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Free the family from the shackles of its wealth

There seems to be a growing feeling that traditional family offices are failing families of substantial wealth. Family office executives talk about the revolving door of employment; family members are trying harder and harder to find the model that should work for all families; and new conference companies sprout like weeds to offer advice to family offices.

Everyone reading this knows just what a family office looks like. Yet, when each explains the vision of a family office, each sees something different. Like the blind men describing an elephant, our views of family office are entirely different. The family office comes to represent a family's view of how its wealth should be managed. Each is unique.

Despite the diversity of models, there are common deficiencies in today's family office management. Based on many years of helping families of wealth, I see serious and repeated errors in family wealth management. These mistakes include the shackling of family members in the chains of their wealth through bundling of services and design of governance roles for family members. Additionally, the family office all too often winds up favouring the needs and wishes of the wealth creator, rather than recognising and respecting the individuality of each family member.

To understand how family offices went astray, it's important to recognise that today's family office is a creature of its own existence. Originally designed for efficiencies and investment principles that reflect the culture and vision of the wealth creator – or those in the eldest living generation of the family wealth – the family office today increasingly puts survival first. As these creatures build comfort for themselves, the individuality and passions of family members become victims of institutional success.  

The efficiency and, in some cases, the perpetuation of the family office leads to an avoidable mistake: the "bundling" of assets as the family spreads among many branches. The old British system of primogeniture kept wealth concentrated in the eldest male of each generation. Today, wealth holders think of division of the wealth at each generation, so that each individual owns only a percentage of the pot owned by its parents' generation.  

Under this structure, process and rules must develop to ensure that the wealth stays together to allow the family to maintain a family office. The problem is that the most efficient management can occur only when all family members are treated similarly – when individuality is sacrificed to systems.

The easiest systems to build for smooth and efficient operation are investment analytic and performance-based systems. Investment expertise is ideal to "bundle" because it allows efficiency, objectivity and technological solutions. But when family offices place too much focus on investment performance, they sacrifice many other areas of importance. To name just a few: appropriateness of investment varying from individual to individual; the education of a younger generation by careful design and implementation; strategic philanthropy that requires understanding from each family member. And yet "keeping the family together" – the vision of many wealth creators – and maintaining the bundling is often most easily accomplished around an investment platform that deals in absolutes not molded to the individuals in the family.

The investment-driven family office, often incentivising employees by compensation based on investment performance, may well produce poor investments. As we have seen in the great market meltdown of 2008, many family office executives were encouraged to go into investments that are illiquid and not transparent. The expert investment professional was likely buying the hottest products of Lehman Brothers and others.

Sizzling performance rewarded him or her with bonuses year after year, as well the opportunity to crow to the family about the office's investment management sophistication. Today, many families find themselves in "black boxes" with no understanding of the investments, and the family office executive finds himself without a bonus. In fact, annual profits are not the proper fit for a family with a hundred-year perspective. The alignment of the family's interests and its office is not served when the office is compensated disproportionately on annual performance.

The net effect of this emphasis on systems and efficiency is to shackle family members to their wealth. Freedom from wealth is very hard to achieve when the office itself is rigid and designed for efficiencies. Individualisation must be sacrificed for the "common good" of family wealth management. Even the most thoughtful office asks family members to play a governance role, and most try to engage family members in supporting office functions – serving on committees, writing reports and playing active roles in "softer issues."

Can family offices change to meet the needs of the modern global family? Clearly, in multi-generational service, change is key success. Yet, individuals in families rarely like change in their wealth management services. They resist it because they often have other areas and needs more pressing and interesting, and institutions rarely look for change when the market is not forcing it upon them. The combination of complacency and generational shift creates tensions incapable of an easy resolution.

To manage change, a family office needs a trusted advisor who has a strategic perspective on all areas of family wealth management – everything from governance and philanthropy to investment management and succession planning. The wise family office professional will likely see the need for individualisation, independence and change. Here is the true trusted advisor – a person who has loyalty, knowledge, understanding of the family, patience, a multi-generational perspective, discretion in behaviour and conversation, and administrative skills to manage the office's staff and operations. 

Unfortunately, that person is not easy to find. He or she is not being developed in the modern law office, accounting firm or commercial bank and, even if the person can be found outside or, even better, within the circle of individuals who have known the family for a long time, the role is quite isolated. The family office executive cannot talk openly with other offices, except on the most generic levels. The family office executive cannot turn to one family member to help with another. And, the family office executive can never justify his attention being distracted by one family member to another.  

Among the most important tasks of the seasoned trusted advisor is to ensure that there is a clear, methodical plan for his or her own succession. In fact, most family offices have no culture of succession, and that has led to many of the problems we see today in family office management. I was reminded of that recently when three 60-year-old employees of a family office told me they have 90 years experience – but no plans for building succession. So the loyal family trusted advisor serves alone and with no capacity to build succession. In a single-family office, the job is almost impossible and intolerable.

Will family offices survive over the next 20 years? Many will not. Those that will survive will do so under leadership of a trusted advisor who can deliver family wealth management services that give family members freedom from wealth and freedom to live life on their own terms. Enlightened family office leadership will see among its responsibilities the building of customised services fully designed for the family members using the office and recognising their individuality and needs. Efficiency must necessarily be subordinate to individuality, and focus on realistic succession must be more important than design of systems. Vision will be truly long-term and multi-generational.

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