What is a Family Office and Do I Need One? with Kevin Alerding
Do you know what a family office is? Ed didn’t either. He’d heard the term before, but just never really understood its function. Ed has known Kevin Alerding of Indie Asset Partners for a while. He’s seen him speak a couple of times and, he recently joined a practice in which the practice is a family office. So Ed reached out to him and wanted to learn a little bit about what a family office is and who’s it for? Why does it work? And why are so many families moving in that direction?
Enjoy this conversation with Kevin Alerding!
1:41 – Who is Kevin Alerding?
4:49 – What is a family office and how does it work?
7:58 – Who are the advisors from the firm IndieAssets.com?
11:46 – How do I know that a family office may be something I need to be considering?
15:27 – How do you measure your success?
19:41 – What has been an effective way to communicate financial lessons to younger generations, that perhaps they didn’t previously receive?
22:16 – How do you get paid for the work you do?
26:02 – What role do you play in helping a family establish a legacy keeping the business in the family?
28:08 – How philanthropic are the wealthy business owners right now?
32:30 – What is one piece of advice that you could give our listeners that would have the most impact on their business?
33:47 – Connect with Kevin
Who is Kevin Alerding?
I’m a lawyer by training. I spent 23 years in the active practice of law, most of that was doing estate planning work. I started at a medium sized law firm, where I did a lot of tax work, estate planning, worked with a lot of closely held businesses, contractors, subcontractors, construction companies, and those are mostly family owned or maybe have a couple of owners. So we did a lot of business succession planning and estate planning with business owners. I moved to a larger firm in Indianapolis and spent 17 years there with maybe a heavier focus on estate planning but continue to work a lot with business owners.
What is a family office and how does it work?
It’s kind of one stop shopping for professional advice. But probably the easiest way to describe it is with an example. If you start with an ultra wealthy family, say hundreds of millions of dollars, and you’re not required to have this, but just to explain how it works – If you have a family that has hundreds of billions of dollars, they probably have a pretty complicated financial life. They have certainly stock accounts and have real estate investments in multiple homes, and business interests, and trusts, and family partnerships, and private family foundations, and it takes a lot of work to manage all of this.
You don’t have to hire your local stockbroker or your local accountant or your local lawyer, you can actually hire a team of accountants and bookkeepers and lawyers and private equity people and investors to work exclusively for your family. That’s the full time job – working for your family. That’s a family office.
Now, if you take that down a couple of notches, we’re not talking about hundreds of millions of dollars, but we’ve got a wealthy family, well shy of hundreds of millions of dollars but still wealthy and still have a complicated financial all those things that I mentioned with the trust and the multiple homes and the partnerships that could apply to a family that’s way lower than hundreds of millions it but it’s still complicated.
They can’t afford to hire a full time team of advisors. And that’s what a multiple family office does. And that’s what the multiple family office I have is. We have a group of advisors that did work for several families to help them. Some of the work we do directly and then other work we help coordinate with other professional advisors, but they eventually get the benefits of having one place to go to deal with the complexity of having a lot of wealth to help coordinate all of their advisors so that everybody’s on the same page, and maybe most importantly, to help take advantage of opportunities when they arise.
Who are the advisors from the firm IndieAssets.com?
So most family offices handle the family’s investments, and they’ll offer financial planning and estate planning advice. Some of them also have accountants on staff to handle tax returns. We don’t, mostly because our clients tend to come to us already with an accountant who they like and we prefer to simply work with the professionals that they’ve already established relationships with and have a long history with so that’s a lot easier. We’ll work side by side with them and work with families a little bit.I know there is one family office in this state that I’ve heard of that is only accountants. They don’t have anything beyond income tax planning, yet there’s still a family. So there are different varieties, but most of them are going to focus on investments and planning.
How do I know that a family office may be something I need to be considering?
