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  • Dan FitzPatrick

Family Office Executives Face Increasing Complexity, Challenges


Family offices (essentially the in-house servicing of the financial, fiduciary, investment and administrative needs of wealthy families) have been around for a long time. Traditionally based on dynastic fortunes and corporate wealth, they have expanded in numbers more recently with the rise in finance-related wealth (hedge funds, etc.) and the explosion of growth in new, predominantly technology-driven, companies minting instant millionaires and billionaires almost every day. The market is significant: Family Office Exchange (FOX) has estimated that there are currently over 10,000 families in the United States with over $100MM in assets, and the number of single family offices (SFOs) could be as high as 6,000. Add to that the fact that roughly $30 trillion in assets are expected to transfer from the WWII and Baby Boomer generations to Generation X and Millennials over the next few decades, and the job prospects for professionals experienced in family office needs and issues would appear to be very strong.


It is difficult to define this market with any real precision, as each SFO is truly unique, tailored to the specific needs, objectives, personalities, family structures, geographies, wealth source, charitable inclinations, passions, beliefs and value sets of its constituent family. Multi-family offices (MFOs) further complicate the task. Thus, it is also difficult to generalize about the skill set needed to be an effective family office (FO) executive. What is clear is that these families are all looking for what I refer to as the Six C’s: effective Control of their wealth; Confidentiality; Customization; no Conflicts of interest; Competence; and Confidence that they have someone in place who is constantly looking out for their best interests.


First generation FOs are usually greatly influenced by the founder/creator of the family wealth, often still involved in management of the underlying operating company. In such instances, a trusted advisor (lawyer, accountant) who knows the founder and the business will usually be chosen to lead the FO. Where the family wealth is principally liquid investments, portfolio management skills are critical. And where family wealth is held in multi-generational structures, a fiduciary professional might be the best choice. As the family’s needs expand – especially in the second generation and beyond – so to do their expectations of their FO executive(s), who are called upon to coordinate, orchestrate and execute across a broad range of disciplines. Some FOs are so large and complex that they require a veritable polymath at the helm.


Despite all this variety, there are several issues and challenges common to most every FO. Some are obvious, other less so. Many are outside the family’s direct control, except in terms of how they plan for, and react to, their occurrence. I’d like to highlight and discuss three of those challenges.


Taxes


This falls in the obvious category. Effective tax management is an issue for every FO, even those which are fully charitable. Significant resources are currently directed at being and remaining in compliance with the mind-numbing array of relevant state and national laws, rules and regulations. Pending tax reform at the national level could trigger reconsideration of existing practices, particularly for those FOs with interests in operating businesses. Fortunately, there are many advice providers actively monitoring this process with the needs of FOs in mind. Expect FO executives and their advisors to be following these developments very carefully.


Elder Care


Perhaps less obvious, but no less inevitable. Everyone ages, but the wealthy have the resources to take advantage of advances in diet, medicine and lifestyle choices to increase the odds of a long and active life. However, all too often there comes a time when the mind declines faster than the body, and it becomes necessary to address issues of dementia, possibly over an extended period of time. According to the Alzheimer’s Association, the greatest known risk factor for Alzheimer’s disease is increasing age, with nearly one-third of the population age 85 and older at greatest risk.


No one is well prepared for the emotional toll this situation presents, and money – while it can help address some practical aspects of physical care – cannot make everything right. FO executives will need to become experts on this condition, its treatment and the art of dealing lovingly with the fears and injured relationships that often accompany it. Family offices can join together with subject matter experts to help advance understanding of this condition, and collectively pioneer ways to prepare families in dealing with its effects on family cohesion. I believe this is an area where FOs can provide immense value to the greater good while addressing an inevitable challenge to their individual missions.


Cybersecurity


Once an obscure topic, this must now become a focus for us all, particularly those in a position of responsibility for stewardship of the assets – especially the financial assets – of others.


My bank management experience provided me with a front row view of this issue. Incredible amounts of time, money, equipment and personnel are required to stay on top of the constant threats to our financial system from hackers – amateur, professional and possibly even government – seeking to gain unauthorized access to information and systems to commit fraud, steal money and otherwise inflict damage. It is a never-ending game of trying to stay one step ahead of the bad guys. The good news is that our financial institutions understand this (after all, “that’s where the money is”) and for the most part are making the investments necessary to battle the known direct threats. This will remain an increasingly important part of their business strategy – and budget – for years to come.


This is a major emerging issue for FO executives, both those who rely on financial institutions for custody and management of FO assets, and especially those who utilize their own systems to oversee, coordinate and report on the management of FO offices. As stewards of their family’s wealth, FO executives need to satisfy themselves as to the integrity and “hardening” of all points of access to family information. Once hackers identify a target, they search for weaknesses in any component of an information system, often impersonating a client (i.e., family member) to gain access to confidential information they can use for further impersonations, or even authorizing fraudulent transactions and external wire transfers. Recent advances in cloud-enabled cybersecurity may encourage FOs to consider moving some or all of their information and/or client interactions to cloud-based systems where economies of scale allow for continuous monitoring and enhanced threat detection, incident response and data recovery capabilities. Of course these advantages come with a cost – the outsourcing of control over highly sensitive personal data – which many families may be reluctant to incur. In any event, it is critical that FO executives keep abreast of developments in this rapidly advancing field.


The world of wealth is complex, and becoming more so every day. Families also can be complex, and tend to become more so with each successive generation. The challenge facing FOs and their executives is to keep up and stay in front of the issues that may impact their families – and then to develop strategies and implement plans to preserve, protect and defend their families’ interests. That is, after all, the very essence of stewardship.

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