The Family Office

A Practical Guide to Strategically and Operationally Managing Family Wealth

Boris Canessa, Jens Escher, Alexander Koeberle-Schmid, Peter Preller, Christoph Weber

• Publisher: Palgrave Macmillan
• Year: 2019
• ISBN:
  9783319990859
• Topic: Business
• Subtopic: Financial Services
• Index: Business

The book offers crucial advice in helping entrepreneurs and their families find or found a family office that fits their goals. The authors survey the key considerations in this process, including: What are the different models for family offices, and what are their respective benefits? What costs can be expected from a family office, and how much wealth must be under management to justify them? What are the role and responsibilities of the Family Officer and his staff? Which are best practices for family governance, succession planning, and philanthropy at a family office? These insights are then supplemented by a wide-ranging set of interviews with family members, family officers and consultants from around the world. Both family office professionals and families themselves will benefit from this thorough but highly approachable examination.

The author team of Boris Canessa, Jens Escher, Alexander Koeberle-Schmid, Peter Preller and Christoph Weber are eachexperts in a specific field related to the family office. They apply their professional and personal knowledge as family office specialists to provide details on organization of the family office, governance structures, asset allocation, succession and family governance planning and more.

© The Author(s) 2018

Boris Canessa, Jens Escher, Alexander Koeberle-Schmid, Peter Preller and Christoph WeberThe Family Officehttps://doi.org/10.1007/978-3-319-99085-9_1

Begin Abstract

1. What is a Family Office?

Boris Canessa¹ , Christoph Weber² and Alexander Koeberle-Schmid³

(1)

Düsseldorf, Germany

(2)

Essen, Germany

(3)

Köln, Germany

Boris Canessa (Corresponding author)

Email: [email protected]

Christoph Weber

Email: [email protected]

Alexander Koeberle-Schmid

Email: [email protected]

End Abstract

The basic concept of a family office is simple: an entrepreneurial family establishes a financial back office dedicated exclusively to the management of its wealth. Historically, the first families to build out this model were ultra high net worth industrial giants with names such as Morgan, Vanderbilt, Dupont and Guggenheim. The employees of these new organizations were tasked with attending to the external financial interests of the family, at a level of professionalism matching or exceeding that found in the family’s own operating business. Over time, those employees would come to handle all reporting, supervising and controlling tasks for the family and its members. This was the original form of the family office, which today would be called a ‘single family office.’

The defining characteristic of the family office is its freedom from conflict of interest: It pursues no commercial interests of its own and its entire staff are employees of the family. This fundamental requirement serves as the foundation and cornerstone of the trust that a family must have if the family office is to fulfill its primary objective—the preservation and development of wealth—and its extended mission of fostering long-term cohesiveness in the family. It also applies, with some modifications, in the more complex form of the family office, the so-called ‘multi family office.’

1.1 Why a Family Office Makes Sense

Today’s ultra high net worth families are increasingly questioning the wisdom of engaging external commercial organizations to manage their wealth. Numerous academic studies have shown that dissatisfaction among bank customers is at record levels. Perhaps more notably, the mass media has also picked up on the strong anger among customers, with a flurry of articles in recent years about the rising tide of complaints and lawsuits against wealth managers related to losses in securities trading. Politicians, sensing a fertile ground to connect with voters, have not shied away from criticizing banks and their investment products.

This widespread negative coverage reflects a broad-spectrum dissatisfaction among affluent parties with the consulting services of banks and financial service providers. The financial crisis that emerged in 2007 further illuminated government’s seeming inability to master the rapid pace of change in this field and led many wealthy parties to re-evaluate their options. In fact, poor experiences have bred a fundamental disinclination in many wealthy individuals to shares in “bank funds” and other volatile asset classes.

Practical Example: Experiences of a Single Family Office Client

Our family office really opened our eyes! For many years, my four children and I were private wealth management clients of a large bank. Each of us had a somewhat larger portfolio under management. Given our long history together and the extensive range of consultation it offered, we trusted the bank.

At some later point, the employees of our newly founded family office took over these discussions for us. What we learned is that the bank was charging each member of our small family a different set of fees. This was quite unprofessional of them, since the services were always the same. But what really irked us was learning that even the lowest set of those fees was still more than 50% higher than customary market prices!

A different member of the family then informed his bank he was considering terminating his contract and joining our family office. When he asked whether a modified set of fees could be explored, they dropped those fees massively without any further negotiation. Another member of the family had received notification of the fee structure in writing from his bank. When the family office then controlled the numbers, it found that a variety of fees were missing from the list—and that the real accrued fees were over two-and-a-half times higher than listed.

These experiences taught us as a family that it benefits all of us to bundle our interests and knowledge onto one shared family office. I mean, each of us can do with our fortune as we please. But we don’t need to all make the same mistakes, and this lets us share and learn from one another.

Wealth Management by a Family Office?

Wealthy families are increasingly asking whether there are different, more effective structures for managing their wealth. Entrepreneurs and entrepreneurial families in particular are looking for suitable alternatives for successful asset investment and a full range of consulting on asset-related questions. At its core, a new type of wealth manager is being sought. The family office appears to offer a solution.