Probably a couple of ways, one might be if you’re spending a lot more time than you want, simply managing your family’s wealth. A lot of what we do is we take over some of the administrative burden. So if you’re keeping track of when business entity updates have to be filed with the Secretary of State, or when distributions from trusts have to be made. So if you’re spending more time managing your wealth than you are enjoying it, then you might benefit from having a family office take over some of that.
A lot of our clients come in, and they’ve had financial services, and they’ve had estate planning services, but they don’t really understand what they have. This is really common with the estate plan. And say, “I know I have a trust. I don’t really know what kind of a trust I don’t really know what it does, and I’m not sure what I’m supposed to do with it.” So if that’s you, then you could probably benefit from a family office. We can take that trust that the lawyer may have drafted years or decades ago and we can show you what it’s supposed to do. And if it’s still appropriate, we can help you get that done.
How do you measure your success?
It’s interesting that this is not something that clients bring to us, but they probably should. I mean, once you engage a professional, I think it’s perfectly legitimate and appropriate to say, all right, how do I know if you’re doing a good job or not? After we’re in this for a year and we look back, how do we know if you’ve done well? A lot of our clients will find that after working with us for a while they actually pay less overall and professional fees, just because they have better coordination among the professionals. They might find that they’re paying less tax. They might find that they’ve actually transferred more wealth to younger generations. And so all of those things are kind of measurable and quantifiable.
And then they’re some of the things that are a little softer. Like you said, the family members feel like they’re spending less time managing their wealth and more time enjoying it. Do they have more peace of mind? Now they just sleep better at night that things are being taken care of, and they’re not worried about whether the document has been signed, or if they can find a copy of it. They know that all that stuff is handled.
A lot of our clients find that their risk profile and their investments go down so they’re not nearly as worried about a stock market crash as they used to because their investments are just handled a little bit better. We spend a lot of time getting the next, the younger generations involved.
What has been an effective way to communicate financial lessons to younger generations, that perhaps they didn’t previously receive?
Well, frankly, it’s not us doing it. It’s us helping the family do it, and it takes a heck of a lot of communication and repetition, so it can’t be an event, it has to be part of the family’s DNA. In fact, I’m working with a family right now where the children are 50. And there’s a lot of money that’s coming downstream to the children, but the children have not had this kind of resources before. But the parents are now at the age where they say, all right, soon, we need to start releasing this money and giving it to the kids. And even though they have some experience with money, they’re not connected with really high level financial managers. They don’t really understand tax or investments. And I’m afraid if I just dumped, you know, several million dollars on them at once it’s not going to go well. And so we’re spending some time really going back to the basics. And even though for these kids, they already have some experience in investing. We’re starting at the basics. Let’s look at how you review an investment portfolio, and how the taxes work.
What are your plans, and if we work through that for a couple of years, and what the family is planning to do, and this was their idea, wasn’t my idea, but I like it. They’re going to put a million dollars into a joint account with each child, and they’re just going to and then the child is going to kind of report to them. Here’s my plan. I said, I don’t want the details. I don’t need all the nitty gritty, but generally speaking, I want to know that you have a good plan that I would agree with, because I want to know that before you inherit the bigger chunk. So we’re starting with relatively small steps so that when they get the big chunk of money, they will already be accustomed to working with high level advisors, and they’ll have a plan in place.
How do you get paid for the work you do?
Well, most of our family office clients, we also handed their investments. And so the family office comes as part of the fee, which is billed the same way that most registered investment advisors are. We’re not a broker dealer. So our fee is a percentage of assets under management. And I have a couple of clients who I brought with me from my law firm who have a different financial advisor so we don’t manage their money. All I do is the advice and for them, they pay an annual fee quarterly, quarterly payments. And a lot of the fee is it’s kind of interesting because first of all, each one of our engagements is separately negotiated.
