family office, you get the amount of help you need in the proportions you need, when you need it,” Drake says. This offers a lot of flexibility to bring in people with niche expertise when needed. “You can get the best talent on a particular topic. You can assemble a phenomenal team.”
Challenges: coordination, reporting and contracts
But outsourcing can bring its own complications, particularly around reporting and coordination. “The reality is that it can get complicated,” Rosplock says.
Contracts, for example, are one potential issue. “The contracts are lengthy, and there’s a lot of devil in the details,” Rosplock says. “It’s not a simple switch to swap out a dedicated person who delivered high-touch service and expect a seamless transition to get these exact services from a third-party vendor. That said, I do see more offices try to augment their single family office virtual footprints with support of professional service firms and technology vendors.”
Potentially problematic contract details can include provisions that assume the family office has a dedicated person who can serve as the point person on specific issues, for example, or that require a response in a certain number of days.
Another challenge is that the more players are involved, the more complicated it can be to make sure everyone has access to all the data they need. “Some is with the lawyers, some with the accountant, some with the investment people,” Drake says. Part of his role is to organize the data so the family has control over it and can best utilize it.
“Reporting is a constant headache for families,” Huang says. “There is not a good solution yet, but there are a lot of players trying to attack a space that has been not innovative and clunky.”
Helping coordinate both the data and the people producing it is the key role for the professionals spearheading virtual family offices. “You’re herding cats,” Drake says. “You’ve got to get a bunch of different firms who don’t normally work together in that type of a relationship to work together. You do run into having to manage the egos, so to speak, and get people to see the vision of what you’re trying to do as a collective for the family. Getting it set up and then managing the synergies is where the core family office executive work lies.”