An entirely new breed of family offices is emerging in the 21st century, shaped by a next generation who are introducing new ideas about the role of the organisation. Suzanna de Baca explores how three family business heirs have recreated their family offices
Throughout history, parents have trustingly sent their children off to be educated and gain experience in the real world, only to feel surprised, and even somewhat slighted, when their offspring return with new and different ideas of their own. Integrating modern practices with long-established traditions has been a challenge for countless generations of family businesses and it is no different in family office environments.
In recent years, however, many family offices have experienced seismic shifts as younger generations have introduced new technologies, alternative investments and increasingly global perspectives in order to remain effective in today's rapidly changing world. In some cases, the transition is smooth, and in others, an entirely new structure emerges.
A new world view
"My investment approach and world view are very different from my father's," says Brad Werner, who joined his father's family office in St Louis, Missouri, in his early 30s. While he respects his late father's methodology, he says his generation "approached the family office and investing in a very different way".
Werner's father worked in the family insurance business, but made his own mark multiplying the family's assets through investment. For Werner, however, the concept of working with his father was something he never considered. "I didn't really understand what he did," says Werner. "I didn't think that managing the family's money was a real career path."
Werner earned an MBA and worked in international business until his father finally impressed upon him the magnitude of the portfolio operation. They opened a formal family office and Brad's principal goal was to free his father's administrative burden. Over time, he grew not only to love the investing, but to develop a greater objective of expanding the family office role.
Terri Chernick (pictured) grew up around her family's operating business, American Tourister Luggage Corporation, founded by her grandfather, Sol Koffler. Despite the childhood fun she had in the warehouse, she says, "I never considered working for the family because there were greater opportunities for learning business and mentoring from other employers."
After receiving an MBA at Harvard Business School, Chernick worked in consulting. Following her grandfather's death, however, his three daughters separated their assets and in her early 30s Chernick was lured into organising the investments for her family.
Today, Chernick runs the substantial investment arm of her family office, a sophisticated global operation which bears little resemblance to the original office her grandfather established after selling the company to Hillenbrand Industries in 1978.
Similarly, the Hon Henry Channon, a sixth-generation member of the Guinness family, had little direct involvement in the family office, Iveagh Trustees. Over time, however, the interests of different family members diverged. Subsequently, he and several other younger leading members of the Guinness family joined with the alternative investment firm Arundel Partners three years ago to create Iveagh, a private investment house.
Rather than being a full service family office, Iveagh is an entirely new operating business which specialises in providing expert investment services to several Guinness heirs as well as outside investors. As a result, says Channon, "the whole investment philosophy has changed."
For all three family office executives, globalisation and alternative investments drove fundamental changes in the way they approached the family's finances.
In Werner's case, this was met with initial resistance. His father managed a domestic, long-only portfolio and he says they "diverged on our opinion of international investing". Gradually his father came to see the need for diversification away from broad US markets. Now, Werner's portfolio includes various alternative investments, including private equity, hedge funds, and a significant allocation to international investments.
Chernick began her family's investment portfolio from scratch after the original family office dissolved. She credits much of the success of the new family office to her step-father, a powerful role model and mentor.
"In both investments and real estate, the firm blossomed after my step-father took over and empowered the heads of each business," she notes. The investment side of the business also flourished under Chernick's professional management. Applying the rigorous analysis techniques she'd learned in industry, she fashioned a formal investment policy, created an asset allocation, and constructed a multifaceted portfolio.
"By the new century I was influenced by new asset classes and was delving into investments like timber, alternatives, and commodities," recalls Chernick, who says her family supported her exploration of these new investments.
At Iveagh, the investment portfolio has been completely revamped by a formal investment committee, with the addition of alternative and international investments. The younger generation, Channon says, "is now much more confident that we have an effective
In addition to the new investment approach, Channon says technology has revolutionised Iveagh's business. "We moved from the 1950s to the 21st century very rapidly," he comments, noting the speed and analysis of reporting has fostered a positive and "radical" change.
Werner echoes this sentiment, recalling when he joined the family office his father still entered every dividend by hand into a ledger. Over time, he introduced technology that freed much of the administrative burden and allowed him to participate in a broader array of investments that better serve his family.
Chernick says that "from day one" their family office has used technology for portfolio accounting, analysis, and modeling. She does short, intermediate, and long-term studies and scenario analysis for all types of risk, which has enabled her to manage a complex but nimble portfolio.
Freedom and Authority
Taking control of the family office involves an element of personal risk for younger and older generations alike. "When you get involved, you don't know if your family will give you the freedom and respect you might get in the outside world," says Chernick.
She says that in order for an effective transition to take place, the older generation must actually relinquish financial or governance responsibilities at some point. This can happen gradually or under the tutelage of a consultant or other advisor, she says. "In order for the younger generation to make an impact, you have to give them true authority."
Werner's father was gradually able to turn the financial reins over to Brad as they worked side by side. Giving him authority on the investment side was straightforward, while philosophical issues proved more difficult.
"His goals were investment-driven: tax planning, value analysis and dividend reinvestment," he says. "But to me, that's strictly investment policy." He has given more time and thought to how the office can direct financial capital toward helping each family member live "purpose-driven lives", an issue that did not preoccupy his father. Nonetheless, he acknowledges his father's trust in his ability as the key to the successful transition from one generation to the next.
For Channon, participating in the creation of a new family office has been rewarding. He feels that the partnership has added a valuable outside perspective. "The risk is that the family can get too insular," he says, commenting that the needs of a family will naturally change over time, requiring re-evaluation of existing structures.
"Things do not stay the same," notes Channon, "They get bigger or smaller, but they do not stay the same. Therefore, a family naturally has to evolve."