We are all familiar with the role of a chief financial officer in business, but when does a family need one?
In a corporate context, the CFO is responsible for financial analysis, accounting and budgets, and overseeing insurance, banking, investments and certain legal issues. By focusing on the numbers, the CFO provides one of the crucial inputs to the chief executive when managing the business goals.
Families with significant wealth often have many traits of an operating business, with similar demands and financial resources at stake. For families just coming into wealth, the challenge is to manage it with the same adroitness it took to create the wealth in the first place.
Unfortunately, for most, the job of managing a family's wealth usually requires a different set of skills. Families of great wealth traditionally have met this challenge by creating a family office headed by a full-time, dedicated CFO.
Others, like many of our clients, need some of the expertise of a CFO but don't want the expense of a full-fledged family office. Financial advisers can serve as the family CFO in those scenarios.
Here are two things to keep in mind:
Build and maintain a strong advisory team. If an adviser is going to play this important CFO role, coordinating efforts with the family's other advisers is one of the most important jobs. Taking active responsibility in these vital relationships means building and maintaining connections with the family's certified public accountant, bookkeeper, attorneys, insurance brokers, outside philanthropic contacts, money managers and lenders. The objective is to make sure these advisers have up-to-date financial and investment information, and that all involved communicate and strategize as a team.
Bring order, expertise and perspective to every aspect of a family's financial life. The two main benefits of hiring a capable family CFO are creating emotional distance from the family's wealth and bringing to bear experience from someone or a team that has dealt with similar circumstances.
The responsibilities of the family CFO generally include addressing most or all of the following areas:
Balance sheets. A detailed and complete balance sheet is a necessary starting point for almost all the other analyses for which the CFO is responsible.
Income and estate tax planning. Income taxes can take up to 50% of earnings, and estate taxes can take another 50% at death. The CFO must have a strong background and understanding of the intricacies of tax law, and must be committed to staying abreast of changes in the law. This allows the CFO to better partner with the family's CPA and/or estate attorney, creating a powerful team to consider all angles.
Investment management. Overseeing investments is a primary responsibility of the family CFO. This often entails working with outside money managers, with the CFO managing overall asset allocation, manager selection and continued monitoring. In a good partnership, the investment portfolio can be built to maximize return at an appropriate risk level by acknowledging the different tax consequences and time horizons of the various structures.
Life insurance. The death of a primary wealth earner means the end of his or her earnings cash flow and can affect a potential estate tax bill. Life insurance can be a means to address those issues.
It can also serve another purpose: When viewing the family's portfolio as a whole, including wealth transfer to future generations, life insurance can act as a portfolio diversifier, as its return pattern can be very different from other assets in the rest of the portfolio. It is the job of the CFO to review the appropriateness of the structure and amount of any existing coverage, and work with the insurance advisers to determine if the policies are performing as they should be.
Property-and-casualty insurance. The job of managing wealth includes the responsibility to protect it as much as possible against the risk of loss. If the family's house burns down, will the insurance proceeds be adequate?
Small fishing boats and expensive yachts have something in common: They both transport people across water. But there are vast differences, as well, and it takes significantly more skill to build the latter.
In the same way, people with significant wealth inescapably have additional complexity and moving parts. A family CFO can take on that complexity.
John Przybylski is chairman and founder of Federal Street Advisors Inc.
