Randy Abeles (RSM) and Eric Johnson (Deloitte) teamed up to talk about current issues faced in family offices. Both of them work closely with family offices and deal with these topics on a regular basis. Like most of the other sessions I attended, this one focused heavily on advising family offices to treat themselves like a regular service providing business.
The first topic was about keeping services in-house or outsourcing them. The advice shared was to make decisions about what services you are going to offer in-house and stick to them. If your principle(s) comes to you with a request for something else, outsource it, or at least consider outsourcing it first. The reason is that you will have set up processes and staff around your core services, to add an additional one can cause problems with time management at the cost of your other services. There can also be issues around charging fees. If you take on more services you will need to change your fees or risk facing SEC scrutiny over market based fees. The benefit to you is that certain services, like managing household payroll and “Nanny Tax”, can often be outsourced for less than you would need to charge and can still guarantee the work (this is what we do, see more here).
Speaking of market based fees, Randy and Eric also touched on appropriate fee structures and transfer pricing if there are multiple entities within the family. IRC 482 is the code section that governs transfer pricing. Basically you can’t sell something from one controlled business to another at a discounted rate. Both Randy and Eric stressed the importance of written service agreements. If you face an audit it is always good to have everything documented (this one should be obvious). It was also suggested that family offices engage an outside company to perform a transfer pricing analysis before those agreements are created. This ensures a non-biased look at inter-entity dealings, something the SEC and IRS like to see.
Another topic discussed was whether or not it is ok for a family office to turn a profit. The answer is a simple yes, in fact, family offices should be pursuing profit making endeavors, though it does not need to be much. One of the reasons for this is that capital contribution funding is not a good long term strategy. Another related trend is that family offices are starting to shift toward investing through private equity firms and away from Wall Street for better returns and investments. This does however complicate matters when it comes to profit allocation and the associated tax issues. Section 2701 outlines how to deal with these profit allocations. The basic takeaway is that the profits need to be allocated evenly. It is ok to allocate in a tiered structure, based on percent ownership for instance, but no one can receive an unfair share.
The last topic touched on was using technology in the office. Randy and Eric’s main point revolved around data aggregation. With all the organizational software available these days it is easy to find something that fits your needs. Things to look at include; custom dashboards for family members, bill payment on the go, and digestible breakdowns of investment portfolios. Most of these services are cloud based so they are flexible, scalable, and secure (IT security is another good outsourcing opportunity). These systems also help to streamline procedures in the office and can offer real time data which is always helpful for advisors.