Family Offices

Family office decision factors

Advisers offer these suggestions for families considering a single-family office (SFO):

• Solicit feedback from the family about potential benefits. Is the primary purpose to bring the family assets under one umbrella, or are you mainly interested in personalized and confidential services? Do you want your family office to promote the well-being and unity of the family over generations?

• Decide if your asset levels are sufficient to offset your fixed costs. Families with lower assets who desire a wide range of services will likely pay a sizable percentage of their assets for their office. “If a family has $100 million and requires services and employees that [total] $5 million, that’s equivalent to a 5% annual fee. If a family has $1 billion, a $5 million cost for their SFO [single-family office] would be 50 basis points,” says Nichol MacManus, director of 1818 Family Office and managing director of Brown Brothers Harriman & Co.

• Consider that you’re developing an organization. “Launching a family office is as complex as starting any other family business, and it needs a clear business plan for the professional design of the office,” says Sara Hamilton, founder and CEO of Family Office Exchange, a peer-to-peer network for high-net-worth families and their family offices.

• Decide how services will be provided. “If family members already have outsourced service providers (money managers, lawyers, accountants, etc.), is the SFO intended to replace those people or work with them?” asks Jennifer Pendergast, a professor of family enterprise and executive director of the Center for Family Enterprises at the Kellogg School of Management.

• Recognize the potential downsides. Overseeing a single-family office can be costly and time-consuming. Is there someone in the family willing to undertake this task to ensure it meets the family’s expectations?

• Do your homework. MacManus advises organizers of a single-family office to reach out to other single-family offices, multifamily offices and consultants to pick their brains. “Families don’t know what they don’t know, because they haven’t been in this business. Go out and see what the landscape is like,” she says.

Hamilton suggests taking the time to participate in workshops on how to design a family office, “to make sure you understand what you are getting into.”

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    

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Covid-19 raises cybersecurity issues for family offices

The move to working from home revealed vulnerability to phishing among family offices that had not set up proper controls for remote access.

As family offices scrambled to respond quickly to the health and safety issues and the economic turmoil caused by the COVID-19 pandemic, they also had to contend with another threat to their organizations.

Since late January, cybercriminals have been disguising themselves as trusted banks, merchants, co-workers, IT administrators and the like to trick people into divulging sensitive data, according to PwC US.

Proofpoint Inc., a cybersecurity company, reports that “coronavirus-related email lures now represent the greatest collection of attack types united by a single theme” that the firm’s research and detection team has seen in years, “if not ever.”

“These phishing emails may use scare tactics to trick users into interacting with malicious links or attachments, or direct them to websites designed to steal their credentials. Any individual within an organization can be targeted,” Proofpoint says.

Working in this treacherous landscape could be particularly dangerous for those family offices whose staff are making their first foray into working remotely.

Danielle Valkner, U.S. family office leader at PwC, spoke with Family Business Magazine about the challenges facing family offices.

FB: Have cybersecurity issues been a concern among single-family offices as COVID-19 has forced staff to work remotely?

DV: Many family offices have been very deliberate in the past in prohibiting or limiting remote access due to confidentiality concerns. Now they may find themselves in a situation where they are scrambling to set up the proper remote access in a well-controlled way at a time when fraud campaigns are spreading quickly. Business email compromise (BEC) scams that are designed to trick victims into transferring sensitive data or funds have skyrocketed in recent months. These scams also look to steal login credentials so [cybercriminals] can infiltrate your organization and compromise your systems and operations.

FB: Could there be an impact on the family’s privacy or safety?

DV: Wealthy families are always a high-profile target for cybercrime. Now that most of the country is working remotely and many are transacting more via email, it is more important than ever to be on high alert for fraud and safety issues. Your employees are your first line of defense, and it is critical to provide education and alerts to employees to [urge them to] be skeptical of email communications and requests from unfamiliar sources or even those that may look familiar on the surface. Common recent attempts include phishing and BEC emails disguised as government announcements with official-looking logos as well as emails with subject lines of interest to your business in light of impacts of COVID-19. [The emails] may attach official-looking documentation such as invoices, shipping receipts and job applications with harmful malware or ransomware embedded in them or links to fraudulent educational, healthcare or charity-related sites that can open the door for malicious activities and threats.

FB: Are family offices simply trying to find their way through this without a map, like every other business and family?

DV: Most likely. Transitioning to remote work at home can be done without compromising security. At a time like this it is important to consult with the experts and ensure you have the tools and risk management processes in place to enhance your monitoring and detection of threats, educate your employees and protect your assets, data and devices.

FB: Will the pandemic fundamentally change the way family offices operate going forward?

DV: Yes, I believe so. The current environment is certainly testing operational, financial and risk management capabilities. It is essential to identify your critical data, processes and reporting needs to drive decisions and enable proper risk management and controls. Family offices should be evaluating their processes and tools to ensure they have the capability to gather, aggregate, report and distribute critical information as well as execute and manage required activities in a well-controlled and timely manner. The current environment may expose some gaps that will need to be remediated. Also, the entire business community is learning the power of digital collaboration tools, which will undoubtedly have an impact on how we conduct business and operations going ­forward.

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    


 

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Single-family office nuts and bolts

Eric Allyn knows his way around an operating company.

Born into the family that owned the Welch Allyn Inc. medical device company in Skaneateles Falls, N.Y. for 100 years, Allyn could tell you all about ophthalmoscope design when he was in elementary school. In adulthood, Allyn ran company business units, headed specialty markets in Japan and served on the board of directors for seven years. “I was raised to be a good steward of the family business,” Allyn says.

Since the 2015 acquisition of Welch Allyn by Hill-Rom Holdings for $2.05 billion, Eric Allyn has been finding his way in an entirely different business — the Allyn Family Office. It has not been easy, even though the Allyn family has had a family office in some form since 1992.

“It’s an entirely different thing than running an operating business,” says Allyn, who oversees the family office and serves as its chairman. “Most of this has been new to me.”

Many family enterprise leaders like Allyn face the challenging and complex task of setting up a single-family office to manage the family’s wealth, investments and other needs, sometimes after experiencing a liquidity event. Allyn refers to it as “Family Business 2.0.”

“It should be viewed as creating a new business. I worry that families don’t realize the amount of work required,” says Jennifer Pendergast, a professor of family enterprise and executive director of the Center for Family Enterprises at Northwestern University’s Kellogg School of Management. “You need to set up a corporate structure, agree to policies and procedures, hire a team, set up governance structures [and] determine a strategy,” such as what services will be offered and to whom, and how the office will be funded.

The term “family office” covers a sweeping array of unique organizational structures. In general, a single-family office can be defined as a private, family-owned entity that manages a family’s private wealth and other family matters. Under the federal definition that excludes single-family offices from regulation under the Investment Advisers Act, a family office is wholly owned by family clients and is controlled by one or more family members or family entities. It serves no clients other than family clients.

The design and activities of a family office can be as creative as families themselves. Some exist primarily for the purpose of investment management and wealth preservation, while others provide a smorgasbord of services that might include philanthropic planning, next-generation education and family reputation management.

Raphael Amit, a management professor at the University of Pennsylvania’s Wharton School, stresses one key quality of a family office that makes it distinct from a private asset management company.

“A family office addresses the needs of an affluent family in a more holistic way through a range of activities that enable family unity, harmony, happiness and health, as well as activities that enable financial wealth preservation and creation,” Amit says.

There’s a lot at stake for families who embark on the single-family office endeavor. Consider that advisers suggest a family have at least $100 million available for investment to make the operation of a single-family office financially sensible.

What’s more, there is no one playbook for setting up a single-family office, says Nichol MacManus, managing director of Brown Brothers Harriman & Co. and director of 1818 Family Office, a multifamily office. The strategy the family uses to develop its office is not always linear, either.

“It’s just so different for every family,” MacManus says.

Pendergast echoes that. “Each SFO is different depending upon the problem the family is trying to solve by creating it.”

Families should view the creation timeline in “years, not months,” Allyn says. His advice to other family business owners is not to wait until the need for a family office is urgent.

“Have a family office well in advance of ever considering selling the family business,” Allyn advises. “I can’t imagine where we’d be without one. It’s imperative to have a family office more than a year before the sale.”

A new challenge
Over time, family offices have evolved from being primarily money managers “to something much broader with a goal of creating continuity, cohesion and engagement across the family for generations,” Pendergast says.

To Steve Lytle, a fourth-generation member who serves on the board of The Agnew Company, a single-family office based in Vancouver, Wash., the investment part of a family office is “pretty straightforward.” Much more difficult is “the business of ownership,” which he defines as the process of building and executing a system that supports the family’s long-term objectives and principles.

