You advise individuals on setting up family offices. What are the sorts of challenges involved and what do individuals find most difficult in the overall process?
Today individuals are globally mobile and always connected. As a result family offices and the functions they provide can be established in different locations, even different continents depending on the needs of family members. So one important decision is what activities family members want their family office to provide and where they should be centred.
These questions are not as straightforward as they appear. Individuals often start with a ‘copycat’ approach, thinking they want what they see others as having. As they analyse the process they often realise that actually what they want is particular to them. One of my clients were confident they wanted an investment advisor, but as they considered it more carefully they realised that they wanted to take on the role of managing assets themselves. If that can occur in an aspect generally regarded as a ‘core’ family office activity, then when it comes to other areas, such as philanthropy, looking after directly owned assets and so on the variations are enormous. Similarly they may want some functions performed in Europe, but different functions in Asia, depending on where they expect to spend time.
Having decided what they want and where, the key for the family office executives is to set up appropriate structures, governance, staff and so on, to deliver ‘best practice’ and proper oversight to ensure that relevant assets are safeguarded and managed. This can have a direct impact on existing advisers, lawyers, accountants and so on, who are on occasion resistant to a more formal structure and governance approach. Being able to deal with the diversity of activity and requirements is one of the key attributes of a successful family office executive. Being able quickly to find high quality answers to what are often complex questions and requests is an important skill.
You have been working in the family office environment as a senior executive and consultant for more than fifteen years. What are the main changes between when you started out and now?
Without doubt the biggest change by far is the impact that technology has had on virtually every aspect of the family office business. When I started most assets were still managed by very large institutional asset management companies or the asset management subsidiaries of banks, including private banks. Technology enabled so many more boutique fund managers to establish themselves offering very bespoke strategies, some extremely successful and also highly selective about the number and nature of clients they wanted.
This market fragmentation is great in terms of choice, but became something of a nightmare when it came to identifying these ‘winners’. Four or five years ago this generated a growth of interest in hiring investment advisers to help identify the best managers for an individual family. However, more recently private banks and fund of fund vehicles have been created to solve this dilemma for family offices. In essence the traditional providers have ‘reinvented’ their services to make them relevant and attractive to family office clients.
But that is only one aspect of technology. The second big change is in the quantity of data and the connectedness of individuals through social media. Particularly for the younger generation that can lead to a measure of intergenerational differences of opinion. Some clients want to keep such a low public profile that they actively scour the internet in an effort to eliminate any reference to them or their family. That is extreme, but most wealthy individuals in my experience prefer to keep a quite low profile. Privacy is becoming a rare commodity and adjusting to that reality is not always going to be easy.
Looking towards the future, what trends do you see emerging in terms of new challenges and issues that families and family offices are going to have to deal with?
Obviously the proliferation of data is a major issue for the future. This is one of the reasons why some families still prefer to have as much of their business as possible handled by employees within a family office, rather than outsourcing it to specialists. In particular while all my clients are happy to provide information to relevant government authorities, they are less confident about the ability of those governments to properly safeguard the confidentiality of the information they receive. No one believes that the computers of the IRS or HMRC are any less vulnerable than those of commercial banks or government agencies that are known to have been successfully targeted by hackers seeking information. It only takes a small slip for The Times ‘Rich List’ to be based on fact rather than more or less informed opinion.
Regulation and legislation, whether driven by tax considerations or a desire for more political control, are not going away either. Structures have been adjusted
to try to keep many single family offices in particular away from investment management for third parties that would involve being subject to much greater oversight and regulatory burden and costs. Even for families who try to be very open, the level of transparency in the world at large does cause concern on simply privacy grounds; hence the nervousness around delivering data, even to governments. Whether intrusiveness merely results from innocent curiosity, or some more malevolent motivation does not really matter. Many very wealthy individuals and families simply want to be left alone, and that is getting ever harder to achieve.
One final trend I have noticed is the desire of family offices to group together in private equity, venture capital or other investment deals. To achieve this however, requires the establishment of trust among the different professionals and families that is not easy to generate. In some countries informal networks of individuals are in place, for example in the UK investing in EIS qualified firms. However, those are for the generally wealthy, and tend to involve relatively small transactions. Family offices are looking at much bigger transactions and creating any kind of formal or informal network has proved difficult to date. When I speak to my clients and meet families and their representatives at conferences and events that is a consistent and recurring theme.
You mentioned the issue of outsourcing. Do you detect that attitudes to outsourcing have changed? Has the pattern of hiring changed as a consequence?
