Career trajectories to the top: Where does the ideal family office leader come from?
The role of family office leader rarely becomes available and if it does unexpectedly, it can often fall on the shoulders of internal leaders to take charge—regardless of their specialism.
It is often also the case that newly established family offices seek a professional leader from the benchmarked environments of financial or professional services to bring a different dimension to their family affair. While these can commonly include legal, accounting and banking professionals, no path to the C-suite ever looks the same, especially when it comes to family offices. So what career trajectory is best?
We explore five key trajectories to the top and the advantages and disadvantages of hiring a leader from each.
Do lawyers make the best chief executives? If you look at our global political leaders, past and present, you might think so. In fact, Nelson Mandela, Mahatma Gandhi, Barak Obama and Vladimir Putin are all graduates of law as are many leaders within the financial world. Brian Moynihan, chairman and chief executive of the Bank of America equally brings a rich history in law as does the former chief executive of American Express, Kenneth Chenault and former chief executive of Goldman Sachs, Lloyd Bankfein. Wherever you go, you are able to find chief executives with a legal history, but how often does this translate in the world of family offices?
With regulatory scrutiny set to intensify for family offices, lawyer-first leaders can certainly come in handy. Ample studies have shown that organisations led by chief executives with legal experience are associated with much less litigation and not only can they diffuse potential legal conflicts, but they can advise on complex matters. In fact, lawyers can make great leaders, mostly because of their ability to err on the side of caution. They are trained to think in a particular way, to pause, reflect on a situation and its impact on a business before making a judgement and it is this ability to ask before they answer that makes for an efficient workplace culture and smart business acumen. It can also be a problem.
Lawyers by their very nature are risk-averse. Thinking at three steps ahead at all times, they know the risks attached to most decisions and make a conscious effort to avoid risk wherever possible. This can be a great thing of course, but a reluctance to take risks and a consequential slow pace can rob family offices of the most lucrative deals. After-all, high risk equals high reward and without it, family offices led by legally-qualified chief executives can often fail to monopolise or dominate a marketplace.
Chief investment officers
Family offices are established to preserve and generate the wealth of a family and the way in which they do this is through investments. When investing wealth is the primary objective of your business, it is hard to argue against hiring an Investment-focused family office leader, especially when there are undeniable benefits too.
Family offices have broad and diverse investment portfolios that require professional management and this is something an investment-focused leader can absolutely support. They are also accustomed to working against high expectations as even in challenging markets where yields remain low for extended periods of time, they are still expected to uphold the fiscal security of the organisation and judged upon it. Equally, investment leaders have great communication skills due to their experience in making strategies and investment expectations clear and explainable to their principals and other stakeholders. While having a family office leader responsible for both investment strategy and operations can work well, it can also be an impossible task to ask of a professional.
Managing investments is a colossal task for chief investment officers in family offices when performing the role in isolation and so asking a chief investment officer to also take on the role of family office leader is an impossible ask. Equally, if you promote a chief investment officer from within, it may be difficult for them to dissolve their own power to a new recruit. One may argue consequentially that the best route in for an investor-first leader is from outside of the family office although our early case study might suggest otherwise.
Another thing to consider in this type of leader is their appetite for risk. While we have described lawyer-first leaders as risk-averse which can be a negative, the high-risk, high-reward mentality of investors can place family offices in some difficult situations in the long term.
A family office costs in the region of 1% of total assets under management. While 1% may not seem like much, with over a third of family offices in our network managing more than $1 billion of assets, family offices can cost upwards of $10 million a year.
With tens of millions of dollars at stake, cost-cutting has never been more important which could be an argument for hiring a chief executive from the world of accounting or broader financial services.
Wealth preservation is a universal objective belonging to family offices and so hiring a person who is able to both preserve your family wealth and generate a return is always beneficial. When this person is responsible for also leading your family office, it guarantees that cost-saving is at the heart of every business decision—something many leaders can take for granted.
In a similar way to lawyers, qualified-accountants, particularly those who are trained within a top 10 accountancy firm, also bring with them a structure and sophistication which can support those family offices which are embarking on a journey of professionalisation. Not only are they accustomed to a structured environment, but their duty within a large firm is to support and audit some of the world’s largest organisations, gaining a first-hand account of what works well and what does not work well operationally and commercially.