“We want to build a system of governance, decision making and communication that provides us with the best opportunity to own [family assets] well now and in future generations.”

Unfortunately, many families starting a single-family office just “jump in at the deep end of the pool,” says Robert A. (Bobby) Stover, Americas family office leader at Ernst & Young LLP. For example, they’ll run out and buy an operating company.

“They know they want something but they don’t have a plan,” Stover says. “It’s like taking a child to a toy store and saying: ‘You can have anything you want.’ ”

Gary Katz, managing director of Downtown Capital Partners, a family office in White Plains, N.Y., says creating a family office “should be daunting for people whose life experience was to run a successful operating company. A family office is a different animal. It’s a different skillset.

“Just because you’re a brain surgeon doesn’t mean you can do heart surgery.”

Many highly talented entrepreneurs who have run successful operating companies discover they simply don’t enjoy being a chief investment officer and making passive investments, Katz says.

“It’s just not the same level of adrenaline you get from running an operating business,” Katz explains.

Most U.S. family offices are only a few generations old, according to Joan Crain, global wealth strategist with BNY Mellon Wealth Management.

“I’ve seen a couple that have lasted five generations,” Crain says.

She’s also seen some family offices being dissolved.

Sometimes future generations “unwind” family offices created by the wealth generators if they can’t see the value of an organization that was designed by a patriarch or matriarch to meet the founding generation’s needs, Pendergast says.

Following best practices
While “there’s no right or wrong” to the creation of a family office, there are best practices, Crain says. Good governance practices should be the thread running throughout the process, including such things as the responsibilities of owners versus managers, she says.

To begin, families are wise to deliberate among themselves to determine what they’re trying to accomplish with a single-family office.

Asking “why” also can become the basis for the family’s mission statement.

Some families might primarily be interested in investment management, while others may want the organization to focus on philanthropy or NextGen education.

The Agnew Company, for example, is chiefly an investment company that manages a diverse portfolio of assets, including timberlands, commercial real estate, marketable securities and alternative investments, Lytle says.

“Every family should make a thoughtful assessment of how they would benefit from either an MFO [multifamily office] or a SFO [single-family office] before they make the decision to start one,” says Sara Hamilton, founder and CEO of Family Office Exchange, a peer-to-peer network for high-net-worth families and their family offices.

For most families who have started a single-family office, the benefit is family control. A single-family office offers customization, including a framework created specifically to meet the needs of a large, multifaceted family. The office protects the family from prying eyes while managing risks and information flow.

In some cases, the family office becomes the new family business after an operating company is sold, creating the glue for the family, Pendergast says. Post-sale, the family office provides the family identity once conferred by the operating business.

Depending on the asset level, some families might be interested in using their wealth to have family office staff take care of the management of nannies, household staff or private jets.

“Agreement on what services the office will do and, more importantly, what it is not designed to do, is essential to manage expectations of the owners,” Hamilton says. “And developing the specific measures of success for the office will help in the hiring process and in the performance management process.”

The most common service family offices provide is the ability to leverage the family’s collective assets for the best professional services, such as investment, legal or tax advice, in the most cost-effective way, according an article co-written by Crain called “Key Considerations When Creating a Family Office.” The next most-common service is centered on providing the family and family office executives with timely data and analysis of complex investments, trusts and estate plans, and the like.

Setting a mission
Advisers recommend that families develop a mission statement for the family office as well as a constitution (also known as a charter). Ideally, the mission statement should mirror the values of the family the office will serve, Hamilton says. Crain notes that the best practice is for family members to come together to craft the statement as a group.

“You need involvement from all levels of the family,” Crain says. “The worst thing is having an outside adviser do it.”
Crain had a client family who convened a meeting to hammer out a mission statement. But when the family came together, the father had written it himself.

“I felt sorry for him because he had spent a lot of time on it,” Crain says. “But we got input from all the children. If we had just gone with what the father had written, they wouldn’t have felt like it was theirs.”

Candid conversations among family members will result in a mission statement that really clarifies a family’s desired outcomes, Lytle says.

Amit says the vast majority of the nearly 200 family office mission statements he’s seen define their purpose as managing the family assets to promote family unity, harmony, happiness and health.

The constitution or charter spells out governing principles for the family and family office that are intended to endure for generations.

“The constitution is constant and is the guiding principle,” Stover explains. “The laws may change; the principles stay the same.”

Crain suggests families develop a shareholder agreement, policies governing who can work in the family office and a code of conduct. There should also be provisions for family members to exit the office, she says.

Families might also want to create an investment policy statement. Pendergast says an investment policy is needed if it the family office is managing money for family members.

“There may be a blanket policy statement for all clients of the family office, or accounts may be managed separately for different clients who will each need an investment policy statement,” she says.

Not all families feel the need to develop a collective investment strategy, Hamilton says. That could lead to problems down the road, she cautions.

“Through the generations, if you don’t have a set of collective investment vehicles to organize the investment alternatives for each household, that process of making individual investment decisions becomes unwieldy if you are dealing with 20 households and 12 to 16 different asset classes for investments,” she says.

Another critical decision for families starting a family office is its legal structure,  such as a limited liability corporation or a corporation.

State law will determine the limitations on liability and the legal life of the structure. The family office does not need to be based in the state where the family resides. Families should consult their legal and tax advisers to determine the structure that is most advantageous for them.

Building a business plan and team
Family offices should have a strategic plan and a business plan, Stover says.

The strategic plan should spell out the results and opportunities the family wants to see in 10 or 20 years. The business plan should list the actions that are needed to get those results in Year 1, Year 3 and Year 5.

The business plan should include an operating budget and should spell out how the family office will be funded.
Family members or households generally pay fees or the family agrees to another arrangement, such as funding the office through a trust, Pendergast says. If the office manages money, family members typically pay a fee based on the assets under management, she adds. 

“Typically, SFOs are set up to break even, not to be a money-making entity. The fees charged to family members are set so that they break even,” Pendergast says. “If the family finds that the fees are more costly than what they could get via outsourced providers, then the family office leadership and board need to justify why the family should pay more.”

Staffing needs will depend on the kinds of services the family office will provide, such as investment, philanthropic management and concierge services. Depending on the family asset levels, the staff could range from a handful to hundreds of people.

Hamilton says that because of the complexity of family structures and the importance of risk management today, the latest trend for larger families is to hire someone with a legal background to lead the family office, instead of a person with an accounting or financial planning background.

“As family offices have become more popular in the last 20 years, it has become easier to recruit talented managers into this industry,” Hamilton says. “There are search firms that specialize in finding talented office executives, and today, retention of talent has become more of an issue than the actual recruiting process.”

Compensation, of course, will factor into the cost of running a single-family office and will be an important consideration, particularly if the office hires a CEO, CIO, attorneys, accountants and other staff.

Other operating costs include technology and cybersecurity protections (see page 53), as well as office space.
The Allyn Family Office, which performs wealth management services only, employs four accountants, one attorney and one paralegal.

Governing body
Family offices, like family businesses, need good governance.

“As a best practice they should have an advisory board at a minimum,” Stover says.

“Just like any business entity, a SFO should have a board,” says Pendergast. “Most don’t have independent directors, but I think they are a good idea.”

Independent directors can bring diverse experience and skillsets to the family office, widening the lens on decision making, including investments.

Lytle says the Agnew family has a family ownership council, which concentrates on “the business of ownership;” a board of directors for The Agnew Company, focused on “the business of investing,” and a board of directors for the family foundation, which addresses “the business of philanthropy.”

Once the office is up and running, the process is far from over, as Allyn can attest. His family office is still evolving after nearly 30 years.

Just as in any business, fine tuning and tweaks to the organization will be needed, including budget honing and performance assessment.

Since a family office is typically planned around generational stages of development, over time the approach might change, Hamilton says. Leadership transitions, for example, are often the time to review and restructure the services and the approach to serving the needs of the family, she says.

“Every family office evolves in its role, just as the family itself evolves through the generations,” Hamilton says. “What works effectively for a founder and his three children in Gen 1 and 2 is dramatically different from what is needed by the same family when they are a Gen 3 to 4 family group with 50 to 60 households to oversee and coordinate.”
As Lytle puts it: “A family office is a means to an end, not an end in itself.”                                                             

Maureen Milford, a frequent contributor to Family Business, last wrote about holding companies.