The basic tension between doing things in house or outsourcing will never be resolved. Even within individual family offices attitudes can change significantly over time. There is an understandable belief that employees owe and deliver greater loyalty to the family and its interests than mere ‘hired hands’, whatever their reputation for discretion. The more people who are aware of family and family office matters, so this thinking goes, the more is the risk that information will leak into the public domain. For the reasons I noted before, this is a cause of concern, certainly to all of my family office clients. On the other hand, the need is to provide ‘best of breed’ services. If individuals stay in the same situation for too long, developments in best practice may simply pass them by. That can be a cause of embarrassment or in some cases result in families running risks that could be avoidable with the right, properly informed, outside assistance.
In terms of hiring, my background was fairly typical of my time. I was an employee of a private company that was sold and the family members took on some of their professional advisers, accountants, treasury personnel and so on, to establish family offices to look after the wealth they acquired at the time of sale. That remains an important source of personnel today with many executives coming out of law firms or other professions, into the family office environment. However in recent years there has been a trend for individuals to leave wealth management and investment banking companies to move into family offices. They obviously have some relevant skills and knowledge but sometimes underestimate the breadth of the challenges that will confront them and the knowledge they will need to acquire to be effective in a senior family office role. Certainly I have known examples where this has worked well. In other cases the transition has proven to be a long and arduous one for all concerned.
How do attitudes vary between the issues that concern ‘old’ and ‘new’ money and different generations?
By and large so-called ‘new’ money families have very similar attitudes to those of ‘old’ money. They want to preserve and grow wealth in an organised way and pass it on to the next generation in ways that demonstrate good practice, providing examples from which to learn.
What is different to some extent are the attitudes between the generations, especially where the generation that created the wealth is passing over to those who are its guardians. The further down the generational tree one goes, the more varied and pronounced some of these differences can become. The younger generations, as well as being more at ease with technology, may also be more cavalier about its use and potentially ‘abuse’. At the same time they are also often more interested in how they can use wealth to achieve aims above and beyond simply investing, spending or giving away money.
So are there particular trends in philanthropy?
Families are often unclear as to the objectives of their philanthropy. Working out that purpose is often a good way of bringing families together to share a common goal. When it involves multiple generations, this can be particularly powerful as a way of engaging younger people in the process of managing wealth, which
may otherwise appear rather dry and dull. As with everything, however, the key to having a good outcome is in spending time to agree what is needed and then determining the best strategy for implementation. It is one area where I always advise clients to start small. In some cases charities may simply not have the scalability to use very large donations effectively. In addition some may deliver less good outcomes themselves even when they do absorb the funds. I often suggest that families begin by giving away as little as 5% of the total philanthropic commitment that they want to make overall. If all goes well they can expand, if not they can look for more suitable beneficiaries.
What areas do you see causing fairly consistent issues in terms of challenges for family office personnel?
Investment in marketable securities generally causes few problems for family office executives. While the process of search and selection may be complex at times, it is generally well established and well understood. Hedge funds, particularly smaller and newer funds, involve more due-diligence but that is manageable. Moving into private equity and venture adds a further level of administrative complexity, including performance measurement and valuations.
However, the only area where I have found consistent problems is the arena of investment in assets such as yachts, aircraft and real estate, which are for personal use of the family as well as involving significant investments of funds. All of these areas involve management, at times of very sensitive issues. For example, with yachts it is not just the costs of managing and maintaining the asset, there is also the issue of the crew. Often the crew will be required to work in an environment in close proximity to family and friends. This calls for individuals who can deal with that situation with discretion. Such individuals are not always easy to find nor easy to retain once found.
My advice to families looking at these kinds of purchases is to speak to someone they know who already owns a similar asset, before going ahead. Hobbies, such as classic cars, have sometimes turned out to be successful investment programmes even though that was not their intention. Real estate has its own management issues. I once had to hire a janitor for a building that my client owned. Those kinds of tasks are not common, but when they arise they assume an importance far in excess of the simple issue of the money involved.
So what do you think it takes to be a successful family office executive?
First and foremost it takes absolute discretion and a solid ability to act diplomatically as and when required. The family has to enjoy a relationship of trust and
that has to be respected by anyone working within a family office environment. The determination to ensure that the highest standards are maintained means having an attitude of, ‘How would I behave if this was my own money?’ Those are the essential personal qualities required to deal with situations where family relationships may be structured around money.
In terms of skills, the curiosity to want to find answers to difficult questions and the ability to accept that at times you will need to consult peers or others outside the immediate environment. That in turn will probably involve creating a network of contacts that is wide and effective. Finally remembering that whatever your opinions and advice in the final analysis it is the family’s money and they are entitled to do whatever they wish, irrespective of your counsel. If you have those personal qualities then you will find engagement with the world of family offices is fun as well as rewarding.
