Ever been in a car with a backseat driver? At best, they are annoying to drive with and, at worst, a downright distraction. Ultimately, they can affect the safety of all passengers – themselves included – and make the driver feel like they're not up to the task.
If you wouldn't drive from the backseat of a car, then surely you're far less likely to do so with your family's legacy and wealth, right? Not necessarily. One of the most startling conclusions from the recently published Global Family Office Report 2014 is that the degree of a family's involvement can result in underperformance. A finding that was surprising to some members of the community and less to others.
The more involved family members are in the strategic and operational decisions of the office and managing investments, the more likely those offices are to be aggressive in their pursuit of growth strategies, the more costly they are to operate, and the less likely they are to outperform.
Those offices where beneficiaries maintain annual to quarterly oversight of financial and investment decisions are much more likely to outperform than those offices where beneficiaries work full-time in the office itself. Furthermore, family offices with daily beneficiary involvement spend, on average, 50 basis points more than offices where beneficiaries leave it completely to the professionals.
So why are they likely to underperform? Family members can be like the backseat driver who tells the person at the wheel to change lanes constantly in a traffic jam, only to find the momentum returns to the lane they just left. Like the impatient passenger, principals or beneficiaries who are working in the office respond impulsively to movements in the market – shifting allocations, then overcorrecting and reallocating, desperate to get ahead – until they find themselves stuck in the slowest lane of the highway or, worse, fender bent and waiting for the wrecker.
Perhaps principals or beneficiaries who are working in the office go against professional recommendations, feeling an investment is too risky or it's not risky enough. Even when they are not necessarily the sector experts, family members may trump guidelines when they don't agree with decisions. This is where drag on performance occurs, and prevents a cohesive and productive work environment for non-family members.
The rules of engagement, who is driving and when, need to be crystal clear. Family principals are the leading decision makers and should be thinking about the big picture. But at a day-to-day level they should be wary of getting involved. Leave it to the board meetings and the quarterly reports, while letting the skilled staff you have recruited for these roles take ownership.
When a family member does work in the family office, how do you ensure they are prepared to assume the responsibilities of that role? There are number of important points to tick off the checklist: that they're matched according to their professional expertise and experience; have the appropriate industry specific or sector specific education; are motivated to do the job that they are in; are evaluated objectively; and are remunerated fairly.
Get it right and you won't need to be that backseat driver. Hand the keys to the executives and let them do the driving, so they can keep their eyes and ears on the road, 100% of the time.