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    

 

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Direct investing strategies for family offices

Family offices have traditionally focused on passive investments, allocating capital to funds and sponsors in a limited partner (LP) capacity. For those raising capital, family offices were often viewed as the most desired investor base because of the meaningful size of their checks, which often came with few strings attached. In recent years, this dynamic has changed materially. As family offices have become more seasoned and more sophisticated, a passive LP role is no longer the desired structure.

The change has been driven by families’ desire for a more direct role in the management of their investments in order to increase control and net returns. Many families created their wealth from their own privately held businesses, so the role as investors in private companies is a familiar one. For many of these families, direct investing can be an opportunity for an older generation to get back into day-to-day management with younger generations playing integral roles as a shared experience.

These families tend to invest in companies that operate in the same industry as that of the legacy company, or a related industry. This strategy gives them a decided advantage relative to industry-agnostic funds. Families with LP interests in private equity funds generally have not been granted a board seat or otherwise been involved in management of the companies in which the funds invest. Over the years, these investors have begun to question whether the funds are providing value commensurate with the fee structure.

Making direct investments in companies can be difficult for family offices at first. Many will build out a team internally to generate deal flow (receipt of investment proposals) and provide the appropriate operational support to the business. This can often prove to be an inefficient use of time and capital. A phased process with assistance from external advisers can often give the family office staff the opportunity to try out team members without committing long-term capital upfront.

Co-investments and club deals can often be an effective stepping stone. Co-investments involve lower fees and more control than LP interests in private equity funds as well as a layer of day-to day oversight. Club deals, where the family partners with other similarly minded families, are the logical continuation of this process. This structure will reveal more of the potential operational weak points that a family office needs to address by hiring staff or through external partnerships.

Setting goals
As with all investment strategies, the key starting point is to identify the goals of the endeavor. The obvious answer is profit, but there are many other considerations. Is training of a younger generation a driver of the investment? How long will the duration of the investment be? What industry or other features of a company are we targeting? How will the investment fit within the family’s broader portfolio?

Every party to the endeavor must have a clear plan for the direct investment and allocate where the responsibilities for the various aspects will sit. Without goals established beforehand, mission creep can lead a family office down unwanted paths or cause them to waste time on investments that are not properly aligned with the family office strategy. Most family offices decline the vast majority of opportunities that cross their desk. Getting to “no” efficiently pays future dividends.

When seeking out direct investing opportunities, family offices have features that distinguish them from the usual players. Flexibility is one of the main reasons why working with a family office appeals to companies. In contrast to institutional investors like pensions and discretionary funds, family offices are not constrained by very specific mandates. This flexibility enables family offices to work toward the optimal solution for a specific opportunity.

One example of this is family offices’ reputation for providing “patient capital.” This makes family offices more appealing than funds that require an exit in three, five or seven years. as is typical with professional investment funds. However, that competitive advantage should be tempered to align with the family’s total wealth, liquidity and strategic goals across their portfolio.

A family’s history in an industry can also give them a leg up on the competition when chasing deal flow. However, the privacy that many family offices fight so hard to maintain can sometimes be a disadvantage for direct investments. While anonymity is desired, it limits sector name recognition. As mentioned previously, internal infrastructure and controls can often be a weakness of family offices. Many family offices were originally an extension of an operating business that the family controlled. While the accounting, legal and operational functions are likely to have been built out as needed over time, most family offices lack the necessary structures and processes to handle multiple direct investments.

Getting into the game
How do family offices get into the direct investing game? There is no one strategy that fits all; however, the family office must efficiently leverage and grow its network of valuable relationships. Like the oft-quoted real estate phrase “location, location, location,”  a critical asset to develop is “deal flow, deal flow, deal flow.”

Any family office will already be in contact with independent sponsors, investment funds and other family offices. Office staff should immediately begin to leverage those relationships in a more organized way. A focus on quantity and quality of investment opportunities is of the highest priority. Certainly, family offices will have a web of experienced professionals, such as lawyers and accountants, but a wise family will seek out advisers who not only provide substantive recommendations but also propose potential deals and provide advice outside the scope of their professional engagement. These counselors should be supplemented with industry partners to perform diligence and sector advice, including insurance and regulatory experts.

Experience proves it is impossible to predict who will introduce the next valuable investment. This approach will allow a family office to gain experience, deploy capital more efficiently, share resources and cement relationships for deals and exit opportunities. This can be tracked in parallel with assessing the speed at which internal resources should be added: to increase talent and expertise in sourcing deal flow, conducting due diligence, negotiating direct investments, analyzing market trends, understanding transaction documents or providing technological support. The conclusion may be that it is too expensive to build out these functions internally. However, it must be noted that more family offices are being formed each year and a higher percentage are actively pursuing direct investing. In order to identify and close quality investments, it’s necessary to establish a formalized approach to business development, proprietary deal flow and analysis of market trends.

Even large, established family offices sometimes lament their perceived lack of deal flow compared with professional investment funds. A direct investing strategy will take time, patience, fortitude and some investment. Yet a family office seeking higher returns and greater control in its corporate equity investments is likely to conclude that a direct investing capability is essential to achieving their goals and a competitive advantage.

William N. Haddad is a partner in Venable LLP’s corporate practice (www.venable.com).

How to manage the challenges of an embedded family office

Many successful family businesses have a form of family office embedded in the company. It may start with the CFO helping family members with their taxes, or someone in accounting setting up the books for a family member’s outside business, or perhaps someone advising a family member through the purchase of a house or car.

Over time, this often becomes two or three employees supporting the owners’ outside needs, plus one-off support from staff in IT, legal and other departments. Many families don’t think of this as a family office. As one founder told me, “The business is my family office.”

The pitfalls
This is not necessarily a bad thing. A family office embedded in the business can be the most cost-effective way to manage risks to the family while supporting their wealth and endeavors outside the family firm. However, there are several challenges to an embedded office, which require careful management or may even result in the family deciding to separate the office from the business.

Distraction. Business staff should be focused on growing the business and serving its clients. Supporting family members’ personal acquisitions or handling their separate needs may distract company staff from their primary roles. It is difficult for even a senior staff person to explain to one of the owners that an upcoming tax deadline or new technology release won’t leave them time to support the family member’s personal request.

Privacy. When business staff also support the family, they may not be as diligent about protecting the family’s privacy as dedicated family office staff would be. They might not be discreet when the president of the company asks about her brother’s personal financial matters, and they might be tempted to tell co-workers about the new sports car a family member is buying.

Fairness. Is it fair when family members who work in the business are able to make greater use of business staff for personal needs than family members who do not work in the business? In some situations, large shareholders don’t have the opportunity to take advantage of business staff, while minority shareholders who work in the business leverage staff extensively.

Risk. A family office should reduce or mitigate risk to the family, perhaps by providing advice and support as family members make large acquisitions, ensuring they have adequate property and casualty insurance or providing technology and cybersecurity support. If family members outside the business are not comfortable using the business staff, then the family isn’t mitigating this risk as intended.

Part-time focus. When the family office consists of business staff who support the family on the side, those staffers might not perceive the family office as their full-time job. It is unlikely that anyone is providing strategic planning, being proactive about risk management or even looking at how to most effectively support the family’s needs. For example, someone in accounting may provide paychecks for household staff, but is anyone in the organization performing background checks on those staffers?

Control. An embedded office can fall into a “no man’s land,” where everyone assumes somebody else is providing proper oversight and control. In one case we know of, nobody was reviewing business credit card expenses for the embedded office — accounting considered the task to be the responsibility of “the chairman’s office,” and the family had never thought about doing so.

Cost and value. When the family office is embedded and split between parts of the business, nobody knows how much the office really costs. When we identify the various pieces and assign costs to them, owners are often shocked at how much they are spending on a family office. Family members also may not truly appreciate or value the services they receive when they don’t know how much they really cost, how much time various staff put into those services or the level of expertise they are accessing.

Mitigating the challenges
Embedded family offices can take many forms, and most of the above challenges stem from staff splitting their time between the business and the family. Some offices are embedded within the business legal entity but are actually a separate department or group that is fully dedicated to the family. Such an office can operate as though it were completely separate.

A hybrid version we see involves a small number of staff fully dedicated to the family (perhaps in the CFO’s office), who oversee family requests. These staff in turn may leverage business employees and relevant expertise. This version minimizes the size of the office, provides dedicated staff and still leverages the skills and capabilities of the larger family business. This dedicated team also allows the family to create specific controls, measure costs and focus on key risks involving the family.

