Single family offices (SFOs) are designed to centralise the management of significant family fortunes in excess of $30-50 million, though overseas experience tends to suggest that for the office to be effective on its own, that figure should be a minimum of $100 million or higher. Typically, these organisations employ outside staff to manage and administer their investments, which could include areas such as taxation, philanthropic activities, trusts and other structures, as well as handling other legal and due diligence matters.
Often for those non-family managers who do work for an SFO, particularly at the senior levels, it is a particularly difficult and demanding mandate presenting unique career challenges not generally found in professional and institutional investment organisations. In addition to 'doing their job' of investment management and administration, outside family office managers can get caught in the emotional cross-current and politics of family-owned investment companies.
On top of the often-emotional family-based negotiations that these managers need to effectively navigate, the family office and its owners have a mirror challenge of recruiting, adequately rewarding and retaining trusted talented managers using market-matching incentives and opportunities.
Looking beyond the costs of outside hired help, this separate task of managing 'staff' as opposed to family, understandably leads many wealthy families to outsource the whole family investment company task to multi-family offices (MFOs). However, assuming a wealthy individual and/or family want to be kept close to the operations of (if not direct control of)) their wealth, what must they reconcile in order to either establish an SFO and/or bring in outside managers?
Family wealth or investment management?
The body of family wealth is the essential object of a prospective SFO's attention—being by its very essence the personal wealth (if not the identity) of its owners. This often equates to a very emotive, psychological and conservative bias in the SFO's desire for family equilibrium and rhythm.
Further, it embodies the need for the wealth not to be lost with the SFO's long-term aims of caring for and nurturing it, as well as handling intergenerational transfers, distributional 'justice' and very ethical values among its many other non-financial objectives. Such objectives may not necessarily be consistent and without contradiction, coupled with individual family members who will bring their own mix of positive and negative behaviours to form the emotions-based (and not always apparent) context of the family's wealth management.
Now, compare the above with the discipline of investment management, which is task-driven, outward, and based on efficiently maximising wealth opportunities to, among other things:
- Professionalise and make more cost-efficient the SFO's investment operations
- Be active and pre-emptive in investment processes
- Align portfolios and investments with stakeholder risk and reward preferences
- Enable succession planning and education for managers and stakeholder owners of the wealth.
For outside managers in an SFO, these different approaches regarding aims and priorities can seem incompatible and the source of daily and sometimes unreconciled friction. This highlights the possibility (as opposed to inevitability) of negative impacts regarding any excessive transfer of family values onto the SFO's operations and its outside managers.
There are of course many examples of successful 'family-first' solutions to staffing SFOs with next-generation family members brought in to commit their working lives to managing the family fortune. However, by dint of chance, available family may (or be perceived to) not have the aptitude, talent or inclination to do so. It is at this point that key family wealth owners will need to consider either:
- Keeping direct control (i.e. the DIY solution)
- Delegating (i.e. outsourcing various wealth management functions)
- Collaborate with trusted non-family talent and managers
The first solution is an act of postponement and keeps any SFO at the embryonic or 'emerging' stage, with owners and SFO remaining as one. The second is the domain of private banks, MFOs and other specialist wealth management service providers. The third choice is where the wealth owners seek a middle path between keeping total control of investment management versus trusting the contribution and support of external advisers and consultants—bringing in external managers with the skills to help the SFO grow and respond to its wealth and investment challenges dynamically.
Outside managers for an SFO are not recruited in a vacuum. There is a well-developed and deep market for finance professionals and business managers whose salary and on-costs are commensurate with the relative value, task complexity and risks of the role. A useful benchmark is to compare the annual cost of the manager and divide it by the basis point charge for a comparable (outsourced) wealth management asset or time-based charge.
Example: Calculating an outside manager's value
A fulltime SFO employee costing A$200,000 would be justified at say a comparable 40 basis point charge of a passive whole-asset manager. This equates to a minimum A$50 million asset base that would justify the in-sourcing. If an SFO was also looking for alpha-plus returns, the equation will of course be more complex.
