Global Family Office &
Family Business Trends
Family Office Association Q&A between Angelo J. Robles and Marc J. Halsema
How can your global experience with highly successful family businesses translate into assisting a family to develop best practices for its single family office?
Highly successful family businesses around the world face an increasingly diverse array of risks and opportunities in today’s highly-connected global business environment. Family businesses clearly have unique needs in comparison to corporate business operations and similar challenges exist for a single family office (SFO).
While the primary functions of the SFO are to centralize the management of the family fortune and to effect over time a financially astute and tax-efficient transfer of the family’s wealth, additional critical SFO functions include family governance, philanthropy, education and maintaining a critical complement to the core family business. The family business and the SFO operate as distinct operating concerns and legal entities, yet each is linked at various touchstones through the common nexus of the family’s collective values and heritage.
Our approach in developing best practices for the family business as our first and most important priority — for example, forging strong and independent corporate governance, implementing critical internal controls, advising with respect to domestic and cross-border tax, legal and business issues, sourcing and retaining key talent, planning for the next generation and frequently working with our family business clients to attract third-party stakeholders — sets the stage ideally for our continuing work with successful families in the logical next stage of their business evolution, which frequently involves the creation and management of its SFO.
​Which global and industry trends do you see as directly impacting the development of SFOs outside the United States?
Nearly 90% of the world's current family offices exist in the United States, United Kingdom and Europe, which means that the successful development of family offices generally in the strategic growth markets of Asia, Latin America, the Middle East and Russia has tremendous upside and a very promising future. As family businesses in these dynamic economies continue to grow, the appetite to create SFOs in these markets will similarly evolve.
We see a number of global trends directly impacting the development of SFOs in these strategic growth markets and how advisers to these families must adapt in order to deliver exceptional client service.
First, there has been a tectonic shift in family wealth from mature to strategic growth markets and the nature of this new family wealth is by definition entrepreneurial.
Second, while the overwhelming majority of family wealth in the strategic growth markets remains concentrated in the hands of first-generation wealth creators, estimates suggest that 75-80% of first-generation family wealth will be transferred within the next decade.
Third, the traditionally tax-neutral offshore family wealth model is quickly changing which requires vigilant monitoring of the tax, legal and regulatory environment in the jurisdictions where wealthy families maintain assets.
At the same time, we see a number of industry trends which run parallel to the global trends and which in turn will have a major impact on the evolution of SFOs in both developed economies as well as in strategic growth markets.
Family Education and Governance. Through education and governance, families link their values across generations. Many of the families we serve are responsible for education and we see this as an increasingly relevant priority for our global SFO clients.
Operational Efficiencies. Because the concept of a family office of any type is still in its infancy in many parts of the world, families of means in strategic growth markets are increasingly looking to outsource and delegate critical portions of family office management to highly trusted advisers in order to bolster operational efficiencies for their SFOs.
Global Political Risk. The overwhelming majority of entrepreneurial families in the strategic growth markets recognize and understand the importance of evaluating and managing where possible global political risk. While it is nearly impossible to predict certain geopolitical upheavals such as the Arab Spring, for example, families are focusing very intently on how global political risk will impact theirs businesses and their SFOs.
Executives in the SFO are critical to the overall success of the enterprise. However, how do you know if you have, as Jim Collins would put it, "the right people on the bus"?
Very often the principal impetus to create the SFO in the first place arises from the desire of the family to create a stated boundary between the family business and the business of the family. To that end, fostering a clear demarcation between the roles and responsibilities of family members who are active in the family business versus those who are active in the SFO should become a top priority when assembling the leadership team of the SFO. It is every bit as important to foster competent and visionary leadership in the SFO as it is in the family business itself, although for different reasons.
With the above stated, however, before the search for leadership and management of the SFO can begin, the SFO mission statement, business plan and employee hiring strategy all need to be finalized in written form. The most critical employee positions within the SFO (e.g., CEO, CIO, CFO, etc.) need to be clearly identified and defined in the SFO business plan and employee hiring strategy, including the qualifications and responsibilities of each desired position. However, only after the initial process of finalizing the SFO mission statement, business plan and employee hiring strategy is completed can family members turn in a thoughtful way to the search for the proper candidates.
As is the case with the selection of a top-drawer management team for any company, the selection process for the SFO management team should begin with industry networking, tapping into existing family business contacts and the potential engagement of a family office search firm. With respect to the selection of the investment management function specifically, quantitative information such as how the manager has previously performed in good markets and down markets should be analyzed. Qualitative criteria such as personal style and professional recommendations will also come into focus in making a final selection decision.
The SFO at the end of the day is a family business. How can metrics and a plan be customized to ensure maximum effectiveness of the SFO?