In one family office we recently designed, business staff were clear that they enjoyed providing support for family members — it was different from their day-to-day job, and they didn’t want to lose that. Some hybrid solutions, such as the one described above, can accommodate that desire.

Why some businesses choose to separate the family office
Some people perceive embedded family offices as temporary, filling a need until the family or business is large enough to support a separate entity. That may be true, but not necessarily. Many families maintain an embedded family office for generations, and don’t see any reason to change.

However, there are several reasons that a family may choose to separate the family office from the business. Here are a few such reasons:

The family is planning to take the business public. Such families will want to carve out any personal support as quickly as possible, so advisers and analysts are not confused by the functions. It is extremely rare for a public company to house a family office (although we are aware of a few), and it is not something we recommend.

The family is planning to sell the business. While we often see provisions within such transactions providing the family six months or even more to carve out the family office, there may be value to separating the family office before the transaction is in progress.  One such reason is to ensure that staff whom the family wants as part of the family office will not be included in non-solicit arrangements with the new owners. We have seen scenarios where a family wanted the business CFO to run their new family office, but since they didn’t plan it before the sale, they were not able to hire the person.

The family is looking to receive outside funding for the business, perhaps for future growth or liquidity. Depending on the source and amount of such funding, they may be able to maintain an embedded family office, but it is likely that, even if the family maintains control, the new owners will prefer to have personal services separated.

The family decides that its privacy needs are not being met or business staff are being distracted. While there are ways to mitigate these challenges, as described above, the simplest way remains separating the family office from the business. Many families have concluded that these challenges are insurmountable, leading them to a separation.

While there is no definitive research itemizing the number of family offices, embedded or otherwise, we believe there are more embedded offices than separate ones. Carefully considering and balancing the goals and needs of the family and the business enables you to  decide if an embedded office can continue to support the needs of both.         

Charlie Carr, CFP®, leads PwC’s Family Enterprise Advisory Services practice, which advises family businesses and family offices (pwc.com/us/familyenterprises).

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.                                   

How to determine whether your family office is successful

Last year, someone asked me a simple question that led to quite a bit of thought and discussion: How do I know if my family office is successful? The most common initial answers (investment returns, tax benefits) feel flippant and incomplete. One former family office president said, “I considered each year a success if I didn’t screw anything up … (long pause) badly.”

What became clear is that very few family members or office leaders had thought about this question. If they measure success at all, their assessment is based on total expenses or investment returns, because these are the easiest factors to quantify.

If you don’t know how to define success, then how can you properly do strategic planning or decide where to focus new resources?

Derailers of success
We believe that most initial responses to this question are derailers of success rather than measures of success. In other words, good performance in these areas does not define success for the office, but poor performance can take the office off the track toward success. Here are a few examples:

Investment returns: Great investment returns generally do not make a family office successful, but messing up investments can make the office a failure. If a large investment flames out, or even if returns significantly trail their benchmarks, the family may place the blame on the office and its leadership.

Taxes: The family office might minimize tax liabilities and provide excellent tax planning, but this may be viewed as just doing its job. Losing an IRS audit or realizing that the family could have saved millions of dollars with better tax planning before selling a business or investment may define failure for the office.

Fraud: Discovering that an employee stole from the family or perhaps uncovering how an outsider successfully committed fraud may make the office appear to be a failure. If there wasn’t any fraud last year, or at least none that you are aware of, the perspective may be that the office did what it was supposed to do. But does that mean it was successful?

Service: Most family office staff will go to extreme lengths to provide any service or support that the family desires. Often, such efforts become expected and don’t constitute success, whereas not doing so may be an irritant or failure in the family’s view.

Total cost: One family member told us he viewed the family office as a bottom-line number: “Do we really need this many people?” We doubt many people consider staying within budget to be their definition of success.

Each of these things may be compared to the starter on your car. When you turn the ignition (or press the button on many cars), you don’t think about whether or not the car will start, unless you recently had problems with it. Being able to start the car doesn’t guarantee that the journey will be successful, but if the car does not start, the journey will likely be a failure.

What is success?
The definition of family office success will vary, depending on the family and the office. What is the purpose for the family office? Most often, even when the family hasn’t defined it explicitly, the purpose is to promote the family’s legacy. How well does the family office support the family’s vision and hopes for the future, in addition to supporting their financial ability to pursue these dreams? This likely has more to do with maintaining family unity and cohesion, maximizing the family’s human capital (rather than financial capital) or seeing an entrepreneurial spirit and passion persist in future generations.

In the earlier analogy of starting your car, the car is a means to support your journey, whether that is to the grocery store or on a vacation. A family office is part of the means for a family to achieve its vision or legacy — the vision or legacy is more important than the office.

One family told us their family office’s purpose was to “remove the burdens of wealth from the talent [next-generation family members], so they can focus their time and attention on the business.” For this family, success can be measured by how much work has been removed from the family members. Another family told us that the founder has very strong values, and they will measure success by whether or not the values remain after the founder passes away. This is harder to measure, but an admirable objective.

It is not an easy exercise, and it requires being intentional in thinking through your purpose and identifying how you will define success.

Measuring success
Once you identify how you will define success, you need a reporting dashboard to track it. This should be a one-page report, measuring not just the primary measures of success, but also the derailers. A good report will track what will make the office a success, as well as factors that could prod the family to say it is a failure. The measures should be both short-term (e.g., How we are doing this year?) as well as long-term (e.g., How we are doing over five years?).

The easy metrics are typically the derailers: total expense, investment returns, tax liability and fraud. How do you report on fraud? If you were a victim of fraud, you obviously report that. If you are not aware of being a fraud victim, perhaps you report results from accounting controls or from your regular ethical phishing tests (because you are doing those, right?).

How do you measure family members’ entrepreneurial spirit and passion? One family decided that a partial answer was to track the percentage of family members whose earned income is at least as much as the distributions they receive. This is not a clean proxy, but it’s moving in the right direction. Another family tracks level of academic degrees earned and ongoing educational efforts.

One might wonder how the family office can impact or influence these results. Once you understand the vision and desired legacy for the family, the office leadership can get creative in helping them move toward that vision. If education is a big part of that, then the family office can help each family member find ways to further their education or participate in relevant conferences or seminars. If entrepreneurship is important, the office might find relevant speakers for the family retreat as well as provide one-on-one coaching.

Supporting a multigenerational family legacy is never easy, but don’t let the challenge deter you from putting in the effort. Start with intentionality, then add creativity from your leadership team and a lot of hard work — and prepare to celebrate the success of your family office.    

Charlie Carr, CFP®, leads PwC’s Family Enterprise Advisory Services practice, which advises family businesses and family offices (pwc.com/us/familyenterprises).

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.                                         

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Championing the future

Dramatic change is on the horizon, and multigenerational businesses are facing critical transition issues as ownership in private companies and substantial wealth are transferred between generations. Because few families are ready for these transitions, the family office will play an increasingly important role in supporting the family.

The Family Office Exchange (FOX) has worked closely with families, family office executives and advisers for more than 30 years. According to the 2019 FOX Family Office Benchmarking Report, the rising generation is often unprepared to take on a leadership role.

This FOX proprietary study found that while 41% of families identified “helping the rising generation become productive adults” as one of their top three priorities, 78% of respondents lacked a formal program to educate their rising generation.

FOX has identified three fundamental tips to guide family offices in planning family education programming:

1. Take a more strategic role in helping families prepare future leaders. A key succession challenge is that the rising generation is unprepared to take on a leadership role. Family office executives should become the champion for family learning and design or work with outside experts to institute programs beginning at an early age. Key building blocks for this program may include fostering personal identity and growth, increasing financial acumen, teaching leadership skills, defining the responsibilities of shared ownership and engagement, and providing training in family governance and participation on the board.

Families that do this well form multigenerational committees to develop goals related to family learning. In time, these working groups evolve into a family education committee. Committee members work together to create family learning tracks, set education expectations and plan learning events. With structured assistance from a learning champion or consultant, families reap the rewards of engaged and educated participants. 

2. Focus on family values. All learning programs should be anchored to the family culture, history and values. FOX experience suggests that family learning not only prepares future leaders but also can bind the family more closely together. Common approaches include:

• Exploring and understanding how shared family values can be articulated in the future.

• Openly discussing the family culture and where divergent views may reside.

• Tying family values into core learning programs on topics such as investing, philanthropy and wealth transfer.

Families that focus on shared values and regular communication are more cohesive, better organized and able to work together effectively. Many families begin rising-generation education, or in-law onboarding, by focusing on the family history and values. In some cases, families also focus on finding meaning and purpose in life, in conjunction with these values, before embarking on a specific education curriculum. This “family first” approach provides a foundation for all future learning. It gives learners cultural roots before they begin technical education.