We sit down and we spend some time together Figuring out what kind of value can we bring? And then once it works, it’s going to be what’s it worth to the family? And then I have to judge from my side? Can I accomplish it? And if so, what kind of efforts and skill is it going to take? And what’s the market value for that? And so every one of our engagements is separately negotiated. Often the fee in the first few years is higher than it is in later years. Because in the early years there’s a lot of time put into getting people organized, and figuring out what we’re trying to accomplish.
A lot of times, I meet with families and really don’t know yet – they haven’t fully determined how much they want to leave to their kids or how much they want to leave to charity. So it often takes a lot of time just to figure that out. And then to put the structure in place to help them reach those goals. So that’s your role the first couple of years, two or three years is getting that done. Then once we get that in place, then the years after that you kind of shift to a maintenance mode, where you’re not building it anymore. Now you’re just maintaining it and then the fees often will go down. So I’m certain if I’m a business owner, and I enter into a family office type situation, what happens if it goes bad? How do I unwind it? I’ve known you for a while. So I’m reasonably certain you don’t have a great deal of attrition. But if I needed to unwind all of this, how difficult is it?
What role do you play in helping a family establish a legacy keeping the business in the family?
I’ll say first of all, a lot of our clients come to us after they’ve exited their business. So now they’ve got liquid wealth. And so probably three quarters of our family office clientele is people who have already exited. But those who are still business owners, we participate, by helping them plan for what they’re trying to do. So again, if you meet with a family and they own an active business, then one of the early questions is going to be when is the current generation that’s currently operating the business wants to retire? What’s going to happen? Is there a younger generation that wants to take over or is the younger generation not interested in running the family business? Are there three or four people in the younger generation who are all competing for the top job? So we have to figure those out. And we help the family through that analysis. And then if the answer is there’s nobody in the family who’s going to take over the business, eventually, we’re either going to hire professional management, so they will continue to own it, but it’ll be professionally managed by paid executives.
How philanthropic are the wealthy business owners right now?
We’re seeing a lot of philanthropy and we’re finding business owners are very active in philanthropy. First of all, I have a very positive view of people in general, I think people are philanthropic or if they have a lot of money, they like to share it. And this is one thing from your exit planning work that a lot of business owners are dissatisfied with their exit from the business a year later, not because of the amount of money they got or didn’t get, but because they lacked purpose. You know, when you go from being the one man or the woman who’s in charge of the business, to I’ve got a lot of money, you lose something in your life. You lose some sense of purpose, but a lot of times that sense of purpose is replaced with a very active charitable gift plan. And it’s not just writing checks and giving money away. It’s being entrepreneurial in a charitable way. So I find philanthropy being a very big part of it. The other thing is that the estate tax exemption is so high now for a married couple, it’s about $23 million. So you can give $23 million a way to your kids and grandkids with no tax at all. So families are able to spend less time on estate and gift tax planning, and more time on income tax planning, and income tax planning often includes family foundations, Donor Advised funds, charitable, trust, travel, etc.
And if I tell you what to do, that’s a great way to engage the younger generations. Yeah. When you say family, we’re going to get together we’ve got $10,000 to give away. Let’s talk about where we’re going to give it how we’re going to give it work and make the greatest impact. That’s a great way to bring family together.
What is one piece of advice that you could give our listeners that would have the most impact on their business?
I would say start early, start your planning early if there’s going to be a transition and ownership transition either to younger generations or the third party sale. If you can start that at least three years early, it’s going to be many multiples more effective, because you’ll have time to integrate some tax and family planning into the transaction. If you wait too long. Once you’re in the midst of a transaction, you do not want me around, I would just be a bother at that point. Because all of your focus is on getting the deal done. But I can if you get me in early enough, we can set the stage so that when you then you can, in fact focus and still get all the benefits of the work that we provide. If you don’t call me early enough, you have the transaction and then you call me, I can still provide value, but many of the opportunities that I would have had will be gone already. So I’d say start early.
Connect with Kevin:
Website – https://indieasset.com