Managing Philanthropy Through A Family Office - US Study

Eliane Chavagnon

5 November 2012

A growing number of wealthy families are turning to family offices as a way of managing their philanthropic giving - a move with numerous benefits, but not without challenges, a new study in the US shows.

The National Center For Family Philanthropy, in collaboration with Family Office Exchange and the multi-family office Threshold Group, explored the relationship between family offices and family philanthropy and found that managing philanthropy via a family office can be a very effective approach, particularly if there are several branches to the family and if they use a number of charitable vehicles. The research is based on a survey of about 400 family offices with foundations, and 15 interviews.

Highlighting how philanthropy is taken seriously by families and family offices, 84 per cent of the study participants said they have paid staff to work on behalf of their foundation, while 60 per cent have active boards of directors overseeing the foundation’s giving, for which about a third (34 per cent) reported that a foundation chief executive serves as the primary decision-maker. By contrast, only 5.7 per cent reported that the family office CEO played this oversight role. Given this, 40 per cent of the family offices surveyed support more than one foundation, while 16 per cent work with two and 22 per cent with three or more.

The findings closely follow those stemming from Bank of America's 2012 Study of High Net Worth Philanthropy, which found that average giving as a percentage of high net worth household income "held steady" at about 9 per cent between 2009 and 2011, while three-quarters of wealthy donors expect to give "as much or more" over the next three to five years (view here.)

In terms of what influences families in their decision to start a family office, five main factors came up: coordination, control, conflicts of interest, confidentiality and customisation. "Similar to a family’s philanthropic interests, the ideal family office structure and services reflect the mission and goals of the family," the report said.

Reflecting on the coordination aspect, it continued: "The family office coordinates the multiple dimensions and relationships of a family including philanthropy, investing, estate planning, tax planning, custodial services, and banking, etc. Beyond these professional services, the family office can coordinate family governance, communication, education, and other support required to meet the family’s mission and goals."

Meanwhile, a family office can provide owners with control of the entire process and a single point of contact. This is important because members "may not always be aware of the embedded conflicts of interests that exist in relationships with product and service providers," it added.

And in a world where privacy is a challenge - particularly to high-profile families - the report suggests that a family office can play a critical role in providing a secure environment for maintaining family records and personal information. It may also oversee personal security for family members, it said.

Other key benefits offered by the family office structure include:

- Integration of functions and services;

- Economies of scale;

- Efficiency for family members;

- Expanded capacity for mission-related investments;

- Alignment of the family’s shared values relating to governance, financial and investment management, and family leadership development.

Challenges, recommendations

The study also demonstrated that while family office leaders and foundation staff place a high value on next-generation education, "neither side is spending much time in this area." Accordingly, the National Center calls for the philanthropic field and family offices to invest additional focus and resources in educating and training the next generation for leadership.

Other challenges associated with the family office structure include the different cultures of business and philanthropy, as well as varying measures of success and different terminology that can cause tension, miscommunication and misunderstandings. Respondents also cited competition for the attention and resources of family members, and IRS restrictions on interactions that result in complexity and uncertainty.

The centre said it was surprised by the finding regarding the extent to which family office staff were involved in the family’s philanthropic activity, as the majority of respondents noted that the family office is involved in helping the foundation find a strategic focus, leverage the impact of its giving and measure the effectiveness of its grants. The National Center therefore proposes increased professional development and training for family office staff on philanthropy issues and practices.

It also recommended that families who manage their philanthropic foundations through a family office should pay "special attention" to the self-dealing laws and regulations, in addition to new SEC regulations governing this arrangement.

"To get it right, families must pay careful attention to structure and governance, to understanding the goals and values of the family, and to effective communications," said Virginia Esposito, president a the National Center.