3. Understand that one size doesn’t fit all. Families often span multiple generations, geographies and levels of sophistication. Family learning requires thoughtful planning and customization to meet the needs of the entire family. Programs should also address multiple styles of learning and provide different educational settings, including peer groups, family groups, individualized coaching and online learning.

Families that have thriving and productive rising-generation members allow for autonomy and belonging. It is important to encourage the rising generation to express their personal identity and choose learning opportunities that fit their life paths. It’s equally important that all family members feel a sense of belonging and understand the education and participation that is expected of them. This includes family attendance at industry learning events, in-house programs, education sessions at family gatherings and meetings with consultants. 

A family that is committed to education will also create a pathway for engagement with the family business, including such options as traditional employment, customized learning experiences and an idea lab. The idea lab provides a way to capture the innovative suggestions of all family members who aren’t interested in an onsite experience and provides an appropriate way for them to offer input. It creates engagement and shields company staff from an unexpected call from a family member. Each pathway offers a customized approach for those who want to engage on a different level. Allowing flexibility in how family members engage with the business can work well to accommodate everyone in a diverse family.

The priorities and focus on family education will differ for each family, but the family office can play a key role in making the case for a well-thought-out plan and emphasizing the importance of preparing for transitions.

Mindy Kalinowski Earley is chief learning officer for the Family Learning Center at the Family Office Exchange (www.familyoffice.com).

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The ABCs of wealth and responsibility

Nearly 100 years ago, Pierre S. du Pont was concerned about the difficulties future du Ponts would face as a result of the fortune being generated by the young chemical giant of the same name.

Du Pont, one of the three cousins who transformed the family’s 100-year-old gunpowder business into the modern DuPont Co. in 1902, wrote to his nephew in 1922 about his concern that “du Ponts born to a position of wealth” would not have to “work for a living” as had previous generations dating back to the 1802 patriarchal founder, according to Pierre S. du Pont and the Making of the Modern Corporation, by Alfred D. Chandler and Stephen Salsbury.

The coming generations could need “greater moral stamina to combat the temptations of wealth and luxury and to carry forward, in a manner becoming the family traditions,” du Pont wrote in the letter. He warned: “If you fail in your example those immediately following you may do likewise.…”

Generations later, these types of concerns continue to trouble owners of successful family businesses and other high-net-worth individuals. At the start of the economic downtown in the last decade, 53% of high-net-worth parents reported that they worried about the possible negative impact wealth with have on their children, according to a U.S. Trust Survey of Affluent Americans in 2007. Those who work with wealthy families say that figure still seems valid today and is likely an age-old fear among those who amass wealth. 

Nearly three-quarters of the affluent parents who responded to the U.S. Trust survey reported that they themselves taught their children to manage wealth. Today, there are professionals who can help provide wealth education for heirs. The most tailored, hands-on education can come through the family office. These entities that serve high-net-worth families can offer a wide range of customized schooling and counseling services, starting with children as young as 2 years old.

With the number of family offices exploding in recent years, these entities have often evolved to include family education.

“There is a growing awareness among sophisticated families about the real danger in doing nothing,” says Donna Trammell, director of family wealth stewardship at Bessemer Trust, a multifamily office.

The demand for such services is likely to grow as an estimated $15.4 trillion in wealth is expected to be transferred by individuals with a net worth of $5 million or more by 2030, according to “A Generational Shift: Family Wealth Transfer Report 2019,” by Wealth-X, a company that provides data analysis of wealthy individuals for-prestige brands in industries such as financial services and higher education.

The education offered by many family offices today usually involves much more than just teaching young people how to read a balance sheet, create a budget, understand a buy-sell stock agreement or perform other basic financial tasks. More important, many family offices work to provide social and emotional support to imbue heirs with the qualities they need for a meaningful life.

Ryan Agre, director of Vermeer Family Office, an entity embedded in the Vermeer Corporation, a family-owned manufacturer of construction, industrial and agricultural equipment based in Pella, Iowa, says his role includes anything that could help prepare future generations, whether it’s financial fluency, college planning or character development. He describes himself as “part coach, part teacher, part cop, part firefighter, part disciplinarian,” to name a few roles he performs.

“It is an investment and it’s a long-term payoff,” says Agre about the work a family office does to educate heirs.

The need
Often a family turns to a family office for generational education after a precipitating event, says Jill Shipley, senior managing director of family culture, impact and governance at Cresset Family Office.

Perhaps a young family member hears in school that his family is wealthy. A college-age heir might be approached by a friend with some investment or business opportunity. Marriage plans might necessitate a discussion around prenuptial agreements.

In addition, more and more information about a family’s financial situation is floating around the internet. Some information can be misleading to the next generation, Trammell says.

“If a number is revealed, the family office can provide important context for it,” she explains. “For example, many NextGen clients need some help understanding the different considerations for a $10 million and $100 million pool of assets.”

But while there are instances where the next generation might request more transparency, in most cases “it’s a top-down issue,” initiated by their elders, says Rhona Vogel, founder and CEO of Vogel Consulting Group, a multifamily office.

“Parents are worried about how this inheritance will impact their children,” Shipley points out. “I see parents initiating out of worry.”

Robert (Bobby) A. Stover Jr., Americas family office leader at EY, agrees. He often hears: “I don’t want money to spoil my children.”

Certainly, there are enough cautionary tales of profligate children and squandered fortunes through the ages to keep any parent up at night.

Thayer Willis, whose family founded Georgia-Pacific Corp., knows the pitfalls firsthand. She recalls she had an “attitude of entitlement” and “taking things for granted.”

“My father was a very kind person, but he couldn’t say ‘no’ to me,” Willis recalls. “My father felt like there was plenty, and why wouldn’t he give it?”

But Willis explains that her father was brought up in modest circumstances and had no experience with raising affluent children.

“The people that make the money don’t know anything about bringing up wealthy kids,” says Willis, the author of Navigating the Dark Side of Wealth: A Life Guide for Inheritors. “Parents raised in much more modest circumstances want to give kids things they didn’t have.”

This is where a partner, such as a family office, can provide sound, dispassionate guidance. Indeed, many family offices now have chief learning officers.

“A family office can be a catalyst to preparing the family on three fronts: act as a sounding board for parents in developing messages to share with future generations, reinforce those messages when interacting with younger generations, and act as a capable teacher/coach who is, sometimes importantly, not a parent,” Trammell explains.
This takes the parent “off the hook that they should know better or they should know how,” explains Amy Hart Clyne, chief knowledge and learning officer at Pitcairn, a multifamily office.

The nuts and bolts
Family office professionals agree that helping heirs achieve financial fluency should begin as early as possible and be continuous. Some say toddlers can pick up valuable lessons.

“They know the wealth is around. The sooner you start educating, the better kids are at absorbing it,” says Stover.
Smaller children can play games that require decision making. Shipley suggests fun activities like a bank tour or a visit to a nonprofit organization. Another method is to coach parents to take advantage of everyday teaching moments, such as explaining what happens when you swipe a credit card, adds Lauren Blatz, director of family education at GenSpring Family Offices. These are opportunities to educate children in navigating the real world, not through abstract concepts or theories.

“We try to take advantage of what’s going on in their lives,” such as getting a first paycheck or first credit card, Blatz explains. “We’re trying to coach our clients into more responsibility.”

The Vermeer family office takes advantage of “pop-up learning opportunities” by presenting lessons in person or by video conference, Agre says. For example, Vermeer held a session on the proper use of social media and the potential fallout from a hasty tweet or post.

Pitcairn has developed an “individualized learning map” for heirs that has many different components, including financial aspects, Clyne says. It’s a dynamic approach that allows for flexibility.

While Bessemer Trust offers strategies and exercises families can practice at home with young children, it typically starts working with the next generation in their teens or early 20s.

This enables the NextGens to “get comfortable with their team of advisers before they reach important financial and personal milestones,” Trammell says.

The responsibilities of ownership
Business families may overlook the necessity to educate the next generation to be responsible owners, particularly if a child is not expected to be employed in the business. But early education by a family office in this area can help circumvent future difficulties.

Shipley, who taught responsible ownership to college students whose families owned a business, says even those not working in the family enterprise needed an understanding of business finance, accounting, family systems and family dynamics.

Shipley’s approach is to understand an individual’s goals, hopes and fears, as well as their current and future roles and responsibilities.