Before exploring the question of if and how a family office can meet the specific needs of high net worth families, it makes sense to first flesh out the definition of what one is. Easier said than done, unfortunately, as there is no uniform, globally accepted definition of a family office. One reason for this is that family offices can be set up in a wide variety of ways and pursue a wide range of core missions. Sara S. Hamilton, founder of the Family Office Exchange, sees the family office as a central resource that develops custom strategies tailored to a family’s specific needs. Family offices can serve as a controlling instance for costs and streamline the use of external strategic consultants. In her view, the concept of the family office is rooted deeply in traditions and activities that have withstood the passage of time.

In his book “Family Office in Private Wealth Management,” Peter Schaubach, a professor specialized in family offices, defines family offices as an “organizational unit established by a family or individual with a large portfolio of complex assets to grow that wealth more effectively; it achieves this by bundling the strategic, tactical and operative services related to the configuration, coordination and mobilization of financial, social and human assets, harnessing long-term advantages that help create value” (Schaubach 2011, p. 63).

Christian von Bechtolsheim and Andreas Rhein, both family office experts, writing in their publication “Management of Complex Family Assets,” underscore the central importance of engaging a family officer free from any conflicts of interest: “The decisive factor is a family officer who serves as a trustee in the interests of the wealthy party. Starting from a position of freedom from conflicts of interest , he can steer the overall portfolio to meet the specific needs and objectives of the client. This independence is another essential characteristic and differentiation criterion for family offices” (von Bechtolsheim and Rhein 2009, p. 371f). Unlike the representatives of a bank, the family officer is working solely in the interest of the wealthy individual. He has no underlying mission to sell any specific investment product. The book “The New Family Office” by Lisa Gray, a renowned family office consultant, builds on this point:

They must transform their identities from investment management consultants into wealth optimization consultants, realizing that the wealth optimization consulting model provides the basis for long-term competitive superiority. (…) educating investment management consultants in such wealth management disciplines as compensation plans, retirement plans, alternative investment strategies, asset protection, estate and gift tax codes and charitable planning. (Gray 2004, p. 3)

Synthesizing these various definitions, we arrive at the following description: a family office is a self-contained organizational unit belonging to one or more families or individuals with a large portfolio of complex assets. It exists to organize the management of that wealth by bundling assets and streamlining services for better long-term growth. The active consulting that the family office provides to its individual members or family as a whole must always be free of conflicts of interest.

1.2 Reasons for Founding a Family Office

With this basic understanding of the family office—one that will be enhanced considerably in the chapters to follow—we can now turn to the considerations and situations that can potentially drive a wealthy family to establish a family office. One important caveat in advance: Every wealthy family looks back on its own unique past and out onto its own current self-identity and situation. The potential paths that lead to the creation of a family office are just as distinctive and varied. In many cases, the sale of the family’s company has put the family into unfamiliar territory.

The sale of the family’s company can have the following impacts:

• A sudden rise in current assets, typically in the form of (low-return) liquidity. A family in this position can feel a certain (subjective) pressure to invest the assets more professionally and effectively, or to apply it to further entrepreneurial goals.
• The loss of the professional management team that had previously, if indirectly, also handled strategic questions related to the investment of private assets and which had guaranteed the family a certain threshold of financial expertise and a collegial exchange of ideas.
• The loss of the clerical staff that had always handled the many different administrative tasks with efficiency and professionalism.
• Constant overtures from private banks, wealth managers and other (typically sales-oriented) capital market experts competing for a mandate to manage the assets. The language, approach and thought processes on the part of these experts is often entirely different from the way the wealthy family is used to being addressed. This can produce an inner sense of pressure to “do something sensible.”
• Loss of identity. Up until the sale, the family’s self-identity was tied up in its entrepreneurial nature and with the company itself. Cohesiveness, pride and the family’s sense of self were based on that business success. After the sale of the firm, the desire can often arise to engage in a new set of entrepreneurial activities.
• There is precious little time to become accustomed to the new state of things and to accommodate to the new normal.

These and other changes leave the family feeling suddenly at risk of falling apart as a family (and in particular as a “business-owning” family). In addition, the loss of the mission to lead and support the company can leave a certain void, particularly among the family members active in the company. To counteract this dissolution of the family and to provide a new entrepreneurial goal to its members, a family office is often founded to serve as a shared anchor and “new family firm.” In many cases a new family constitution reflecting the modified situation is also composed. Following the sale of the company, the family leader faces distinctive challenges: His or her gravitas and leadership skills are crucial to keeping the family and the fortune intact and helping define a new vision of their future together.

The leader of a small family (in the first or second generation) may well be able to induce the creation of family office structures on her own, especially if the family is used to accepting the suggestions (“instructions”) of the family leader uncritically. Timing matters, however. There is often not much time to try to counteract the centrifugal forces that set in after a cash event.

When considering a family office, the family leader should take into consideration the fundamentally changed character of its asset portfolio. After all, leading a company and managing a private fortune are two very different endeavors. During the initial stages in particular, the primary focus should be on creating new structures that are free from conflicts of interest and competent networks that help the ...