However, this methodology may be too clinical, as there are many other more qualitative benefits (some of which have been mentioned already) of having an aligned in-house adviser and manager—as well as risks on both sides.
Indeed, the metrics of valuing outside managers for an SFO are a separate complex subject, depending on specific tasks and the relative effectiveness and structure of governance and key family personalities.
Challenges for outsiders
For the outsider, the challenges of working with an SFO begin from the outset with its culture and integration into it. The SFO culture, as is the norm, is based around the first-generation wealth-maker, often of strong character. Thus, it may be difficult for an outsider to adjust to or change/influence this dynamic.
Alternatively, consensus-based partnership or informal family structures could be equally challenging to manage. Therefore, it helps if the manager possesses prior experience working in SFOs or family businesses as such.
For the SFO looking to retain staff, and for managers to better know what they are in for, the SFO needs to have a clearly formulated set of values and vision statement. Further, there must be a conscious effort to reassure managers at the onboarding stage and on an ongoing basis around:
- Career development.
In return for employment and career direction, the manager needs to earn and secure the trust of their SFO employer. Getting them to feel comfortable with their competencies and behaviours is not an unfamiliar a task for any potential or incoming employee. However, the acute fiduciary trust being asked of the manager needs to be appreciated and applied in the delicacy of this challenge. Moreover, trust has both character and competence components, which respectively carry deeper expectations of intent and integrity in the first instance and capability and ability to produce desired results in the second.
The relationship with the SFO's broader family may also be a factor for consideration. Out and out suspicion of 'outsiders' together with the additional or separate possibility of the manager becoming (as Peter Leach says in his Family businesses: the essentials book) 'triangulated' between key SFO owners and the broader family, or becoming the 'dumping ground' of (or being dragged into) unresolved third-party conflicts between family members and partners is itself a source of uncertainty for the manager regarding the ability to do their job effectively.
It goes without saying that an SFO lacking a succession plan, or possessing a latent or unclear one, adds to any job insecurity that an outside manager may experience.
While the universal ideal is a conflict-free work environment, SFOs have advantages over institutional work environments, such as the resilience of informal and flexible close-knit working teams, personal relationships and the confidence that comes with clarity of dealing directly with stakeholder-owners of the SFO. The offers the opportunity for the manager to become a key and trusted member of the SFO team and, by extension, its family owners.
Family office lifecycles
Family offices, like the investment markets, do not stand still and, in their own way, have lifecycles. Their initial formation begins as a strong desire to safeguard and perpetuate the family fortune or for various other 'reasoned' purposes, be it promotion of family values, causes or established business and so on.
As such, the survival of family capital across the generations will, with time, become more important than one-off gains and transactions in the business and investing space. A first-generation entrepreneurial fortune-maker will have a different starting point and aims compared with say third-generation (and likely more widely dispersed) wealth inheritors. The SFO (and its managers) straddle the spectrum of time, lifecycles and characters of wealth owners.
An appreciation of the nuances regarding the change in number and composition of people to the sensitive SFO manager also means the SFO (and supporting managers, bloodline or not) need to be receptive and adaptive to the whole train of other changes that could follow. This includes culture, assets, decision-making procedures and ground rules.
This is indeed a challenge for the outside manager to further help the SFO transition from an owner-manager SFO to one of a cross-generational and sibling-partnership structure to an even more effective institutionalised corporate governance regime found in third-generation SFOs and beyond.
An outside manager accepted into the fold can help to define and retain what has historically worked, and still works, for the SFO, discard what no longer does and help facilitate new techniques, processes and relationships that will.
Dealing with both an investment company structure populated with family-owner bosses and stakeholders brings unique challenges for an SFO manager over and above that of a pure wealth manager.
At worst, the outside manager may be seen as a threat to the SFO, the wealth it is meant to steward and the values it is meant to espouse. At best, taking in outside managers and being outward looking, allows SFOs to take advantage of a broader range of external skills and networks. Moreover, it allows the SFO and its stewarded nest egg to grow and effectively manage change in investment markets and family-owner dynamics.