“I help families develop governance systems to ensure owners — especially those not working in the business — are informed, have an appropriate voice and understand the implications of being a stakeholder and shareholder,” Shipley says. “Many heirs benefit from technical education on the financials, budgeting, understanding shareholder agreements, gaining clarity around distribution and implications on one’s financial life, estate planning and passing on shares to future generations, etc.”

At Vermeer, all age groups learn about the “implications, opportunities and challenges of family business ownership,” Agre says. “Our NextGen program is geared toward education on Vermeer ownership, in age-appropriate ways, while also helping them understand themselves better, which creates a more stable ownership group.”

This year, for example, children 16 and younger created a lemonade stand. “They had to pick the spot in Pella for the stand, build the stand from a kit, choose the type of lemonade to serve, choose the sales price based on the input costs, sell the product and then (as a team) deliberate and choose a charity that would receive all of the profit,” Agre says.

“These hands-on activities cement how business works, but also the family’s goals of teamwork and philanthropy.”

Family wealth education do’s and don’ts

Amy Hart Clyne, chief knowledge and learning officer at Pitcairn, offers these recommendations for educating NextGens about business stewardship and family wealth:

Do:
Tap your resources. Give the NextGens space to learn outside the family structure and to benefit from experienced professionals who have demonstrated this unique competency.

Set family and individual learning goals. Develop personalized SMART (Specific, Measurable, Attainable, Relevant and Timely) goals. Don’t be afraid to include some stretch goals. For example, a reasonable goal for a 21-year-old family member might be to build a personal budget for 2020. A stretch goal might be to create a personal economic mission statement.

Make it engaging and fun. Provide a variety of flexible formats.  Meet NextGens where they are (which means taking time to understand where they are and what they want to know). If they are old enough and mature enough, enlist them in building their own learning experiences. These experiences should be relevant and current. Don’t just tell them how the world works, show them.

Be intentional about communication and inclusion. Find ways to share experiences in order to build relationships and family cohesion. Parents need to tell their heirs their plans. Find ways to support the individual and ways to support the family. Intentionally bring in-laws into the conversation. Let the younger generations in.

Budget for these experiences. Set aside money to cover the cost of the learning programs — it’s an expense often overlooked. Establish a policy that spells out how the budget will be administered and what qualifies as a family learning expense: grad school tuition, conference fees, one-on-one learning sessions, coaches, etc.

Don’t:
Impose. Don’t be dogmatic or prescriptive. Don’t impose a plan without seeking input from the intended participants.

Assume. Don’t presume your NextGens will learn what they need to know in school. Make sure the advisers you engage have the necessary competency and experience. Don’t presume family members will be able to learn the responsibilities of a role by osmosis. Don’t assume one size fits all.

Vermeer has also instituted family summer camps that focus on relationships. Participants learn about the history of the company as well as the family’s service to the community.

Bessemer Trust takes a holistic approach when working with future owners. The process begins as early as possible, Trammell says.

“If good governance is already in place among the adults, we often suggest forming a junior council when the youngest child is around 7 or 8 years old,” she says. “In that regular forum, often adjacent to or concurrent with the annual stakeholders’ meeting, we can help the junior council understand what it means to be a good steward.”

The content of the forums is age-appropriate and interactive, such as bringing the company’s values statement to life. Other times it might involve interviewing a family director.

“All of this is done in the spirit of preparing them to be the best business owners they can be,” Trammell says. “After each session, we typically encourage the junior council to present what they’ve learned to the broader group, so they start to become confident with their knowledge of the business.”

To help next-generation family members understand what it means to be a partner, Bessemer works with families on their shared vision and on communication and conflict management skills. Having a facilitator present allows everyone to be heard and keeps the discussion moving forward.

“Family members need to trust each other and want to work together, and often that trust is built through regular family meetings that don’t focus only on business decisions,” Trammell adds.

“Consistently adding pleasurable shared experiences to the family bank is important so that they will have more to draw from in times of conflict.”

Shipley says she works on styles of communication, including helping young people understand their own way of communicating and the communication preferences of their partners. Also beneficial is training on generational differences in attitudes, values and behaviors.

“This helps increase understanding and reduce judgment,” Shipley explains.

When it comes to educating future company directors and/or trustees, family offices can help with the basics, like understanding a trust document and the duties a director or trustee owes to the organization or trust beneficiaries.

“A clear understanding of the role of a board member and how the board will interact with the ownership group and management is essential to the success of a family business over generations,” Trammell says.

The tricky part
Much harder to impart are the social and emotional qualities that wealthy children will need to lead a worthwhile life, experts say.

Indeed, some, including Willis, believe there can be too much emphasis on financial matters.

Children need opportunities to develop self-worth, confidence and resilience. This can be tough if “the world looks at you as if you don’t have the right to have problems,” Shipley points out. “Growing up in the shadow of success can be paralyzing.”

Willis remembers she was “irresponsible, fickle and spoiled,” into young adulthood.

By contrast, Jeanna French, whose father founded the J.L. French Corporation, an aluminum die casting company, grew up without expectation of great wealth. Indeed, she says, there were periods when it looked as if the business wouldn’t survive. French was in her late 30s when the business was sold and her family experienced a liquidity event.

“I think we were lucky because we were old enough,” says French, whose family is a client of Vogel Consulting’s family office services. “We already knew the value of money. We’d paid bills and been out in the world.”

The way French sees it, family offices can help family members realize each other’s strengths and remain a cohesive unit. A family office can serve as the outside, unbiased adviser and counselor.

“Future generations need to be armed with both a technical understanding of investments and with the softer skill sets: communication, conflict resolution, delayed gratification and gratitude,” Trammell says.

By helping to develop such life skills, family offices can guide the next generation to fulfill its potential.

“Wealth is not there to be on easy street. You want them to self-actualize,” Vogel explains.

Clyne puts it this way: “If Pitcairn could do one thing for every family as they navigate their family’s dynamics, it would be to help them facilitate a dialogue around their values and mission. It’s foundational work that will benefit the family long into the future.”

Agre believes that helping heirs develop a strong sense of themselves is the underpinning of any good educational effort. “Know thyself. That is foundational to everything else.”

One way to achieve that is by nurturing individual talents. For example, Agre coaches Vermeer family members in sports, and there he learns their strengths and weaknesses. “You can give all kinds of advice on technical matters, but you can’t buy intimacy and can’t buy trust,” Agre says.

When children get older, a trusted family office member can be the neutral third party serving in the role of a wise aunt or uncle. “Having an outside voice helps,” Shipley says. “Professionals can say same thing as parents, but it comes across differently.”

While a family office can help launch children into the real world, parents should remember there’s no standard model when it comes to wealth education. Programs can be as unique and varied as families are.

“There’s no ‘every-family-ought-to-do-this’ rule,” Vogel says.                                                                  

Maureen Milford is a frequent contributor to Family Business. She last wrote about the pros and cons of debt.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Signs you may be ready to consider a family office

When a family experiences a liquidity event, such as the sale of the family business, they may feel as if they’re entering an uncertain phase of life.

The transition results in new wealth, but also a loss of business infrastructure, increased complexity of assets and a desire to maintain privacy. Family members will need to be educated about stewardship of the wealth.

Consider this example: Julie took over from her father as CEO of the family’s successful data analytics business. She and her husband, Steve, grew the business for another 30 years. They received offers for the business but always ignored them, until they received one that was too good to refuse. They closed the deal 120 days later and received a very large amount in cash.

After coming up for air, Julie and Steve realized they had no one to help them. Their estate plan and financial architecture were fairly complicated. Their professional office staff had helped with most of their personal finance and legal activities.

What’s more, Julie carried some guilt about selling the business her father started and the impact on the family legacy. Julie and Steve were private people. They doubted a local wealth manager would be able to provide the attention and depth of expertise they needed. They realized that a family office would be the best avenue for them.

Whether you have sold your business or have accumulated significant wealth outside the family firm, a family office might be the best option for you. Here are some signs that your family may be ready to engage with a family office:

You’ve “lost” key personnel. You have just sold your business and no longer have access to support from key office personnel you’ve relied on for years to help with your personal affairs (CFO, bookkeeper, executive assistant). You realize how dependent you have been on those people. Who’s going to help you keep your new family enterprise running smoothly? You realize it’s more than you and your immediate family can handle; you need an expert team and proper infrastructure. You may need such a team to establish legal entities. More important, you need them to help you develop processes, procedures and a governance structure for making decisions.

Things have gotten really complex. You might have a number of trusts, entities such as LLCs or partnerships, and other complex assets, like real estate and operating businesses.

