Family office management liability issues to consider

Successful family offices combine financial, philanthropic, legal, and administrative operations and help ensure that family objectives are achieved from generation to generation. However, these responsibilities create a range of liability exposures for the family office executive and professional staff. Like all directors, officers, and professionals, those working for family offices can be sued for everything from professional negligence to mismanagement of funds and employment discrimination.

A family office manager’s exposures rival those of corporate directors and officers. Family office executives perform many services commonly associated with trust operations and assume those duties and obligations as well.

Ultimately, family offices are employers with the same workplace concerns and liabilities faced by larger organizations. The family office executive should be mindful of the liability risks that exist in the family office setting.

Directors and officers role

The primary duty of any director or officer of a family office is to represent responsibly the interests of the family as an entity, as well as any other operative interests, in leading and managing the chosen affairs of the family. Family office executives can be held liable, just like a director or officer of a public company, should their misjudgment affect the family members.

Professional and trustee services

Professional services provided by a family office involve fiduciary standards of care. Family office executives must administer their accounts according to the provisions of the office as well as in accordance with the law. Examples of the many sorts of claims that may arise from this professional and/or trust practice include:

• Improper delegation of authority to a third party.
• Failure to treat family members impartially.
• Failure to comply with terms of the charter or account.
• Payment of invalid claims against the family.
• Improper record keeping.
• Malpractice in estate planning, tax planning, or deviation from investment goal strategy.
• Lax or inept oversight of investment managers.

Employment practices

Wrongful discharge, discrimination, harassment, and defamation claims represent serious risk exposures to employers, and their directors, officers, and supervisory employees. Various state and federal statutes serve as a vehicle to bring an action against an employer, including family office managers. Major examples include:

• Title VII of the Civil Rights Act of 1964 prohibits race, color, sex, and religious discrimination in the workplace.
• The Americans with Disabilities Act (ADA) prohibits discrimination in the employment of handicapped individuals.
• The Age Discrimination in Employment Act (ADEA) prohibits age discrimination (age 40 and over).

Protective measures – indemnification and insurance

Often the best protection a family office manager can employ is to obtain indemnification provided by the family office itself. However, even written indemnification is not without its limitations:

1. The office may be insolvent or lack sufficient attachable resources to fund the indemnity.
2. The indemnification provisions may not be broad enough to encompass a given claim situation.
3. The family office board itself may not authorize indemnification.

Insurance programs, written broadly enough, will also help protect the family office professional against directors and officers liability, professional errors and omissions exposures, and employment practices risks. In addition, appropriate insurance coverage can complement existing indemnification provisions — in some circumstances exceed them — and absorb indemnification costs assumed by the family office.

Management liability red flags

Does your family office:

• Have professionals on staff?
• Provide accounting or tax planning services to clients?
• Assist in estate planning for clients?
• Perform investment advisory services for clients?
• Form and maintain private investment funds or investment partnerships?
• Select and oversee outside professionals or outside professional service firms?
• Have individuals who serve as trustees of family trusts?
• Work in conjunction with a private trust company?
• Assist with the placement and management of domestic staff?
• Coordinate the placement of insurance for clients?
• Perform administrative or support services for any family foundations?
• Assist clients with structuring and operating small businesses?
• Have its own pension or 401k plan for employees?

If any of these “red flags” exist, we recommend a comprehensive review by a family office risk specialist. You can also learn more by reviewing our Family Office Benchmarking Study.

For more information, please request a family office risk review.