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| Multi-Family Office (MFO) Business Economics
James H. "Jamie" McLaughlin |  |
In early 2010, I left a role as CEO of a New York-based multi-family office and spent six months conducting a highly focused field study of themes and trends in the wealth management and family office world. It was clear that a transformation was underway and I wanted to understand where the forward market demand would come from and how various firms and family offices were responding.
Summary
Among many observations and themes the issue of MFO business economics is most salient. While the promise of the MFO remains noble, very few MFOs have succeeded in this most recent and extremely challenging market cycle. Generally, they have used the presumption of "full-service" to gather assets and have often unintentionally under-delivered or, perversely, they have consciously honored their "full-service" commitment by staffing up with non-revenue facing personnel and have systematically eroded their profitability. I will proffer several observations and findings. (Read more from Jamie McLaughlin and add comments). |
| It's Not Personal, It's Business: Separating the Family Wealth from the Operating Company
Lisa Ottum |  |
It starts on a small scale; the founder of the business may ask his CFO to help with some personal tax matters. As the family and the business grow, the scope of the personal wealth management services being handled inside the company grows as well. The IT department helps a second-generation member with his personal computer set-up, and the company's in-house counsel drafts an estate plan for the family. At this point, lines get blurred. When is the work that operating company employees are doing for the family outside the scope of the business? Should family members be paying directly for the services they are receiving? Who is overseeing the process?
Regardless of how careful employees are about billing personal wealth services to family members, regardless of how the family sets up its technology to protect file access, even when employees are extremely diligent about tracking the hours they spend on private family matters - managing family wealth inside the business is not an optimal wealth management solution. This arrangement increases the family's risk exposure while forfeiting the significant benefits that come from an autonomous family office or external wealth manager committed solely to the goals of the family. (Read more from Lisa Ottum and add comments).
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Greetings!
A year ago I edited a series of blogs for the Family Business Wiki Newsletter on multi-generational families of wealth and family offices. Those blogs were mostly introductory and defined the territory and the needs. This year, much has happened. The world of wealth is in turmoil, and the domain of family wealth management services, including family offices, is in deep transition. The blogs in this year's series are thoughtful and cutting edge, with leading experts in the field offering assessments, key concepts and surveying the world of change for family wealth. Each of them could be the basis for further dialogue, as families considering a family office, defining what their office might do, or considering change for the future, can learn from them. Dennis Jaffe Family Business Wiki Newsletter Guest Editor Professor of Organizational Systems and Psychology Saybrook University |
 | Thought Leader Blog: John Benevides | | The Family Office: Three Essential Questions, Three Honest Answers
 O n July 26, 2011, George Soros announced to investors worldwide that he would be closing his fund and sending money back to investors. His reason -- to form his personal family office. That same day, an influential commodities market CEO and derivatives investor signed final paperwork to engage a professional family office. Also that same day, a family business patriarch sold his business and moved his 28-year employee and general counsel to a new position -- head of his personal office, charged with establishing a hybrid personal/professional family office.
In each case, these business savvy individuals asked themselves the same three questions all family wealth owners must ask:
1. Should I have my own family office?
2. How much will it, or should it, cost?
3. How will I know that I am getting value for what I am paying?
Should I have my own family office?
The answer to this question spans three critical dimensions: time, expertise and control. As complexity builds in ones affairs and the line between professional and personal issues blurs (wealth level, family dimensions and dynamics, business and philanthropic activities, and more), the amount of time required to oversee, manage and administer ones affairs increases almost exponentially. Like aging, and other inescapable facts of life, this truism is assured. (Read more from John Benevides and add comments). |
| Dennis Jaffe
| | Why a Family Needs Family Governance Across Generations
Generational transitions are a deep challenge for a family not just with a family business but who own any sort of shared assets. Of course, any sort of enterprise faces difficulty when it gets to be 20 or 30 years old-it matures, faces new competition, or declines. It needs fresh and new leadership.
But for family owners the challenge has another facet. The owners of a public company are strangers-their personal bonds are not a factor in making decisions. They sell their shares if they aren't happy. Over generations, new family owners emerge, who are siblings in the second generation (A.W., after wealth creation), and then cousins. They are family but what does that mean? What do they have in common? Why are they partners? Do they still owe any allegiance to grandpa?
If they are no different from stranger owners, distant relatives with no common purpose or attachment, then they simply stop being a family business. The family dimension has lost salience. So many families drift apart, and that is fine for them.
Others want to sustain their legacy, but they are hampered by the complex emotional baggage they carry as a family. They may have a wonderful legacy of wealth, but in the second generation, rivalries or jealousies across families emerge. Was there covert favoritism, was one branch kept out of management, was someone fired unfairly? These issues become huge in a family. They may try to settle them by using the business as a hostage. (Read more from Dennis Jaffe and add comments). |
| Allen Bettis
| | Talking With Teens About Wealth: Capabilities of Successful Heirs
It takes no talent to inherit money, but learning how to become a successful heir requires special capabilities. One of the best things wealthy parents can do to prepare their teenage children is to engage them in conversations well ahead of their having serious money at their disposal. Having friends and knowing how to confidently handle relationships is crucial for teens, so talking about wealth and friendship is a good place to start. One great way to launch such a conversation is with a clip from the movie Wall Street: Money Never Sleeps and a few opening questions: Who are examples of successful heirs? When having wealth distorts how friends see them, how do they manage their close relationships to keep them good?
In the film, Gordon Gekko is a fast moving tycoon and an absent parent who did one thing right. He didn't give his daughter Winnie too much too soon. By age 24, she has her college degree, a job she loves, career goals and a smart boyfriend, Jake. But she is also an unprepared heir, unaware of her trust fund and how it will change her life. In one scene, Jake has lunch with Gordon and learns that Winnie has a $10M trust that distributes at age 25. By the time Jake has gotten home to tell Winnie the good news, he already has a plan for 'their' money. Winnie appears frozen as Jake soothes: "This plan can't fail, and you have nothing to worry about."
Showing this clip at a family meeting, stop and ask: "So, is Winnie vulnerable? If so,how? What does she stand to lose, if she doesn't handle things well with Jake?" (Read more from Allen Bettis and add comments). |
| Jon and Eileen Gallo
| | Family Financial Literacy: The Results Oriented Trust Environment and the Financial Skills Trust
A primary concern of today's clients is that inherited wealth will undermine their children's value of money and leave them unmotivated and directionless in a highly competitive global world.
In the past, trust attorneys have often responded by creating an incentive trust, which predicates financial disbursements with benchmarks driven by the benefactor/parent. Incentives quite typically include specific requirements on education, employment and marriage.
During our decades of working with families, we have observed the continual failure of externally driven incentive trusts to achieve the real goal: the emergence of fulfilled, financially responsible adults who enjoy a healthy relationship with their money. We have also seen the potentially negative impact that incentive trusts can have: interfering with a young adults' autonomy and creating family discord.
Moreover, well over one hundred studies conducted in the last forty years by institutions ranging from the London School of Economics and the University of Chicago to the Federal Reserve Bank of Boston, have shown that money is an effective incentive only if the behavior that is being incentivized is routine and boring; for example, working on an assembly line and repeatedly engaging in the same procedure hour after hour. (Read more from Jon and Eileen Gallo and add comments). |
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