Besides the obvious, there are plenty of reasons why established generational wealth comes with an array of benefits – and high on this list is an established foundation of financial knowledge, insight and wisdom, often gained as a result of learning from one’s mistakes and moving with the times.
First-generation wealth creators often lack the luxury of establishment and the safety nets that grow organically with it. As such, they tend to move quickly; building businesses, selling them, accumulating investments and ending up with an enterprise of capital, often considering their methods of wealth creation and maintenance with a mindset of ‘if it ain’t broke, don’t fix it’. While this might work well within the realms of company cash flow, it’s important to remember that family capital has a tendency to behave differently, and thus requires an entirely different approach.
Enter the family office. More than an extension of whatever assets have been sold, family offices are an ecosystem in their own right; one that is meticulously designed to preserve, develop and ultimately transfer wealth to the generation that lies ahead. With family offices growing worldwide and plenty of brand new offices being established for a new crop of UHNW individuals and families, there is no shortage of learning curves that require undertaking in order to ensure success. Let’s take a look at some of the key mistakes often made by first-generation family offices, and how best to navigate their often turbulent waters.
Outsourcing everything or hiring too quickly
Many families looking to set up family offices have a tendency to immediately outsource all of their staffing requirements, which – in a current industry landscape noted for its increasing talent gap – is reasonably understandable, and may work well for several offices. Others get ahead of themselves by building a full staff roster before setting their strategies in place, resulting in unnecessary overheads and a lack of carefully-considered direction.
Rome wasn’t built in a day, and nor was it wholly outsourced. A family office does and should take time to develop, and those which phase in talent with intent and appropriate foresight tend to perform better than those which don’t. Most family offices can begin with the bare essentials – good administrative support and a fractional controller, for example – and then grow piece by piece with in-house investment experts once the complexity and number of assets justifies their employment. Simply put, everything about family offices – including hiring – should be treated as a marathon, and not a sprint.
Overlooking conflict resolution
Families and disagreements go hand in hand – they always have, and always will. Too many first-generation family offices replace realism with optimism, and avoid key conversations about the involvement of the next generation; the people who should ideally be at the center of the majority of decisions made. When discussions about roles and responsibilities of other family members are ignored or overlooked, families end up both disconnected when disagreements are on the table, and yet this can be mitigated early on through proactivity and sensible decision-making.
Family offices need an investment committee; one that involves everything from structured quarterly schedules, minute-taking and an iron-clad voting protocol. When coupled with a well thought-out mediation process and policies regarding distribution – essentially, anything you need to ensure everything is crystal-clear from day one – you’ll be able to demonstrate not only the length and breadth of the legacy being created, but the ground rules for how things should be run for generations to come.
Launching without purpose
Connected to the previous point, all too many new family offices are set up as something akin to a passive entity, an informal operation, or something which isn’t imbued with the necessary gravitas and purpose needed for longevity.
It may not be particularly exciting, but family offices need to go to considerable lengths to mitigate risk and navigate unknown futures. This can be achieved relatively simply; a one-page charter should be written to outline the precise purpose of the family office, as well as lay down in black and white the office’s risk tolerance and investment objectives. Not only will this create a mission statement that can be referred to down the road, it will also work to reduce friction among those with agendas or opinions that may not align with the office’s initial aims.
Compromising stability with opportunism
Markets may fluctuate and economic instability is rarely out of the news, but common sense should always reign supreme. It’s extremely helpful for family offices to maintain a strict 12 to 24 month liquidity runway (making sensible use of cash forecasts bound to family office commitments).
Opportunism and risk often lead to good returns, and there’s space for them within new family office landscapes. However, baseline stability and long-term aims should always be at the forefront of any decisions made.
Keeping younger members away from the table
If family offices don’t hold the next generation constantly in mind, then they’re not doing their job properly. By keeping heirs and younger members away from key financial discussions, they simply won’t have the insight and wisdom required when the time comes for them to take the helm – and while it’s not always easy to lay foundations for a prosperous future, it’s absolutely central to what a family office is for.
Plenty of first generation family offices prepare the next generation in a number of effective ways; education tracks can be built around key milestones such as investing in financial literacy and education, bringing younger members into roles within philanthropy committees, or shadowing senior members in investment meetings and acquisitions. Setting up ‘observer seats’ allows younger generations to learn in real-life situations (without any jeopardy), while helping them recognize the responsibilities they’ll take on in later life.
Not keeping pace with new technology
You’d like to think that first-generation family offices being set up today would be tech-literate and on top of the latest developments, but it won’t be long before the technology of right here, right now becomes obsolete and replaced by newer systems and innovations.
Make no mistake, utilizing technology is crucial – but a thorough accounting, reporting and management platform (complete with add-ons for analytics, risk management, trading and compliance, amongst other things) is a significant investment, and one which must be regularly renewed and updated to meet the rapidly-accelerating pace of new tools and systems. As such, family offices need to carefully consider whether it makes more sense to own and maintain their own tech infrastructures, or if outsourcing this to a reliable partner represents a better solution.
Failing to meet the needs of future generations
Generational transition is the number one concern amid family offices both old and new, and yet so many family offices lack a formalized succession plan; something that needs to be addressed to avoid a plethora of issues further down the line. As years and decades pass, first-generation family offices will have to deal with more and more family members – and wealth has a habit of cascading over ever-growing and more diverse generations, each with their own expectations and attitudes.
Facing the future isn’t just about ensuring growth and stability of wealth; it’s about accepting that younger members will inevitably be somewhat removed from the generation that first created that wealth, and will most likely have different ideas about money and how it should be utilized. What’s more, younger generations and future generations doubtlessly have different ideas about how information is consumed – just look at the shift from pdf reports and (the now almost prehistoric) periodic papers of today, to the digital native’s reliance on real-time interactive data, always available, always on demand. While much of the future remains unknown, family offices can work to satisfy these kinds of expectations by being flexible enough to report information through each family member’s preferred channels of communication.
In order to retain their clients, their assets and their reputations for many years to come, family offices established today must remain technologically up-to-date, and information delivery – despite being a relatively minor gesture – signals to younger generations that the family office is able to keep them in the loop and within the fold.
