At whatever financial level we pursue our life's aims, being realistic, organized, knowledgeable as well as aspirational will serve us and our families as well as possible.
What can the average doctor learn from a family office? It turns out, quite a bit.
First of all, a family office (FO) is a staff of financial professionals dedicated to managing the affairs of one nuclear or extended family. There are no specific guidelines, but the usual overhead of some $1 million-plus per year would imply that the amount of assets to be managed should be over $100 million to keep the overhead at about 1% of assets. This is in line with many competitive agencies, such as mutual funds and professional money managers, that charge that amount dealing with multiple, unrelated clients from the public at large.
So what is the advantage gained by having your own full-time staff as opposed to using the services of a variety of experts who also work for others? In interviews and research done by my crack staff, three primary reasons came up.
The most important factor was trust. Trusting our financial affairs with whomever is always implied, but the increased scale of these large net worths make the need for reassurance more overt. And because of the complex nature of managing large assets in a fast-moving financial and legal landscape, most FOs do not function as democracies.
Once the philosophical goals are determined and a workable governance structure is agreed upon, then operations and results are usually transmitted afterward in the interest of efficiency. Given that, trust in management character and competency must be high.
The second reason for having an FO is privacy. We expect confidentiality from all of our financial contacts, but the prominence of large and often visible assets may attract unwanted attention. So it is natural to try to reduce that scrutiny.
The third issue is control. The demands of large, complex resources require a central entity that grasps the entire enterprise. As scale increases, so does the risk of piecemeal management with the sometimes spotty communication that may result in adverse, unintended consequences.
A full-time quarterback, if you will, that can learn best practices for the particular needs of that FO and coordinate the disparate pieces can prove to be important and cost-effective. The quarterback is also in a position to carefully resolve relevant family disputes and keep the enterprise on its stated track. "Be gentle, responsive, helpful and educate" as one CEO put it to me.
No one knows for sure how many FOs there are as they vary so much in size, purpose and age, especially with new ones being established and outdated ones being dissolved. But one of the national associations that acts as a clearing house for information, advice and lobbying for FOs estimate that there may be 2,500 to 3,000 currently operating. These range from most being in the current, founding generation to at least one that stretches back eight generations to the 19th century.
FOs have to satisfy their constituents because there are competitive commercial alternatives. When there is this much money at stake you might correctly imagine that most of the big financial advisory firms, banks, etc., have established competitive services for proprietary, but shared pools of high net worth individuals who may not want or need the full-time, individually dedicated FO. You often see ads for these in the financial media.
Interestingly, the internet era has had a considerable effect on bringing more of these FOs into public awareness. Many of them have websites, both for internal consumption and external purposes.
Is there a difference in the type of professional who works for an FO? Yes, there is, it turns out.
First of all, they must be in the top strata of competency for the scale of the assets managed, familiar with pertinent issues of law, taxes and financial opportunities. And they are often strongly connected to the "right" people in those fields.
Secondly, and interestingly, I was told that when hiring a staff person for an FO, it is critical to identify the individual who "...inherently wants to help other people," which is not necessarily a common attribute among top financial services types. A difficult lesson that I have cited in previous articles is that when hiring we often learn the hard way that character is everything, whether it is in the world of finance or in medicine.
Keep in mind dear reader, that like everything else in life, change is a constant and FOs have to adapt. Laws, taxes, personnel — the age and composition — and the desires and needs of the family or families involved are all subject to change. FOs are uniquely nimble enough to change quickly.
And that segues into another important function of the FO: education, particularly of the next generation, which is likely to be given the fortunate, yet complicated, responsibility of handling substantial wealth throughout their lives. But educating your children to understand and manage money intelligently is not a small matter, even for those coping just with the ordinary circumstances of life. And for all of us, having our children learn to manage financial affairs is intimately involved with the transmission of core moral values and developing a sense of perspective in our lives.
As you might expect, in spite of the time, money and expertise invested, some FOs fail to attain their objectives and are dissolved. According to The Wilmington Trust, 60% of FO failures are due to a lack of communication and trust. Likewise, 25% result from unprepared heirs, but only 3% occur due to inadequate financial, tax or investment planning. Even at this level, with the care taken, not all enterprises are successes.
So the takeaway message for most of us from the fact and function of FOs is that at whatever financial level we pursue our life's aims, being realistic, organized, knowledgeable as well as aspirational will serve us and our families as well as possible.
For we all need to acknowledge that in all of Man's affairs — financial, medical or whatever — we sometimes don't know what we don't know; so we deal with the best people we can find who do know what we don't.