Who is responsible when an outside service provider engaged by the multifamily office makes an error?
Responsibility usually depends on the engagement agreement, the work assigned, the instructions given, and applicable law. The provider may be responsible for its own mistake. The multifamily office may still have oversight duties, including selecting providers carefully, defining responsibilities, monitoring performance, and following up on problems. Investment advice can create additional fiduciary obligations.
Start with the engagement agreement
Review the signed agreement with the outside provider first. It should define the provider’s duties, approval requirements, reporting deadlines, limitations, insurance, indemnification, and procedures for correcting mistakes. The agreement should also show whether the provider had authority to act or was preparing information for office approval.
Responsibility often follows the work assigned. A custodian, tax preparer, property manager, technology vendor, or investment adviser may have different duties. The facts matter, including what the provider knew, what instructions it received, and whether anyone reviewed the work before relying on it. The SEC explains that an investment adviser’s fiduciary duty depends on the scope of the advisory relationship. SEC staff bulletin
The multifamily office still has oversight duties
Hiring a specialist does not remove the office’s responsibility to manage the relationship. The office should check qualifications, define responsibilities, protect access to family information, monitor performance, review reports, and document follow-up. FINRA states that member firms retain ultimate responsibility for compliance when they outsource activities to vendors. That rule applies to FINRA member firms, but it illustrates the importance of oversight when an office delegates important work. FINRA Regulatory Notice 21-29
An office may face exposure when it selected an unsuitable provider, gave unclear instructions, ignored warning signs, failed to review required work, or allowed a known error to continue. The provider may also be responsible under its contract or applicable law. These questions require a fact-specific legal review.
As when hiring any service provider or partner, it is important when selecting an outsourced CIO provider that you ensure that they are focused on the family office industry.
What to do after an error
Preserve the agreement, instructions, emails, workpapers, reports, approval records, and evidence of financial impact. Notify the provider promptly and request a written explanation, correction plan, and assessment of the financial impact. Review insurance and any notice deadlines in the contract. Consider whether contractual, regulatory, insurer, custodian, or family notification requirements apply.
For investment advice, confirm whether the provider is an SEC or state-registered adviser, broker-dealer, or another regulated firm. The SEC says investment advisers owe duties of care and loyalty within the advisory relationship. SEC care obligations bulletin
This page is educational. The family should obtain advice from qualified counsel before deciding who is legally responsible or pursuing recovery.
Related guides
- Family Governance With a Multifamily Office
- How to Choose a Family Office: A Step by Step Decision Guide
- Access to Alternatives Through an MFO: A Practical Guide for Families