A virtual family office (VFO) is a lean single-family office (SFO) that uses a high level of outsourcing to keep the staff as low-cost and flexible as possible. A VFO and SFO are essentially one in the same, but most families with just $20 million to 200 million in assets under management typically use the former model when they need a customized model, but don’t want all of the overhead and support of a fully-fledged SFO.
VFOs first gained modest popularity in the 1990s, particularly in London, Zurich and New York, as wealthy families heard about the benefits of having their own SFO 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.
Video: Here’s a short video that I recorded in Berlin on VFOs, their growth and why they’re being set up more often than ever before:
Three Benefits of a VFO
Here are the three benefits of a VFO that are most often cited by families:
- Direct control and flexibility: If your client doesn’t like one person on the team, he replaces him; if your client wants to reshape his team, portfolio, etc., he can do so swiftly at his own discretion. If your client hires a multi-family office (MFO) or wealth management firm instead of a VFO, he may feel “stuck” with the team that’s assigned to him 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 your client hires a Chief Investment Officer (CIO) to only manage his family’s wealth, the CIO may soon lose track of what other families are investing in and techniques they’re using. Inside of a VFO, however, your client could use an MFO asset management service or outsourced CIO. Your client could negotiate the management of liquid assets or additional areas of his investment portfolio to be administered by a leading MFO, and that office would gladly accept his business. In my experience, this isn’t common practice, but it can be a tremendous benefit for families that use this strategy.
Most VFOs 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 an MFO or outsourced CIO—your client gets the benefit of using the best practices collected from serving MFOs, but within the structure of an SFO. Yes, your client can gain this perspective as a traditional SFO, but likely at a higher price point, which leads us to the next benefit.
- Cost: In theory, your client’s gross costs of running an SFO are reduced if he selects highly experienced outsourced partners. For example, a $20 million dollar net worth family often doesn’t 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.
Three Downsides of a VFO
VFOs are the exception, not the rule, when it comes to family office structures. There are certainly disadvantages that your client should consider when contemplating whether to set up a VFO compared to a MFO, SFO or alternative wealth management structure for his family. Here are some of the main disadvantages and objections raised by those questioning the VFO model:
- Service provider selection risk: Since most of operations and the investment team are outsourced, your client’s 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 your client can review the most well-qualified service providers instead of just the ones who live in his city, are family friends, etc. Still, there’s real risk of making poor decisions as your client selects his service providers—a risk that some families may find too great no matter how much they try to mitigate
- Speed: Since most of your client’s team is outsourced while operating a VFO, he 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 client’s SFO, he’s required to get back to him immediately during business hours. That clear, dedicated attention of someone worried only about your client’s portfolio is an advantage that’s sometimes worth the cost.
- Confidentiality: Naturally, when everything your client invests in is reviewed or managed by outside partners, there’s a higher chance of others seeing your client’s investment portfolio and benefiting from that knowledge. They may see your client acquiring companies in a certain industry or having access to potentially damaging facts about his financial situation or solvency. This isn’t a large worry of most families who vet their service providers thoroughly, but it’s something that should be considered. The Southeast Asian families who I’ve worked with in Indonesia, Malaysia and Singapore, for instance, have been the most concerned with this downside of operating a VFO.
As I noted in the beginning of this piece, the VFO concept is still a relatively new one. The cost efficiencies and simplicity of the VFO model make a lot of sense to families that prize the direct control of this streamlined 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.
By Richard C. Wilson, CEO of The Miami Family Office, an SFO with $500 million in assets and bestselling author of “The Single Family Office Book: Creating, Operating, and Managing Investments of a Single Family Office”