Fairness and finesse

Family offices and wealth managers are adapting to support their clients’ changing priorities and the unique requirements of each family, say Rania Labaki and Grégoire Imfeld.

Fairness and finesse

In the past two decades the number of family offices has exploded, doubling in number to 10,000 worldwide. Today, they control assets worth $4 trillion – that is comfortably more than the GDP of Germany, the world’s fourth-largest economy.

Since 2000, family offices have become one of the most powerful forces in global investment, bringing a new level of professionalism to management of wealthy families’ assets and pushing providers to new boundaries.

That level of success comes with a caveat: in professionalising they must not forget what a family is. The wealth may come from business but relationships and feelings matter.

In professionalising, family offices must not forget what a family is.

Each family office is a unique and evolving ecosystem: a web held together by personal connections. In this context, wealth is as much emotional and social as it is financial.

A tailored approach

The test for the next stage of their development will be the finesse they show in tailoring their activities to each family’s objectives and dynamics.

The concept first took off in the US, where leading families preferred to create their own structures as private banking slid towards brokerage and short-term profits. The financial crisis of 2008 was the catalyst, turning this change into a global phenomenon.

Managing investments has traditionally been a core single family office (SFO) activity, along with tax and inheritance planning, philanthropy and concierge services, as well as managing collections, vehicles, properties and staff.

Wealth is as much emotional and social as it is financial.

Offices may also handle education, health insurance and security. To balance these demands a good CEO is indispensable, and while employing relatives may appear the obvious choice, it is vital they have the right skills. Trust and competency are key considerations in hiring, and having to remove a much-loved relative who underperforms will be trickier than firing an outsider.

In the past, many families saw the size of their office as a status symbol, but today the trend is towards a lean organisation with a focus on key strategic assets. It should also be remembered that SFOs are not the only governance tools available. A family board, investment committee or foundation board may all have a role.

Unique dynamics

The SFO’s success will be measured over the long term, which requires it to understand the family’s unique structure and dynamics – and this is where finesse comes in.

An important early step in safeguarding the future of the family ecosystem is to define its objectives, purpose and values, usually in the form of a constitution. This constitution should be a living document – priorities change as the business is sold and connections weaken among scattered branches.

An important early step in safeguarding the future of the family ecosystem is to define its objectives, purpose and values

There is no “best practice” for an SFO. It needs to act as the glue, strengthening connections, keeping everyone aligned and ensuring that emotional factors make a positive contribution.

It should understand families not only as individuals but as networks of relationships.

Reacting to change

The SFO has a clear contribution to make in ensuring fair process by balancing trade-offs between the business, family and community spheres and among the financial, social and emotional dimensions of wealth.

No two SFOs are the same, nor can they stand still. Attitudes and mindset in a family evolve along with relationships. A good SFO manoeuvres with agility in the environments of its family and the outside world.

It knows when to be reactive or proactive in harmony with the family’s approach and it adapts to recurrent change and transition.

The SFOs that act most fairly and effectively in the future will be the ones that understand the finesse required to harness these complex forces for the long-term interests of the families they serve.

Rania Labaki is Associate Professor of Finance and Family Business at the EDHEC Business School and Director of the EDHEC Family Business Centre; Grégoire Imfeld is Founder of ONE Family Governance.