Considering starting a Family Office?
Every family should have a family office: X
Designing investment strategy is the first step: X
ChatGPT can design this for me: X… maybe?
There is a whole lot more to the role of family offices than just increasing your financial resources… that is, if you intend the family office to grow all of your family wealth:
FW = R (HC + RC)
Your Family Wealth is the sum of your human and relational capital pools, amplified by your resources (financial resources being the second most important resource to time).
This month, I tackle a popular family office topic, when and why to start a family office. Thank you for your time, Dear Reader, I hope in this short read you take away something valuable!
Families that start a family office strategy focusing on the investment strategy must have missed Simon Sinek’s famous Ted Talk Start With Why. Although instead of inspiring action with the business’ why (Simon’s point), in this case, your family’s why will inspire action towards building meaningful family legacies.
Family Champions: resist the urge to start your family office design from the investment strategy. That is the “how”. What is your “why”. What is your unique answer to the question “so what is all this money actually good for?”
Once you have a working answer to that question, please apply the answer to the overall question of how the family office design will effectively impact your goals for the resource.
Here are some subsidiary questions on your family office design that I like to ask:
- Is the Office a means to amplify the love and support you describe as part of your “why”? If so, how will it amplify?
- What important skills and behaviours are the Office role modelling for the family? Skills like financial literacy, critical thinking, due diligence, etc.
- What other ways can the Office be a role model?
- What matters to your family, in the way that your employees in the office behave? If a family member works within the office for a summer or for years, hypothetically, what are the key behaviours you expect that family member to observe as being “just like our family”?
- In what ways will the current and future stewards of your family wealth appreciate and value the actions of the Office?
Often, these are the types of questions that shape Mission, Vision and Values statements for an Office. It is integral to build these documents and especially critical to consistently check-in with management and determine how well understood and relatable those documents are to the family office team.
Now, some questions when starting to develop the Office’s Investment Policy Statement:
- What are your lifestyle goals and those of your known heirs?
- How would the Office support those lifestyle goals?
- What investment policies work to meet the family’s lifestyle?
With lifestyle goals, I do think the “how” of investment strategy is very important. Designing investment strategies to ensure a certain base level of lifestyle may PERHAPS tolerably ignore alignment of your investment strategies’ with your family culture.
Far better though to have all actions align with your why, but depending on the situation, I can see many scenarios where a family is more comfortable with their lifestyle needs being met with a different investment strategy than the strategies applied to the family’s legacy goals.
Legacy financial goals are where the family’s why is the rubber that hits the road.
It is the legacy goals of the family where the family culture’s influence on investment strategy really makes all the difference. The question is not “what investment policies work best to meet the family’s legacy goals?” but rather “how does the family culture dictate the investment strategy for the family’s legacy goals?”
The second question better frames the importance of the family’s why within building an effective family office culture.
There are a multitude of ways to do investment strategy effectively. Except that not all of those investment ideas fit within all family cultures. This is a key determinant in which Family Offices improve the family’s wealth and which detract from family culture by being singularly focused on financial objectives.
Care should be taken to think beyond the most common policy, which is determining which types of businesses the family does not want to support.
Consider other factors like:
- Geographic goals (can interest in various regions improve the family’s worldly perspectives),
- Industry goals (can showing investment interest in an industry stimulate one or more family members’ interest towards investment success), and
- Do certain investments amplify the family’s culture by creating greater focus on the family’s values, goals and principles.
I believe that the families that can consistently identify their why and communicate alignment between their financial legacy goals and their values are the families that successfully apply their family offices to supporting flourishing family cultures.
So, to summarize, these steps are absolutely critical to starting a family office:
- Establish your family’s why for the financial capital (revisit this answer regularly).
- Determine your lifestyle needs for the financial capital.
- Determine your legacy goals for the financial capital.
- Identify investment policies that suit your lifestyle needs and legacy goals in alignment with your family’s why.
- Then, deploy financial capital into the resources required to accomplish all of the above.
Family office design certainly does not end here Dear Reader! Although the above list is a lot of work on it’s own, further work remains. Not everything can be accomplished at the outset; Rome wasn’t built in a day, so to speak.
One last investment issue that I particularly relate to is: how does the family use financial resources to invest in their family members’ flourishing?
This is the role of the Family Bank, and various spending policies on health care, education, development, etc. An effective policy on deploying financial capital into your family members is actually much different than the lifestyle goals described above. The lifestyle goals are more predictable; this Family Bank focus is more uncertain in timing and amount. The more intentional ways to increase human and relational capital.
A clear set of policies on these unique, irregular, opportunities to spend financial capital on the family members is the type of dispassionate policy development that truly shows how much a family cares (how paradoxical does that sound? Bring in the lawyers to improve our loving and nurturing environment!)
With the Family Bank and similar policies in hand, the Office can determine, approximately, what these uncertain investment events might be which has a significant impact on the liquidity and the suitable risk/reward for that portion of the portfolio.
And with the above investment strategy planning complete, a family office is done the hard work…
No, not actually…
An effective family office design must address all of the other risks beyond investment risk! There are many more risks to consider and more tradeoffs to weigh in the family office design.
Here is a non-exhaustive list of other critical risks requiring attention in Family Office design:
- Reporting risks; consolidation, cash flow analysis, accounting, tax compliance
- Custodianship and cash risks; physical assets, marketable securities, currency, private banking, bill pay
- Financial risks; financial projections, debt management, liquidity, tax strategy, Office/active business financial integration
- Security risks; physical security, online security, Information Technology function
- Legal risks; creditor protection, general commercial, insurance, estate, physical assets, active business integration with Office,
- Communication risks; public relations, ownership relations, role of Office in family cohesiveness, family meeting and retreat,
- Governance risks; Boards, policies, ownership governance, overall accountability to family’s goals / plan
- Alignment with “why” specifics: social impact, philanthropy, Family Bank, leadership development, education/learning, mentorship
In the work that a family office can (and cannot) accomplish, not all of these risks can be the priority. Again, the family’s why and culture goals are extremely critical both firstly to the Office’ decisions and weighing tradeoffs and secondly to building effective accountability and performance monitoring and reporting once design decisions have been made.
The best family offices integrate their ecosystems well, calling on all of the various resources required at the right time and keeping them up-to-date on family affairs in between those critical moments. I believe advisor ecosystem preparedness is a critical and under-emphasized communication task (and something well-worth measuring and reporting on!)
A skilled Family Office can consistently bring the family’s why into whatever is the current task at hand with outside advisors.
Many aspects of the family office should never be in-sourced because the quality of professionals required for the task retain their skill by application to many fact patterns.
Simon Sinek caught the world’s attention with Start with Why. And the presentation played a critical role in my summary of how to start a Family Office. Once a family realizes it’s investment decisions do not exist separately and instead require alignment with the “why”, with the family purpose, with clear and intentional goals shaped by values, only then will the family create and sustain a meaningful Office.
And only then will the Family Office contribute more than financial resource strategy in growing the family’s wealth.
No family has a perfect “why” but we should all strive to have something to anchor our decisions to. Striving for that first answer to “what is all this money actually good for?” is that critical first step in building an intentional family culture and in developing a family office.
To the journey,