The Allure of Convenience

Over the past three weeks, we have looked at a number of pitfalls that Single-Family Offices (SFOs) need to avoid. First, we looked at the mistake of prioritizing individuals over objectives and neglecting to create a mission statement. Then it was the turn of the chief executive and the mistakes that SFO should do their best to avoid. And last week we looked at the nuts and bolts of IT security and overlapping responsibilities between the Chief Investment Officer (CIO) and the investment committee. This week we are focusing on why shortcuts rarely work. 

Misstep #7: Using One-Stop Shops Instead of the Best Providers

A common mistake in the family office industry is the reliance on one-stop shops for a range of services. While the convenience of a single provider may be tempting, it often comes at the cost of quality and customization. Given that every family office is unique, a mass-market supplier is unlikely to meet the diverse and specialized needs of this sector.

Many global corporations view the family office market as lucrative and seek to enter it. However, their existing products and services often don’t align well with the unique needs of this niche market. In an effort to adapt and attract family offices, these companies either modify their existing offerings or introduce new services, such as Family Governance. These modified or newly introduced services are often designed to pique the interest of family offices, with the aim of eventually guiding them toward the corporation’s core offerings. However, these attempts frequently miss the mark because they deviate from the company’s core competencies.

The principle of focusing on a company’s core business is crucial. Opting for a one-stop shop may seem convenient, but it often leads to complications. These providers may offer a wide range of services, but they rarely excel in all of them. Families may find themselves entangled in a web of subpar services that don’t fully meet their needs.

The Family Office Operational Excellence Report 2024 from Campden Wealth and AlTi Tiedemann Global found that the services most commonly outsourced by family offices are wealth-related, typically legal, estate, and tax planning. More than 60% of family offices use external vendors to provide these services, with as many as 90% using external legal services. Administrative services such as IT and accounting are also extensively outsourced – the former stands at 60%. Almost half of all family offices outsource at least part of their investment-related needs. Conversely, administrative and family services such as accounting, bill pay, HR, concierge and travel are predominantly in-house. 

Overwhelmingly, they see outsourcing as a means of delivering value in those areas where they do not have in-house expertise or experience, or where they have a specific, complex issue that warrants the engagement of an experienced external specialist. Family offices tend to favor using in-house resources where they have familiarity with the data and where there is a need for frequent, consistent and timely outputs.

As the founder of a midsize SFO in the US put it: “To be an office where you do everything in-house works out to be very expensive. Also, you need a constant workflow to keep people busy all the time. We do what we do best in-house and outsource everything else.”

The notion that “there’s no such thing as a free lunch” is confirmed when examining certain cultural temptations to seek free advice. While this may initially seem like a cost-effective strategy, the quality of the service often mirrors the level of investment – or the absence of it.

In essence, you get what you pay for, which in this scenario could range from receiving minimal value to getting nothing at all, or even worse, receiving misguided advice that necessitates corrective action later on.

In cultural areas where the temptation to seek free advice is prevalent, the consequences are far-reaching. This not only undermines the credibility of the family office industry locally but also has broader implications, such as diverting intellectual capital away from intended regions.

Such outcomes conflict with some governmental initiatives focused on establishing and legitimizing Single Family Office (SFO) hubs.

Instead of succumbing to the allure of free services or one-stop shops, family offices should seek out specialized providers for each of their specific needs. This approach ensures that each service is tailored to the unique requirements of the family office, avoiding the pitfalls of generic, one-size-fits-all solutions.

While one-stop shops may offer the illusion of convenience, they often fail to provide the specialized services that family offices require. By choosing providers who excel in specific areas, family offices can ensure that they receive services that are not only high-quality but also customized to their unique needs.

Misstep #8: Using Others’ SFO Model to Build Their Own

A common mistake in the family office sector is the tendency to emulate existing family office models, often based on recommendations from friends or acquaintances. The hackneyed adage, ‘When you’ve seen one family office, you’ve seen one family office,” highlights the uniqueness of each entity. Despite this, newcomers often end up with a superficial understanding of existing models. They focus on the ‘what’ of these operations, overlooking the crucial ‘why’ behind each decision, thereby failing to grasp the complexities that led to the outcomes they observe.

Family offices are often structured to manage specific, confidential issues or risks, making it a challenge fully to grasp the rationale behind their operations. While each family office is unique, insights from seasoned practitioners can offer valuable perspectives. These experts have a broad understanding gained from advising on various models, and they should possess the sensitivity to appreciate the importance of maintaining the confidentiality which is crucial in this sector.

Chief executives of SFOs often hesitate to disclose the inner workings of their organizations, especially their shortcomings, due to concerns about damaging their reputation for competence. This reluctance poses a significant challenge for consultants, who must first establish a level of trust before chief executives are willing to open up about areas needing improvement. Overcoming this trust barrier is usually a high hurdle, and the time required to build this trust can delay beneficial changes for the family being served. While many CEOs project an image of omniscience and complete control, the reality often diverges from this facade. The notion of a perfect SFO is more myth than reality, a concern that may become even more pressing when chief executives show persistent reluctance.

While the temptation to mimic existing family office models is understandable, this approach often results in a superficial understanding of the unique complexities each family office embodies. By focusing on the underlying principles and rationales, you can ensure that your family office is not just a carbon copy but is truly tailored to meet your family’s specific needs and objectives.