What Is The Right Family Office Strategy?
9th October 2015 Sandy Loder
Sandy Loder explains the best strategy for a family office and how a lack of ‘emotional ownership’ can endanger its future.
As the nerve-centre of an expanding family enterprise, family offices can be a very effective way of growing wealth. If the strategy and culture is right, it can deepen an emotional connection between the family and its wealth.
With the right strategy and culture in place, family offices can also provide a high enough rate of return to increase the family wealth in-line with the growth of the family members.
However, in our experience over the years, we have seen that family offices can suffer from a lack of “emotional ownership”. This factor is much more evident in SFOs that do not have a family business or enterprise.
This can lead to problems such as family conflict, contentious litigation and other disastrous emotional situations. In the long-term, this lack of emotional ownership will lead to family offices closing, especially at a generational change of control.
Why are there so many family offices?
Why are there so many SFOs? Is it because families don’t trust the banks? Is it because they want the privacy, control and security? Is it part of the vanity collection to go with the private jet and Range Rover? The answer is all, part and none of them. As they say, “once you have seen one family office, you have seen one family office”. There are a multitude of reasons why these types of offices are set up.
But will it save the family or grow the family’s wealth?
History would say that the majority of wealth has been eroded within three generations as a result of taxes, divorce or more general wealth dissipation across an ever-enlarging family unit. Retaining wealth is not as easy as growing it.
So what is the best strategy for a family office?
The family office has three primary roles:
- Achieving an agreed level of return from its investments.
- Providing the required (high-quality) service to the family members.
- At a price that is competitive and reasonable.
- If the family office fails in one or more of these responsibilities then it could start to get into trouble.
Investment houses would love to scoop up a failing family office’s family members as clients, so the pressure is on for the family office to succeed.
- What is the right level of return on investments for the family?
- What are the right services to provide for the family?
- What should be outsourced and what should be insourced?
These are all tricky questions that the family and family office will need to consider. For some of the clues then you need to look at the growth rate of the family including the number of children per family unit and the divorce rate.
But before we start all that we need to work out what is the vision of the office and the family, and what are the core values that the family would like the office to adhere to.
If we look backwards in history for a moment at the success rate of the SFOs, it does not look balanced. On the one hand, there are those SFOs with a family business that have survived multiple generations, but I struggle to count on one hand the number of multi-generational SFOs that purely focus on investments.
A challenging world
The number of investments requiring complex systems to report accurately to the client, the mounting costs of running an office in central London, and finding and remunerating the right talent to work in a family office are all challenges. We are also living much longer, requiring our income to last longer, but most challenging is that we are globalising the world and with that the family office has the challenge of family members living in different tax jurisdictions and wanting/needing differing investment requirements.
In summary, getting the strategy right for the family in a family office is a challenge. The survivor rate has been very low for maintaining generational wealth. Having the right knowledge to run a successful family office is limited.
But if the family offices were to focus on three things, then I believe they are in with a chance of surviving:
- Communicate, communicate, communicate with the family.
- Create an ‘emotional ownership’ glue that is unbreakable with the family.
- Take the family office back to being an owner of a business.
About the Author - AH Loder Advisers was established in 2010 by Sandy Loder and operates all around the world working with families, family offices and family businesses from different cultures, who are all seeking to maintain and grow their family wealth.