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Family Wealth & Family Offices – Boundaries, Intersections, and Families

Family businesses are often great drivers of wealth creation – family member owners focus on building, growing and enhancing the business – and if successful their endeavors present new and significant challenges to their families: managing their wealth, avoiding the “shirt sleeves to shirt sleeves in three generations” syndrome, and considering family legacy and stewardship.

Families in business must deal with managing the business, strategic planning, ownership, changing markets, new technologies, customers, competition and more. But what of the family’s wealth ? What is it and how is managed? What of the family’s needs and goals ? At some point, families need to find a balance between the demands of the family and of the business. An overemphasis on one or the other means trust, commitment, business effectiveness and family harmony will be unbalanced and the family potentially conflicted (1).
John Ward and Randy Carlock developed the Parrallel Planning Process (1) suggesting family and business plans should be mutually supportive, matching the family’s interests and the business’s goals.   Key points included 1) family values and business philosophy are the core, foundation; 2) strategic thinking affects family commitment and the business; 3) establishing a shared future vision for the family and the business is a recipe for success; 4) long-term success requires formulating family and business plans.
Jay Hughes, in his book Family Wealth: A Compact Among Generations(2), suggests the guiding principle among successful families is the concept of affinity: families linked by common mission and interest  promote responsible and lasting ownership, and preserve family wealth. But what is family wealth ?

Family Wealth
Family wealth is composed of six key elements or “capitals”: spiritual, human, intellectual, structural, financial, and societal capitals (3). If families of affinity are strong families, how do we get there ? Each of these capitals represents challenges to families and their advisors. Bringing family members together to discuss and agree on their shared values, growing a family’s human and intellectual capital through inclusion, respect for individuality and loyalty to the whole are more easily said than done . Establishing a process of transparency and communications, of sharing, are important building blocks. Families of affinity, which have a shared meaning and purpose are strong families. They are constructed through collaboration, they are not some sort of “immaculate conception”.  Respecting the Next Generation’s dreams, integrating and accommodating them to the extent reasonable and possible are more important than ever as inter-generational change comes of age. Building proper ownership structures, and promoting ownership over management and educating stakeholders helps prepare the family and its members to be responsible owners. Financial capital matters, investments and the investment process are important, but they are only one of the capitals. Taken together, the focus should be about stewardship – the key to generational success.

Families are self-governing and complex systems, and promoting family commitment and growing great owners through the management of the family’s wealth can enable families to stay together. This is however process dependent – and requires patience. Evolutionary yes,  affected by family dynamics, other internal and many external factors, yes. But having an organizational structure which enables it to happen helps.

Family Offices
Family offices focus on serving the family today and into the future. Stewardship and legacy, family mission and vision, values and governance, responsibility of ownership, developing family wealth/capital, and enhancing “the pursuit of happiness” are all important objectives. The challenges to families of wealth and family offices revolve around the notion of establishing and defining family needs – both as a family and individually. Simply put, dealing with the complexities of wealth management – wealth preservation, stewardship, asset growth, risk management, financial independence, family cohesiveness, responsible ownership, and philanthropy – can be a daunting task.
A family office supports and coordinates these challenges by organizing, formalizing, orchestrating, wealth preservation and creation, and family dynamics. It allows the family to control the issues it considers important, promote continuity, access and benefit from leading service providers internally and externally, tailor services to its needs and goals, confidentially and privately. What types of services ? They may include comprehensive financial planning, tax planning, accounting, investment policy and portfolio management, consolidated reporting, succession and estate planning, risk management, trusteeship, family stewardship, governance, family meetings, education, philanthropy and much more.
The family office – in whatever shape or form – helps implement the family’s goals, serve its needs, and support the evolution of the six capitals. From a practical point of view, its services can be multi-faceted:

Family offices are not new, can be defined in many ways, through functionality and constituency. The most common are single family offices, in-house founder’s offices, and multiple family offices. They come in all shapes and sizes, one size does not fit all. Their constituents can range from a small family unit to branches of an extended family, from one to many separate and unrelated families, from a few to many family members.

Single Family Offices are dedicated to one family and its branches. It is staffed by employees of the family who work with and for the family. The selection and  role of the CEO is critical as this person will serve as an important bridge between the family and the office. The staff also play an important role – as service providers and client relationship officers. Services are tailored to the family, the functions of the office reflect the family’s culture and values. It offers privacy and direct control, it is usually very responsive to the family, and relationship-focused. It can offer best in class services internally or through outsourcing, and is an family education/cohesion platform. Cost inefficiencies, service level inadequacies, the possibility of employee/family relationship conflicts pose potential weaknesses, as can employee turnover and remuneration issues. But for families of significant wealth (over $ 100 mio) it is a wonderful platform.

So-called Founder’s in-House Offices are also dedicated to one family, yet staffed by employees who often have a dual role in the family business and the Office. The family does what it wants as it wants, few if any outsiders are part of the team, and the founder often runs an autocratic entity with limited or specific vision with respect to family wealth. The office can be dysfunctional, myopic, subject to compulsive decision-making, and risk management weak, and it can be very efficient. Much depends on the members, their experiences, expertise, attitude and more. But for families looking for limited services, or who are not particularly concerned with legacy and stewardship of the family wealth, such a structure is an option.
Multiple Family Offices  (MFO) come in two basic forms: independent and institutional. Both are growing in appeal for different reasons. Independent offices are established by one or several families looking for economies of scale. Many families are dissatisfied with current institutional providers for many different reasons, and seek greater control over their affairs, more tailored services, and quicker response times. Costs are shared, outsourcing commoditized service requirements important, knowledge sharing fundamental, pooling of services facilitated, and a dedicated staff serves all the families. Again, the CEO plays a critical role as a bridge and service provider. But values and cultural differences can create tension, relationships can be strained if boundaries are not set, and potential conflicts of interest not managed. Peer exchange amongst the members is often enhanced and learning experiences many.  Institutional offices are established as a division of a financial firm, independent of any family, offering a wide range of services. Benefits include access to best in class providers, and organization, staff, management etc is provided by the institution. Service levels can be established and costs are borne by both parties. But families are many and client relationship managers are key to the process. Personnel turnover and other institutional issues (e.g. standardized offerings and services) cannot be discounted, but many efficiencies can be obtained by engaging the “one stop shop”. For families with a minimum of $25-50 mio these are good options overall.