When a family business undergoes a liquidity event, the family may require new financial strategies that can be extremely confusing. Financial structures often include the use of family investment partnerships with features such as preferred/common classes of interest and separate pools for investment allocation purposes. There also might be an assortment of family trusts, and the family might need to establish strategies and policies for intrafamily transactions such as gifting and family loans. Alternative investments and other entities can add further complexity. Many families find themselves unable to understand all the nuances.

For families who still have an operating company, a family office begins to make sense when they start to accumulate wealth outside their business. At that point, they need a coordinated approach to management of the wealth that is separate from the business. Families with extensive trust and estate structures, significant educational needs for younger generations, personal accounting and bill-paying needs, several properties and household employees or large private foundations should also consider family office options.

Your family office team should include well-rounded professionals from different disciplines with specialized areas of expertise.

You’ve got a big family … and it’s getting bigger. Maybe it used to be just you, or perhaps you and a few other family members, creating and managing the family assets. But today multiple households — and several generations — are acting as business partners, investing together and sharing assets as a family. How do you ensure they are all aligned on a vision for the wealth? Do they all have a voice? What does the governance structure look like?

Particularly for families who are geographically dispersed, a family office can help by coordinating and centralizing information, planning and facilitating family meetings, and providing services to all households.

You are attempting to operate as a family enterprise. Overseeing the family’s assets can be just as complex as running a business. You need to develop and implement an investment strategy, monitor investment performance and generate financial reports.

The skills required to be a successful investor are different from those needed to be a successful entrepreneur. Many families realize they need the infrastructure and expertise a family office can provide.

You value your privacy. With the accumulation of wealth come increased security risks. You are keenly aware of that and highly value privacy and confidentiality. You don’t want to involve too many outside advisers. You desire a “one-stop shop” where all your needs can be met by professionals you know and trust, and who know and trust each other.

The upcoming generations need guidance. Poor family communication and inadequate preparation of heirs can lead to an erosion of family wealth. Education and leadership development for your rising generations can help your family avoid that fate.

Family offices can create a wealth education program that’s tailored to your family’s circumstances. Multifamily offices provide synergies between “softer” services and investing and financial services. For example, it can be beneficial for the financial adviser and CFO to attend and contribute to family education meetings.

Family office professionals can also help facilitate succession conversations and help with planning for transition to the next family leader.

Your family legacy is important to you. In addition to financial capital, you want to pass your family’s social capital to future generations. You plan to develop a philanthropic strategy to support the causes and communities you care about and to ensure your values and legacy are perpetuated. How do you define that vision? Does your next generation consider themselves to be stewards of that legacy? Do they feel like they have a voice in building the legacy? Remember, the younger generations will “own” that legacy going forward and will be responsible for continuing it.

You’re a control freak (in a good way). For ultra-high-net-worth families who require a team of advisers to work exclusively for them, a single-family office could be a better option than contracting with a multifamily office or other wealth manager. Having a single-family office guarantees privacy and offers assurance that your family’s interests are paramount.

You’ve accumulated substantial wealth. As your wealth increases, so do a variety of complications. If you have more than $50 million in assets, you’ve probably experienced the complexities described above. A family office can help manage financial issues and guide the family toward good governance.

The choice of a single-family office or a multifamily office isn’t determined by net worth alone. Other factors, such as degree of control, costs and services offered, are key components in determining the right family office solution.

Running a single-family office isn’t cheap. Costs can vary widely, depending on the services provided, but one Family Office Exchange study (“FOX Guide to the Professional Family Office”) found that the median annual cost of a single-family office is about 1% of the family’s net worth. If that sounds expensive when weighed against the benefits listed above, a multifamily office or other wealth manager may be more appropriate.

You must consider your family’s unique set of needs and circumstances in order to determine the right family office solution for you. It’s important for the option you select to be aligned with your family’s values and goals.

Dan Terlep, CPA, is senior managing director of financial and tax strategy for Cresset Family Office. Investment advisory, family office and other services are provided through Cresset Asset Management LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (www.cressetcapital.com).

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.                                                        

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How family offices serve families' needs

Five years after her entrepreneur husband died in 2000, Michele Rollins decided her children needed to be brought in on the family’s financial arrangements.

The late John W. Rollins Sr. had built an empire of companies involved in trucking, environmental services and pest control. He also owned racetracks and hospitality complexes.

“The kids needed to know more,” explains Rollins, the chairman of Rollins Jamaica Ltd., the holding company for the island nation’s Rose Hall Developments Ltd.

To accomplish that, Rollins, who holds a law degree and a master’s degree in taxation, created a small family office. When Rollins was chosen by the Delaware GOP to run for the state’s congressional seat in 2010, her family fortune was reported to be as much as $350 million.

For help, Rollins reached out to a separate family office created by the family of her late husband’s brother — the billionaire branch of the Rollins clan in Atlanta that is behind the pest control empire anchored by Orkin. (Michele Rollins’ branch is not part of that family office.)

Rollins describes the creation process as gradual; her family office eventually grew to include investment management, taxes, bill payments and day-to-day administrative matters.

“It wasn’t a conscious decision to have a family office. It just evolved. We kept adding more and more things,” she says.

Family office nuts and bolts
A family office can be an amorphous concept. Even some successful family business owners confess to not knowing what the term means.

Weighing your family office options

•  Begin the process by having a family meeting to determine your family’s goals. This should be memorialized in a mission statement and family constitution. It might be helpful to bring in an outside facilitator to work through the process. The cost for a facilitator could be $1,000 to $10,000, depending on the amount of work done.

•  Decide whether the family wants to contract for professional services with various individuals or prefers to have most of the services coordinated under one umbrella. You may find the services you need don’t require a family office but can be handled by private banking or other methods.

•  Ask other high-net-worth families what they have done.

•  When looking for a multi-family office, do your due diligence about the organization and the professionals with whom you’ll be entrusting your family’s affairs. Check with other families who have used the services.

•  If you’re thinking about joining a multi-family office, be clear about the services you want the organization to perform for you.

“A lot of times you say ‘family office’ and people say, ‘Huh?’” says Judy Lau, founder of Lau Associates, a multi-family office that is an independently operated subsidiary of Bryn Mawr Bank Corporation.

That’s a testament to how little publicity these entities have received. But over the past eight years or so, family offices have been emerging from obscurity.

The concept gained more notice in 2010, when the New York Times reported that Oprah Winfrey was starting a family office. Over the past year or so, the names of family offices — and the families whose assets they manage — have started to appear in the business press, as more of them have begun to invest directly in businesses (often those owned by other families).

Briefly, a family office is a private vehicle to help high-net-worth families manage their money and other family affairs by bundling some functions, such as legal, accounting and financial advisory services, under one umbrella. Some families, however, have family offices that focus only on functions such as family education, charitable donations and shareholder communications but not on investing and tax services (see sidebar).

Family office services can help families navigate diverse holdings and advice from an array of professionals.

“Most of the people that come to us as potential clients already have an investment manager, an attorney and an accountant. They have the basis of a family office there. What they don’t have is connectivity, coordination and communication,” Lau says. “A lot of people, when they come in as potential clients, say: ‘My attorney’s telling me one thing. My accountant’s telling me another thing. What am I supposed to do?’ ”

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The concept of a family office dates back to the 18th century, when “merchants would hire a trusted adviser to manage their wealth,” according to a study by the World Economic Forum and J.P. Morgan. The House of Morgan, created by J.P. Morgan in 1838, and John D. Rockefeller’s family office, formed in 1882, are two examples from the Industrial Revolution. The family office sector today appears to have grown out of the accounting world, as firms expanded services, says Lucinda Peterson, CFO of Lau Associates.

For families with an operating company, a family office removes the responsibilities of managing the family’s assets and other needs from the family business staff, enabling them to concentrate on the needs of the business. For families who have sold their companies, a family office can help the extended family maintain shared assets and family governance.

Family office pros and cons

Pros
•  A family office can provide governance and management structures to address the complexities of the family’s assets, promoting family cohesion and preventing family conflicts.

•  Advisers’ interests are better aligned with the family’s interests in a family office setting than they are when multiple advisers work with multiple households.

•  Centralization and professionalization of wealth management services generally leads to higher returns or lower risk and enables family members to aggregate and leverage their wealth for investing and delivery of services such as insurance and technology.

•  A family office can help separate the family business from the family’s other assets.

•  A family that uses a family office controls how services are delivered.

•  A family office ensures discretion and confidentiality regarding the family’s wealth.