While a professional background can act as an advantage, the benchmarked environments in which these professionals derive from can also provide a challenge for family offices. For starters, while a family office might benefit from the skill-set and outlook of a qualified accountant in their next leader, that individual might not transition well from a corporate environment. This type of professional is used to a very standardised and benchmarked environment, they know what their career trajectory looks like, how they should be compensated and how frequently this might change. In family offices, standardisation is not always possible and so a hire from such a structured environment may lead to disputes later down the line over things such as compensation. In fact, according to our network, more than one-in-three have had a compensation-related dispute in the last 12 months.
Family office leaders
Family offices are unlike any other organisation. As we have already discussed, their idiosyncrasies, long hours and personality requirements make it a difficult transition from the corporate world which is why hiring a person with previous family office experience can ensure a much more seamless induction. It can also help you evolve as a family office, drawing on their prior experience.
Family offices require loyalty, devotion and excellence. While hiring from non-family office environments might guarantee excellence, a work ethic and a practical skill-set, it cannot prepare a person for the level of emotional intelligence and empathy required by a family. This person has to be trusted to manage extraordinary wealth while upholding the privacy of the family and understanding that there is no such thing as a 9-5. They also need compassion and kindness when dealing with the family behind the office and an awareness that the private and the professional can blur, often. A family office environment is also incredibly unstructured and so requires a level of agility and flexibility not common in the corporate world. Hiring a person who understands all of the above and more is less likely to disrupt your family office, but you must question why they are seeking a change.
There is only one negative of hiring your chief executive from another family office and that is loyalty. As we have stressed loyalty is vital which means if a professional is willing to leave their post at a family office you must ask yourself why. Of course, not every family is perfect and nor are family offices so one cannot be held accountable for wanting to leave a poor culture. However, something we carefully monitor is gaps on a CV, especially within a family office and it’s something your family office should consider when hiring from another to ensure they will not also leave yours after a short period of time.
In the United Kingdom, 40% of chief executives are family members, in Asia it’s 30% and in Europe it’s 20%. Chief executives from the family are becoming more and more of a rarity in newer marketplaces and it’s a sign of the changing times. New generations are passionate about making a non-financial impact while family offices are evolving into sophisticated and standardised machines, requiring experienced, resilient and dynamic leaders in a way they never have before.
That isn’t of course to say that family members shouldn’t fill the top spot. The family office landscape in the United States is undoubtedly the most mature. It can be traced back to the early 19th century and is thought to host more than 6,000 family offices. It also boasts one of the highest number of family members in the position of chief executive at 49% and is perhaps a place for those with competent and willing family members to draw inspiration.
Hiring from the family has its unbeatable benefits. They have a shared vision, objective and goal and can fully understand your challenges and pain points. They are also fully aligned with your interests and can be trusted to protect your family name as well as your wealth. Family-first leaders could also save on costs. In our experience, family members are keen to reap their rewards in the eventual success of the family office by taking lower fixed compensation and helping save on the some 60% of costs spent on staffing today. Of course, this isn’t always the case.
Hiring from your family also has its drawbacks and the first is entitlement. We recently worked with a family in South America where the wealth creator’s son was the chief executive. Despite being unqualified and failing to contribute to its success, he received an extraordinary compensation package which was only rewarding poor behaviour and setting the newly created family office back. We were asked to host a compensation consultation and found that not only was this family office leader receiving more than seven times the benchmark based on our 10 years of data, but he wasn’t right for the role either. We organised an external replacement while encouraging him to sit on the investment committee and pursue both philanthropic work and passion projects.
Hiring a leader from your family can also cloud their judgement. We have been witness to situations in which a chief executive also filled by a family member has risked their entire fortune on a bet and to offer an even more shocking example, a chief investment officer within our network told us how he had to intervene to stop his family-managing director from spending more than $1 million on live stock during an evening out. It’s an oddity, but it isn’t rare and sometimes family members are best excelling in an area where they have a particular passion or subject matter expertise rather than leading the entire operation of the family office.
From career trajectories and cultural fit to values, aspirations and networks, there is no one-leader-fits-all approach to hiring for your family office but there is an exact science to finding them.
This is an extract from Agreus Groups’ latest white paper The Ideal Family Office Leader. Click to download for free.