The SFO should serve as the integrated and centralized cornerstone for the family and, while the SFO may not appear officially on an organization chart detailing the family's business holdings, the SFO will frequently operate as the strategic driver and catalyst for the family's various business enterprises.
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At a minimum, there are three principal imperatives in order to ensure maximum effectiveness for the SFO:
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Family Control. Just as is the case with the core family business, maintaining a strong family voice in the operation and management of the SFO is an important and successful criterion in order to carry on the family's strategic vision,
reputation and values.
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Professional Management. The principal executives of the SFO are frequently independent and highly qualified for the positions which they retain within the SFO with deep previous industry experience.
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Connectivity with the Capital Markets. Successfully managing and caring for the family's fortune will increasingly depend on how well connected the SFO is with the capital markets. The capital markets have the additional advantage of validating the long-term performance of the SFO management team.
How can SFOs benefit from the collective wisdom of an advisor which deals with many different global enterprises?
The global economy has become unbelievably interconnected as a result of the technology explosion over the last generation or so. However, the rapid evolution in global connectivity does not necessarily translate into greater ease in navigating the world's growing economies. Therefore, family businesses and SFOs located here in the United States and abroad will increasingly require the services of outside advisers who possess an international footprint and a deeply global perspective in order to traverse an increasingly complex international business environment.
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There are several challenges for families and SFOs that wish to enter or explore markets far from home, two of the more significant being:
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First, global families and SFOs can benefit greatly from the collective wisdom and services of advisers who currently have "boots on the ground" in various parts of the world and who understand and appreciate how foreign markets really work (as opposed to how foreign markets work in theory).
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Second, there is a compelling need to build effective, cohesive and trusted global teams of advisers who embrace the critical differentiator of providing seamlessly integrated cross-border services to global family clients and SFOs.
Taking into account that each family has different goals and objectives, how od you develop benchmarks and goals for the SFO, which is not by definition in the business of taking on outside clients and is not in the true sense a marketing enterprise like many other businesses?
Each successful family has a unique DNA and understanding the particular dynamics which define the family relative to its highly individual objectives is critical to establishing the appropriate benchmarks and goals for the SFO. However, there are certain common imperatives which all global families appear to share regardless of geography, industry or ethnic make-up. And it is against this set of common imperatives that successful families can effectively develop relevant standards in establishing and growing their SFOs, which include:
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Retaining top-caliber management talent
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Developing an ethos of responsibility
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Sustaining growth and profitability
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Optimizing global capital structure
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Adapting to evolving risk profile
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Building a cross-border family agenda
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Anticipating international political change
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Mapping tax, legal and regulatory priorities
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Evaluating strategic relationships and alliances
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Embedding family vision and values in SFO culture
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Family leadership changes over time as do the family's goals and objectives. The success of the SFO will depend in large part on how effectively the family reevaluates and reexamines on a consistent and regular basis its goals and objectives against this standard set of common imperatives.
While recognizing the culture and approach to family business differ in various parts of the world, what are the principal strategies which global advisors must adopt in order to provide what you describe as exceptional client service to SFOs in the strategic growth market?
The first step in delivering exceptional client service to families of means and SFOs in the strategic growth markets is to recognize not only that each family is unique but also that each market segment is unique as well. By way of example, working with a successful first-generation entrepreneur in Russia will look completely different from advising a member of a diverse second-generation merchant family group in the Middle East in terms of approach, tone and achievable results.
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From our experience in serving SFOs in global markets in a post-financial crisis environment, there are a number of particularly relevant strategies which we have found to be absolutely essential to delivering exceptional client service to families and SFOs beyond the United States and other developed economies.
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First, family governance and family wealth planning strategies which are familiar to SFOs in developed economies are relatively unknown to families in certain strategic growth markets, although concerns about the old adage of "shirt sleeves to shirt sleeves in three generations" (i.e., that wealth rarely lasts past the third generation) are resulting in an increasing awareness of the importance of putting into place proper family governance and family wealth planning strategies during the lifetime of the family wealth creator.
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Second, success in maintaining an effective family governance strategy is not guaranteed simply because a family governance system is implemented during the design phase of the SFO. While many families successfully develop their values, vision and mission for the SFO during the design and implementation phase, there are those that do not fully realize or appreciate that truly effective and meaningful family governance is a constant work in progress which requires critical refinement and reevaluation throughout the life of the SFO.
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Third, and this may be the truly enduring lesson of the recent global financial crisis to families and advisers alike, first-generation entrepreneurial wealth creators in Asia, Latin America, the Middle East and Russia now demand family client leadership from their bankers and advisers, which increasingly requires delivery of bespoke services and consistently independent, thoughtful and authentic advice. Gone are the days of hawking opaque financial products simply to meet artificially-mandated sales quotas. Everything now must be carefully and individually tailored to meet the complex business and personal needs of the families, which is the way it should be, quite frankly.