•  Families with a family office can make direct investments without going through private equity funds or hedge funds.

Cons
•  Family members or family branches must sacrifice autonomy and independence to invest and work together.

•  Structuring and operating a family office can be complicated, time-consuming and expensive.

•  Family members’ expectations for increasing returns and more services may grow over time, resulting in “scope creep.”

•  The greater the number of family members whose affairs are managed by the family office, the higher the potential for conflict.

Sources: PwC / Family Business Magazine webinar, “Is a Family Office Right for You?,” April 25, 2018; Ernst & Young, “EY Family Office Guide.”

Most family offices today are classified as either single-family offices, which handle the affairs of one family, or multi-family offices, which provide services to a number of unrelated families.

Ernst & Young’s “Family Office Guide” notes that most multi-family offices are commercial, meaning they sell their services to client families. Others operate as private multi-family offices, open exclusively to a few families. Most multi-family offices started out as single-family offices that grew to include other families to achieve greater economies of scale.

Among the advantages of a family office are protecting the family’s privacy, reducing administrative burdens stemming from the holdings of multiple family branches, and providing financial advantages (cost savings and investment opportunities) due to the aggregation of wealth from multiple households.

Services handled by a family office can include wealth management, estate planning, tax preparation, insurance, philanthropy, family governance, NextGen education, risk management, bill paying and record keeping. A family office might also handle lifestyle (or “concierge”) services, such as managing family travel arrangements and supervising household services.

Single-family offices can be embedded within the family operating company or organized as a separate entity.
Many families develop their family offices over time, beginning with one employee administering the family’s affairs, says Raphael Amit, the Marie and Joseph Melone Professor and a professor of management at the University of Pennsylvania’s Wharton School.

“Some start in a small room in the company owned by the family,” Amit says.

These small operations can draw from the family business staff for assistance. Eventually, a small family office might grow into a private company — often an LLC — that manages the family’s affairs. Some single-family offices have 20 or more employees, according to Charlie Carr, U.S. family enterprise advisory leader at PwC.

Another option is a virtual family office, which outsources many family office services. At the opposite end of the complexity spectrum is a private trust company, which acts as a permanent trustee for family trusts.
Like family-owned operating companies, family offices vary in management and structure from family to family.

“It’s not one-size-fits all,” says Amit.

How to begin
Generally, the process of creating a family office starts when the family leaders recognize their lives have gotten very complex, says Todd Ganos of Reno, Nev., who started an office for his own family and then developed it into a multi-family office. Ganos’ entrepreneur grandfather owned a hotel, restaurant and supermarket in California.
“You realize you have a lot of things going on and you’re starting to outgrow your CPA,” says Ganos, principal adviser with IWC Family Offices. “You realize your business accountant is not going to have the skill set to do the personal planning.”

Sam Fratoni of Portland, Maine, joined Lau Associates to help build a portfolio about 20 years ago. Over time, he began using more of Lau’s services.

A family office alternative: Clemens’ shareholder services office

John C. Clemens surely would be proud to see how his descendants have carried on the family business he started in 1895. The company, based in Hatfield, Pa., with operations in Pennsylvania and Coldwater, Mich., today has four business units: Hatfield Quality Meats, Clemens Development, Country View Family Farms and PV Transport. The enterprise now generates annual revenues of more than $1 billion.

The Clemens family, now in its sixth generation, has grown to include an eye-popping 740 members. About 337 of these are shareholders in The Clemens Family Corporation. With that many business owners, things can get complicated.

As the shareholder group expanded into the fifth and sixth generations and households began to move outside the family’s Pennsylvania home base, managing their affairs “became more complex than it had in the past,” says Tara Bahn, a fifth-generation Clemens family member and director of shareholder services.

To coordinate professional services and facilitate an understanding of these services, two years ago the company began exploring the creation of a shareholder services function. Bahn, who previously was the family company’s corporate counsel, worked as a corporate lawyer at the Kirkland & Ellis law firm in Washington, D.C., and a trial attorney in the U.S. Department of Justice before joining the family business.

The purpose of Clemens’ shareholder services office is to act as a liaison between the company and the shareholders. The primary goals of the office are the sustainability of the business and having an informed ownership, Bahn says.

“It serves as a clearinghouse” of information and advice from the company to the shareholders as well as information from the shareholders to the company, explains Bahn.

Unlike a family office, Clemens’ shareholder services office doesn’t handle investments or tax preparation. Bahn says this stems from the company’s status as a C corporation, which means the enterprise is a distinct legal organization and tax-paying entity that is separate from the owners.

The shareholder services office works with shareholders’ professional service providers. For example, the office might coordinate with an attorney representing a family member who wants to create a trust for her grandchildren.

Bahn says the office combines and centralizes services and functions so they are performed by one person, thus improving the delivery of these services and facilitating communication. “Our purpose is not to have any surprises,” she says.

The office also handles day-to-day stock ledger functions, which include transfers from one generation to the next, dividends, payments and redemptions.

The shareholder services office currently does not handle education for NextGen members or other shareholders, but that function is “something we’re looking to start,” Bahn says.

Bahn says the transition to a shareholder services office was “very easy.”

One reason is that a third-party accountant who used to handle the day-to-day stock ledger still serves as a trustee on a number of trusts.

“It made the transition easier for shareholders,” Bahn says.

Before setting up the office, Bahn — along with John Reininger, who serves as Clemens’ chief relationship officer, plus the former CFO — interviewed several different family businesses to see how they handled the function.
Bahn notes there’s no one model that’s right for every business.

“We wished we could have found something and said ‘Oh, that’s exactly what we need,’” she says. “But with family business, they’re all different.”

She recalls a conversation with a member of another business family who cautioned against handling a particular function in a certain way. “We would absolutely recommend you never do that,” the person advised.

“I said, ‘Oh, we do that. It’s something that works for our family,’ ” Bahn says.

Bahn points out that Clemens’ shareholder services office is still evolving.

“Everything could change,” she says.

Bahn suggests that business families looking to create a shareholder liaison function talk to other families to learn what they do. The intelligence you gather will help you develop a model that works best for your family, she says.

“And we would always welcome any feedback from others,” she adds.

— Maureen Milford

Fratoni, an angel investor who was an executive in a high-growth biotech company, says it was important to have the family affairs in order “if something should happen to me.”

Advisers suggest that families considering a family office first sit down and develop a mission statement. “I ask people to flash forward 40 years and [envision that] Forbes is doing a story on your family. What do you want the headline to be?” says Ken Ude, director of the Marshall Family Business Program at the University of Southern California.

Amit says what stands out in mission statements he’s seen is the desire to manage assets in a way that fosters family unity, harmony, happiness and health. It’s vital that families decide the best way to manage their investments to accomplish those goals.

Single-family or multi-family?
Families with liquid assets of about $10 million or more might find a multi-family office more practical than the use of investment managers or wealth managers because of the additional services that fall under the multi-family office umbrella (tax compliance services, philanthropic advisory, family governance, etc.). Each multi-family office has its own unique menu of services and pricing, and each client family selects the services they want. The decision boils down to a cost-benefit analysis.

There is varying advice on how great a family’s net worth should be to make a single-family office worthwhile. Some advisers say a family should have at least $200 million to start a single-family office. But there are no hard and fast rules, says Carr.

An advantage of a single-family office is that it can be tailored to your family’s needs. It also offers control, privacy and confidentiality. The downside is that it’s expensive. The annual cost to operate a single-family office has been estimated at $1.5 million or more, depending on the scope of the operation. Advisers also warn that those handling the affairs of a single family may lack the insights that come with working with many families. Another problem could be the loyalty by the office staff to one generation, says Lau Associates’ Peterson.

Other criteria besides wealth should be considered to determine if a single-family office is right for you.

“There’s a big difference between wealth creation and wealth management. Are you interested — and skilled — in managing money, and is that something you want to do?” asks George Isaac, who runs a virtual family office for his family, which owned an industrial-grade metals recycling operation.

Typically, a multi-family office costs half of what it would cost to run your own single-family office, Carr says. Pricing structures vary but can include fees based on assets and additional hourly or fixed charges for other services. The downside, Carr notes, is that your family is just one of many multi-family office clients, so the services offered might be less personal.

Fratoni says families should determine in advance what services they want a family office to handle. “There should be clarity around what you want them to do and not do,” he says.

Whether you choose the single-family or multi-family office option, you must trust the professionals you work with.

“Trust is as valued as talent,” the J.P. Morgan study notes. 

Maureen Milford is a business writer based in Wilmington, Del.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.