A word about Private Banking. Families often wonder whether a private banking relationship is a better solution to the family office options. There is no perfect answer; each family needs to reflect upon its wealth, goals, needs and its perception of legacy and stewardship, as well as the service provider’s offering, corporate culture, its people, and its dedication of service.

Family Wealth Management
The management of family wealth is indeed a journey, evolutionary yet fascinating. It challenges all involved, and now requires a new focus: the management of family wealth rather than only its financial capital.  Family strategic thinking should indeed become the new norm.
Strategic thinking at the family level is one thing, implementation is another. Families are confronted by the daunting challenge of how to manage family wealth.

Where and how to start ?
Practice has shown that family leaders often think they can solve problems themselves, want no challenges, call for help too late, think noone understands like they understand. They like to work with advisors they know. But often other family members also have vision, and they can find themselves left out, frustrated, or even indifferent. The challenge is how to bring everyone to the table – and there is no magic formula. Family dynamics, family members, family structures such as family councils, and trusted advisors can all play a role. Its important to focus on who is the client, what type of family system is involved, what are the key problems and is there any consensus, as well as undertaking a family SWOT analysis, looking for hidden or patent minefields, understanding the family’s communication process, and more. Relationships matter.
Mention is often made of the need for family governance to help guide a family, keep it on track, keep it together. Again, practice shows that families often have some sort of governance system in place – verbal and/or written. They have ownership structures in place, family dynamics, and more. The question for the family is whether or not, and how, it wishes to stay together.

If it decides it does not need to stay together but rather “co-exist”, then each member or branches go their own way on many matters.
If they decide to stay together, practice has shown that successful families are open, inclusive and communicative. They establish a governance system composed of principles, policies and practices which enables them to manage the six capitals. Before they do so, however, they live and co-exist less as “members of a family” where actions and behaviors are impulsive, focused on immediate needs and goals, and family members act independently – and in which basic financial planning is undertaken. This phase is one of wealth creation.  But as family members begin to consider the “bigger picture” of family legacy, stewardship, and their inter-relationships, and the next generation  comes into its own, the need/desire for more coordination arises. Leaders emerge, family meetings are held, and discussions focus on how to link, keep, hold everyone together. The family’s evolution has led it to consider the need for some sort of governance. Sometimes family leaders can help begin the conversation and guide it forward. In many cases they cannot – and the need for help from advisors becomes necessary.  If families are  successful, they are more cohesive, and the notion of affinity takes on a real and constructive role. Each of the six capitals become key success factors. Family members can grow as individuals yet are still part of the whole. All contribute to sustaining the family in the present and into the future.

The Challenge
The challenge for the Single or Multiple Family Office, and even the private banker, is how they support the family’s wealth management endeavors. Trusted Advisors and Consultants can help. The members of each must find a way to understand, to serve, and to help the family turn strategy into reality.

1. Strategic Planning for the Family Business, J.Ward and R.Carlock, Palgrave, 2001
2. Family Wealth: A Compact Among Generations, Jay Hughes, Bloomberg, 2008
3. Six dimensions of Wealth, D Jaffe, Journal of Financial Planning, 2003

Laurent Roux has some 28 years of experience working with families and family offices worldwide. Activities range from strategic wealth management – family legacy and stewardship, family dynamics and organization, family office construction and coordination, and consulting, to international asset management, asset allocation, portfolio management, manager selection, performance reviews, mutual fund administration and global custody.
He was a Director and Managing Director at Pictet & Cie, Private Bankers, Geneva, Switzerland and a number of its international affiliates during his 25 years at his family’s firm. In 2005 he returned to the US and founded Gallatin Wealth Management, a Wyoming LLC. The firm is an independent  wealth management advisory and consultancy whose objective is to act as the trusted advisor, personne de confiance, to a limited number of families, family offices and mfo’s.
Laurent holds a JD degree from California Western School of Law in San Diego (1980), received a BA from the Univ of Colorado with majors in History and Political Science in 1976, and  attended the Graduate Institute of International Studies Masters program in Geneva. He was a  member of the Cal Western International Law Journal, received several Dean’s Awards and Advocacy Honors Board Awards.
He joined Pictet in 1980, worked in Geneva and London, established and headed Pictet’s Asian presence in Hong Kong in 1986, worked throughout the region nine years, headed the Group’s EU operations in Luxembourg, and returned to Geneva in 1998. His responsibilities there included strategic group projects, single and multi-family office services, coordination of Pictet’s international offices, and more.
Laurent currently is a board member of the Family Firm Institute, an advisory board member of the East West Institute, a global conflict prevention think and do tank, as well as the Jackson Hole Center for Global Affairs. He has spoken at numerous forums in Asia, Europe and the US, teaches family wealth advising for the FFI Certificate Program, and was an advisor/participant in the Far Eastern Economic Review ‘Where To Put Your Money’ Quarterly’s in Asia. He has written several articles on private banking and the concept/role of personnes de confiances.

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