Lessons I’ve learned in two decades of building family offices

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For almost 20 years, I’ve been involved in the building of family office businesses, and I’ve had an opportunity to study various family-office firms, both single and multi.

Given the typical complexities that arise with these types of wealth firms, I’ve been fortunate to experience and observe 10 key lessons in the building of these businesses.

1. Determine who the user of your services will be

Will the users of your family office services be strictly family members or also non-family members? This is important, as it has both business operational and regulatory implications. For instance, the management of investments for family offices that serve only family members is typically something that does not require registration with provincial securities regulators. But the provision of investment management services to non-family members can certainly increase the probability for triggering a securities registration requirement.

Although the advice of securities legal counsel will always be key in determining these thresholds, it’s an important factor for affluent families to keep in mind. Also, the servicing of outside family members can often bring extra operating and servicing costs.

2. Identify the services that you’ll provide

The range of potential services that can be provided to affluent families is quite broad. It ranges from core services such as investments, insurance and wealth planning to inter-generational planning such as succession/estate matters, tax structures and family wealth mentoring. Not to mention concierge services. All of these carry costs, which means that focus is key, especially for multi-family offices that are commercially oriented.

3. Establish the right balance of services between “in-sourced” and outsourced

Like any business, family offices need to determine which services they believe they can competently and cost-effectively provide in-house. Traditional single-family offices typically need at least $300 million to provide a range of basic services and be able to generate sufficient portfolio cash flow to cover the family members’ income needs. This balance between “in-sourced” and outsourced needs to be tailored for each family office business.

4. Implement rigorous hiring processes

Most people nowadays can tell a “good story” about their backgrounds and experiences. And though skill and experience are still important, what is of equal importance is a psychological assessment process that can objectively test for a candidate’s natural behavioural abilities to meet the requirements of “the job,” including a review of their level of emotional intelligence. In my experience, references are of increasingly little use as most people are not prepared to speak openly about former employees for fear of potential litigation.

As a result, a sound psychological assessment process can help determine how a potential employee will perform (and behave) in the potential future role. This approach takes extra time relative to traditional hiring processes, but in my experience it’s a solid investment, as it increases team performance, mitigates employment issues and increases employee retention.

5. Engage an investment architect, not an investment engineer

One of the advantages of today’s global investment world is the easy access to so many highly talented, specialized investment managers across all asset classes in both public and private markets. As a result, I believe what family offices need from an investment management perspective are teams that can design portfolios that match each family member’s need for return (cash flow and/or growth) and tolerance for risk by combining various investment mandates and products available in the marketplace.

In other words, family offices need to engage an “investment architect” and allow that person to find the suitable combination of “investment engineers” – those who are highly skilled at selecting individual securities for a given mandate – from the global marketplace. Sometimes family offices hire an investment engineer when they think they’re hiring an investment architect, and in my experience, investment engineering and investment architecture are two very different sets of skills and experiences.

6. Don’t build in-house technology solutions

With the proliferation of so many secure, cloud-based computing applications today in the wealth management marketplace, the need for in-house software development has declined precipitously over the past decade. To the extent that some minor software gaps exist, the use of qualified niche software developers may be warranted in a few less critical areas.

Also, as with any wealth management organization these days, the key for collective software platforms (cloud-based or otherwise) is the integration points among systems to avoid/mitigate the entry of duplicate information (for instance, portfolio management systems vs. accounting systems, etc.).

7. Implement a robust cybersecurity solution

With the growing level of cyber threats, family offices – despite their smaller size relative to large retail wealth-management platforms – should take cybersecurity very seriously and ensure that they have a robust set of cybersecurity policies, technologies and processes that are integrated and constantly monitored. Family offices can access external professional advice in this area at reasonable cost these days. Finally, also critical is the use of cybersecurity benchmark standards (NIST, for example), not just for your own in-house technology protection but also for any outsourced cloud-based service providers.

8. Build close professional relationships with key advisors

Affluent families can present significant complex issues in terms of tax, estate and even actuarial matters (if pension plans are involved). As a result, ensuring that the family office builds close relationships over time with these professionals is key. Also important is creating opportunities for these professionals to talk with one another to create integrated solutions for family wealth. Planning gaps can arise in the future if these professionals – especially legal and accounting – have not communicated and collaborated to solve complex issues for family offices and their family members.

9. Run it like a business, not a club

It’s important that family offices – especially single and multiple (non-commercial) – be operated with a business mindset. I’ve seen some family offices that feel like small clubs, and because of this employees sometimes do not take their roles, responsibilities and obligations to the family as seriously as they would in a more traditional employment situation. Wealth management is a serious business for any family and should be treated as such.

10. Establish prudent governance practices

Larger family offices, especially as related to the number of people serviced, typically require a greater degree of oversight or governance. Again, depending upon size and complexity, this governance can take various forms. But the critical one from my perspective has always been oversight of family assets, as they are obviously the vehicles from which the family members are often provided with cash flow for lifestyle needs, and growth over time for future family succession and potentially philanthropic needs. If family assets are not prudently governed, it’s very easy for wealth to be destroyed due to poor quality investment decisions and portfolio allocations.

Mark Barnicutt, MBA, CFA, is president, chief executive officer and co-founder of HighView Financial Group in Toronto.

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