The decision usually presents itself in the form of a person rather than a function. Someone in the family, most often the one who has been holding everything together, reaches the point where the administration no longer fits alongside the rest of his life, and the conclusion drawn is that the family needs to hire somebody. A search begins, a job title is invented, and within a few months the family is interviewing candidates for a role whose content has never been written down.
That is the wrong order. The question is not whether to hire a person but which functions the family needs performed, at what frequency, to what standard, and whether those functions are best delivered by an employee, by a contracted provider, or by some combination. Families that answer the function question first frequently discover that the workload does not support a full time senior hire, and that the arrangement they were about to enter would have produced an expensive person with too little to do and no colleagues to do it with.
What the function actually consists of
Stripped of the title, the work divides into layers that require quite different people.
At the base is administration. Bookkeeping for each entity, payments, payroll where there is any, document management, coordinating the annual filings and keeping the corporate records in order. This is high volume, procedural and unforgiving of neglect, and it does not require a senior person.
Above that sits control and reporting. Producing the consolidated statement, reconciling what the banks and managers report, monitoring liquidity, tracking commitments and maintaining the calendar of obligations. This requires competence and consistency rather than seniority.
Above that sits treasury and finance. Managing cash across currencies, arranging and monitoring credit facilities, overseeing hedging where the family has decided to hedge, and handling the relationships with lenders.
At the top sits the part families actually mean when they say chief financial officer. Judgement on structure, on transactions, on whether a proposal makes sense, and on whether the advisers are giving good advice. This is episodic. It is needed intensely for a few weeks around a transaction and hardly at all in between.
The mistake is to assume that one hire covers all four. In practice a senior person hired for the top layer ends up doing the bottom one, because there is nobody else, and leaves within two years.
What the internal option really costs
Families comparing options routinely compare a salary against a fee, which understates the internal option substantially.
The true cost of an employee includes gross compensation, employer social charges, any bonus, pension provision, and the cost of the systems that person will require. It includes recruitment, which for a senior role is a meaningful sum. It includes the office, the software licences for accounting and reporting, professional indemnity arrangements, and the audit or review of the office’s own work. It includes the second person who has to be hired eventually, because a single employee means no segregation of duties and no cover for holidays, illness or departure.
It also includes something rarely quantified: key person risk. A one person finance function means that all institutional memory sits with an individual who can resign, and reconstructing what that person knew is expensive and slow.
The compensation ranges for such roles vary widely by country and by the scale of the assets involved, and any number quoted without a source should be treated with caution.
What the outsourced option costs, and how it is priced
The contracted alternative comes in several pricing shapes and the shape matters more than the headline figure.
A fixed annual fee for a defined scope is the most transparent, and it works where the workload is stable and the scope can be written precisely. A time based arrangement suits families whose needs are irregular but requires trust and detailed reporting of hours. A retainer covering routine work with additional fees for projects is the most common structure in practice and the one most families find easiest to budget. A fee expressed as a percentage of assets is the arrangement to examine most carefully, since the work does not scale with asset values and the model can create incentives that have nothing to do with the family’s interests.
Whatever the shape, the comparison must be like for like. An outsourced fee that excludes bookkeeping, or excludes the annual accounts, or excludes transaction support, is not comparable to an internal cost that includes them. The only reliable method is to list the functions, price each option against the same list, and put both totals next to the family’s own estimate of what it is currently paying in dispersed adviser fees.
Price is not the deciding factor
Having done the arithmetic, most families find the two options closer than expected, and the decision then turns on considerations that are not financial.
Outsourcing brings a team rather than a person, which means cover, segregation of duties and a range of expertise no single hire provides. It brings systems that already exist and staff who have seen a hundred structures rather than one. It is variable: the scope can be increased for a transaction and reduced afterwards. And it is reversible, which matters more than families expect, because ending a contract is straightforward and ending an employment relationship with somebody who has known the family for a decade is not.
The internal hire brings other things. Full attention, availability at any hour, complete immersion in the family’s affairs, and undivided loyalty. It brings confidentiality of a different order, since the information stays within the household. And it brings the possibility of a genuine relationship of trust with a person who becomes part of the family’s working life.
Those are real advantages and they are the reason the internal model exists. They are also the reason it fails when the workload does not justify it, since a highly capable person with insufficient work becomes either bored or inventive, and neither is what the family wanted.
Where the inflection point sits
There is a level of complexity above which an internal function becomes clearly justified, and it is not defined by wealth alone. Two families with similar balance sheets can have entirely different requirements depending on what the balance sheet consists of.
The factors that drive it are the number of entities and jurisdictions, the number of adult family members receiving distributions and reporting, whether there is an operating business, whether there is directly held property with tenants and financing, the frequency of transactions, and whether the family runs any direct investment programme. A family with one holding company and a managed portfolio needs very little. A family with an operating business, property in three countries, a dozen adult shareholders and an active acquisition pipeline needs a real finance function whatever its total assets.
Published figures for the asset level at which an internal office becomes economic circulate widely and are rarely sourced.
What outsourcing does badly
Honesty about the limitations makes the choice better rather than worse.
An outsourced provider has other clients, and a family that needs somebody available at short notice throughout a difficult period may find the response slower than an employee’s. Institutional knowledge accumulates in the provider’s file rather than in a person’s head, which is more robust but less intuitive, and a change of account manager can be disruptive. Sensitive family matters are discussed in a room the family does not control, which some families accept easily and others do not.
There is also a scope problem. Outsourced arrangements are defined by their contract, and anything not in the contract is either refused or billed. Families that value informal willingness to deal with whatever arises sometimes find the contractual boundary irritating, although in fairness the boundary is what keeps the fee predictable.
Testing a provider before committing to one
Whichever direction the family leans, the contracted option can be tested cheaply and the employment option cannot, which is an argument for trying it first.
A defined project is the natural test. Building the entity inventory, producing the first consolidated statement, or reorganising the document archive are all self contained pieces of work with a visible deliverable. The family learns how the provider communicates, whether deadlines are met, whether the questions asked are intelligent, and whether the eventual document is one the family can actually read. None of that is discoverable from a proposal.
The contract deserves the same attention as any other. It should name the individuals who will do the work rather than only the firm. It should set out what is in scope and what is billed separately. It should state where the data is held and who has access to it. It should specify the reporting deliverables and their dates. And it should include an exit clause providing for the return of records in a usable format within a stated period, because the one certainty about any arrangement is that it will eventually end.
The arrangement most families settle on
In practice the pure forms are rare and the sensible answer is usually a division of the layers.
The routine work goes outside, where it is done by people who do it every day at a lower unit cost. The senior judgement stays with a family member, a chairman or an independent adviser retained for the purpose. Where the family employs anyone directly, it is often a capable coordinator rather than a chief financial officer: somebody who owns the calendar, holds the documents, chases the providers and knows what everything is, working alongside a contracted team that does the accounting and reporting.
That arrangement fits the actual shape of the work. It keeps the expensive judgement episodic and the cheap administration continuous, which is the correct way round. And it leaves the family free to change its mind later, which is the argument for starting with the contracted version in almost every case where the answer is genuinely unclear.
This article is informational and does not constitute tax, legal or financial advice. The right course depends on the facts. Each engagement is subject to scope and applicable regulation.