Capital Deployment + Risk Management = Family Office Ecosystems
In this month’s edition of Family Office Perspective, I’m distilling the surprisingly complex definition of “family office”.
The holidays are almost upon us; I hope amidst your year-end efforts you enjoy time with friends and family.
I’ve been eager to write about family offices for awhile. The web version of this Newsletter will eventually be chock-full of links so if you want to learn more about Family Offices, please check out our online editions.
The Wealth Equation expresses the idea that your family wealth increases when your resources are applied to growing stronger family members and family culture. Family Offices relate to all aspects of the Equation.
The Wealth Equation: FW = R (HC + RC)
R – Resources
Family Offices deploy resources and manage risk. It really is as simple as that. If you picture a Family Office as a bricks-and-mortar physical office, you might have the wrong framing. The Office of the Family is similar to the Office of the President in that many resources support the Office and many of those resources are probably called in only on certain specific tasks.
All Family Offices juggle internal and external resources. Some Family Offices generate profit for shareholders and some do not. Some Family Offices include investment professionals and, rarely, some do not. All Family Offices must manage the complexity of a family’s affairs, however complex those affairs are, and however that complexity came to be, whether intentional, or oftentimes simply from unintentional momentum.
I first used the term to describe family enterprises that recently monetized the main family business and retained favourite employees and often held real estate to house their teams. My definition has certainly evolved!
Actually I find the term is used so many ways to render it useless without adding clarifying descriptions:
- A “Multi-Family Office” is a for profit enterprises owned in part by non-family shareholders/officers serving more than one family.
- A “Multi-Family Office” is also a cost centre for more than one nuclear family that wants to share resources. Yes I find the synonym confusing also!
- A “Single Family Office” is a cost centre for one “family” (my favourite versions of SFOs define the “family” by affinity not by blood).
- “Virtual Family Office” is a common term and a decent attempt to define the types of MFOs that are particularly leanly-staffed and rely on the resources of partner-level service providers. I like the concept of a VFO but am unsure if the partner-level relationship of the service providers somehow impedes the families they serve at all.
There are still other types of family offices and I’ll summarize to say that all of these family offices are differentiated but also the same in that they are designed around the dual goals of capital deployment and risk management for the families they serve.
The majority of this newsletter’s readership would be interested in for-profit Multi-Family Offices and Virtual Family Offices.
And I believe the quality of their ecosystems separate the wheat from the chaff for these businesses in their goals of resource deployment and risk management.
HC – Human Capital
When I use the term “ecosystem”, I mean the network web of services that are required to varying degrees by families. I see the quarterbacking of those services as the most important aspect of family offices. I personally enjoy the web as do many other advisors, but also it seems unique to find advisors that have the time and mind space to effectively deliver as quarterbacks.
Many of you reading quarterback service providers. Do you enjoy it?
Project management discipline and a strong BS radar are the key skills for the ecosystem quarterback. Sniffing out bad actors is key, and having a network to help collectively sniff out the bullshitters works even better.
RC – Relational Capital
Ecosystems expand and contract based on the risks the family sees and wants to manage.
I’m amazed when I hear of large portfolios managed directly by the family and they use a KISS perspective to mostly own S&P500 and Berkshire Hathaway. They have traded off management of certain investment management risks (the principal ones I see relate to a lack of diversification from public markets). They have decided to prioritize the making of their quarterbacking a simpler exercise for their family.
I get the decision and it very likely improves relational capital, but I would choose to add strong investment professionals to my ecosystem. I would take on the responsibility of a more complex but effective investment management strategy.
I like when families hire the right investment professionals and it is magic to see professionals go after they are empowered with a specific, clear, and unique investment strategy.
And to get to a specific, clear and unique investment strategy, the family has to be able to articulate their purposes for investing. Far more specifically than their risk adjusted return tolerances.* So investment policy statements are a fun and important governance tool to work on and get right**
*** I’m foreshadowing the next two newsletters here 🙂
To the journey,
Post-script, a paragraph of a poem by Douglas Malloch:
Good timber does not grow with ease:
The stronger wind, the stronger trees;
The further sky, the greater length;
The more the storm, the more the strength.
By sun and cold, by rain and snow,
In trees and men good timbers grow.
Read the whole poem here: http://holyjoe.org/poetry/malloch.htm