The Hard Challenges that Large
Family Offices Face
By Charlie Carr, CFP®
While your family may not have a family office, or perhaps has a small one embedded in the
family business, many of the challenges of large family offices
are either common to smaller offices or perhaps are lurking in your future.
A very large family office client recently said they have spent the last decade dealing with tax and estate matters, developing their investment platform, and generally building the infrastructure to support the family. While these tasks are never completed, they believe it’s time to shift their focus to helping build and support the family’s human capital – their purpose, togetherness and family dynamics. We’re finding this is a common concern among large offices, and it’s likely much harder than the prior tasks.
A family office supporting much fewer family members recently bemoaned how difficult it is to get family members to respond to requests, such as where and when to have the annual family retreat next year. That same complaint, a lack of engagement from family members, also plagues the larger offices.
While your family may not have a family office, or perhaps has a small one embedded in the family business, many of the challenges of large family offices are either common to smaller offices or perhaps are lurking in your future. Below are six categories of challenges large family offices are facing.
Shared Vision / Values
If the family does not document a shared vision during the life of the wealth creators (usually the first generation), it becomes very difficult to do so later. Lacking a foundation of shared vision and values, they are much more likely to splinter by branch. A speaker at a recent Transitions conference said the greatest gift parents can give their children is good governance.
We’ll add to that; they should give them a vision and values that transcend the generations.
Related to this, we’ve seen several very large families weighing whether they should offer separate family retreats in the future, because branches of the family are so strongly split over political views. Every family has differing opinions on politics (and religion, table manners, hair styles, etc.), but are we forgetting that we’re still one family?
We would prefer to figure out ways to communicate and celebrate what we have in common, rather than focus on our differences. Identifying such vision and values helps.
Focus on the Family's Human Capital
Having a large number of family members, perhaps hundreds, creates a variety of challenges to an office. How do they provide customer service? Do they assign representatives based on generation or by family branch? They might need a Customer Resource Management (CRM) tool just to track preferences and activity with different family members. As each new generation become adults, the offices struggle with how to provide services to that generation. Often, the younger generation doesn’t yet have the money to fund those services, so the office has to find creative solutions for funding the family office.
As generations grow, there also can be a large disparity of wealth among family members. Some branches may spend far more while others may invest better. As a result, one family member looks to the office to help with basic budgeting while another needs help in acquiring or managing an airplane.
Helping Family Members Find Purpose
The larger the family and the greater the wealth, family members may struggle with finding purpose in their life. While such challenges impact families of all wealth levels, when the business is wildly successful, later generation owners have a greater likelihood of dealing with these challenges. William Vanderbilt said, “inherited wealth has been a real handicap to happiness.” We once knew a large family that discouraged family members from getting jobs (“they’ll take it away from someone who really needs one”), without realizing that they are removing one of the key means of finding purpose in life.
Such family offices are struggling with how to address mental health and addiction issues, as well as looking for ways to help educate family members on how to manage wealth (do they use one-on-one training, classes at the family retreat, three-minute videos or something else?).
Improving Family Engagement
Family offices constantly struggle to get family members to engage with the office. This might be getting responses to where to hold this year’s family retreat, gathering details for tax compliance or just scheduling an annual or quarterly review meeting.
We’ve had offices bemoan that family members don’t open the quarterly newsletter they create and then complain that the office stopped creating it.
Most of these families have a variety of foundations, created to get family members engaged in donations. One of our very large offices wants family members actively involved in making donation decisions, rather than staff making those decisions.
We’ve learned that as foundation assets grow, most families migrate to staff-led decision-making, rather than family-led. This direction may not align with the family’s desires.
Family Office Services: Finding the Right Balance
Family offices of all sizes struggle with what services to make available to the family, balancing costs and usefulness. As for offices supporting larger families, we see three services that are debated most heavily.
1. Should the office support family members’ personal IT needs? With growing wealth and complexity, the family’s technology needs grow along with the cybersecurity risk. While there is a cost to supporting technology for large numbers of family members and houses, the offices who provide such support find that it is one of the areas where the family is most pleased.
2. Does the family office support one-off businesses or investments? Wealthy family members are bombarded with opportunities to go into business with someone or to invest in a business or fund. The professional investment staff of the family office are inclined to always say no, as they believe the family is better off sticking with their investment process. They’re frequently correct, as the ideas might be half-baked. Does the office help with analyzing such opportunities, providing advice on whether or not to get involved, and perhaps even improving the proposition? If the office doesn’t help, then family members are more likely to just do it on their own. Some offices even provide accounting support to the family’s early-stage business ventures, or perhaps offer a strategic outsourced accounting relationship.
3. Personal security. We’re constantly amazed at the family members who tell us they don’t need to worry about security because they “stay under the radar,” despite various published articles about their business and public quotes from family leaders. This is one area where you really don’t want to wait until a problem arises to address the possibility. It is a major challenge if family members travel internationally, but even within the United States, there are concerns. One client recently told us about an unknown person knocking on the patriarch’s front door at dinner time to pitch an investment idea.
"We described these challenges at a recent gathering
of family office leaders, and the most common reaction
was great relief that they weren’t alone in facing them."
Building Family Office Infrastructure
We opened by saying that such offices are shifting from building their infrastructure to focusing on human capital. However, there are still a few elements of infrastructure that continue to be flies spoiling the ointment, especially technology. There are limited integrated options, some of which have major detractors and remain very expensive. Every family office we’ve spoken with is bemoaning their technology options.
Another infrastructure challenge also plagues businesses: finding good staff. Their challenge is compounded by intentionally maintaining a low profile (unlike a business, family offices often don’t want outsiders to know they exist), and since they are thinly staffed, there may not be advancement opportunities. Related to this, it is difficult to benchmark compensation and ensure they are paying competitively. While there are several decent family office compensation benchmarks, geography has a large impact, and jobs with the same title may vary drastically.
Every Family Office Faces Different Challenges
You might have noticed that this article highlights the challenges without providing the solutions; that is because the solutions are difficult and highly customized to each family. We described these challenges at a recent gathering of family office leaders, and the most common reaction was great relief that they weren’t alone in facing them. This is one of many areas where networking among family offices provides tremendous value.
Charlie Carr, CFP® is president of Big Canyon Advisors, LLC, which advises family businesses and family offices.
