What can your Family Office do for you?

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One of the questions that prospective clients most commonly ask me is whether I think setting up a family office makes sense for them. This question is mostly asked in the light of what the size of their investable assets should be.

In discussion with the traditional finance industry, I often hear a figure of 250M€ - an asset base that allows a client to set up a fully-fledged family office with a multi-person team covering a wide range of matters, ranging from investments to accounting to concierge services.

In tech-savvy Berlin, where I am based, I would say the number can be smaller. I typically see more nimble family office structures for clients with investable assets of 50-100M€, with teams of one to five professionals.

In the end, the truth is likely somewhere in the middle, and always very dependent on the needs of a client, as I previously outlined in another article.

But in the end, investable assets is just one part of the equation. In reality, many individuals misunderstand the value-add of a family office, where it can help them achieve their goals - and where it cannot. 

Thinking about your Investment Objectives

No matter if you are a young professional or an entrepreneur after your exit, I recommend thinking about Investment Objectives. That includes your overall goal (i.e. capital appreciation, capital preservation, and/or income), but also specific questions around your desired returns, desired risk budget, and what I like to call qualitative objectives. I like to use the following chart:

But how does a family office achieve those goals?

Some would think that the value-add of a family office is on the left side: Setting up a family office will help owners source proprietary, high-performing investments that ideally also offer lower risk. So they stack their team with former investment professionals and let them loose on the markets…

…and wonder why their expensive team and their fancy, uncorrelated investments in Spanish lemon tree groves, South American farmland and niche debt instruments struggle to generate returns worth the effort and complexity.

That statement is not meant to imply that I have a negative view of such complex investments. I know many family offices that do incredibly well investing in such assets. But for each family office doing well with them, there’s more than one that doesn’t do well, because they fundamentally misunderstood what a family office can do, and what it doesn’t.

Quantitative Investment Goals

With that, let us look again on the left side of the chart: Goals such as Return, Risk, Liquidity (and Illiquidity), and Diversification. All of those are not outputs - they are inputs: The variables that define an asset allocation, on the basis of which an individual investor, asset manager or family office can decide which investments are best suited to help an individual achieve their Investment Objectives. 

Which brings us back to the role of a family office. Typically, family office investment staff is heavily involved in helping the owner(s) clarify their Investment Objectives: They assess existing assets and investment experience, provide education, and as a result help them design their initial asset allocation which considers their respective quantitative preferences. Great family officers are incredibly talented at guiding their owners through this process, as well as monitoring and implementing any desired changes to the asset allocation over time. 

However, a family office isn’t needed in designing this process. It’s not uncommon for owners to define these goals on their own (often also with the help of external partners, such as investment consultants or private banks) and to afterwards decide whether a family office makes sense. The same applies for the implementation of the asset allocation through investments: A family office isn’t needed to make investments, as owners can outsource investment management to asset managers or banks or even take care of it themselves in case of very simple investments (think index funds).

But of course, family offices can still help with their Quantitative Investment Goals:

They help the owners define those goals in the first place. Yes, the task can theoretically be outsourced to banks or consultants, and I personally try to involve external partners in my goal-setting process and the subsequent asset allocation - a second look by an external party rarely does harm. However, asset managers unsurprisingly tend to have ulterior motives, especially if they offer those services for free in hopes of winning business later. Here, a family officer can be the more neutral party, given that they are paid directly by the owners independent of how and how quickly they later deploy the money.

They help the owners monitor - and if needed, adjust - their goals. Defining an asset allocation on a piece of paper is one thing. Monitoring it and staying with it throughout market cycles is another thing. Especially in turbulent times, where individuals that don’t interact with financial markets on a daily basis, the family officers can reassure clients, help them avoid irrational short-term behavior, or can adjust it in the most ideal way, as needed. And they help them avoid unnecessary risks - any good family officer should be quick to tell their owners where not to invest.

They manage costs. A family office is no guarantee of outperforming the market (or even matching the benchmark) - But they are almost always great at managing costs: Making sure that the owners don’t pay unjustified costs for products, advisors, or private matters. As Steve Edmundson, one of my favorite CIOs, aptly said: You can’t control returns, but you can control costs.

In the end, family office staff can’t influence the markets, or the outcome of most investments - but they can make sure that their clients are best positioned to be exposed to them, and to a degree, protected from their risks. Which brings us to the qualitative side.

Qualitative Investment Goals

Some of the Qualitative Investment Goals, admittedly, don’t require a family office. Your overarching goal of why you invest - whether for your financial returns, self-actualization, or both - obviously should come from the owners, and not a family office. The same applies for some of the philosophical questions, such as whether you want to have ESG preferences or are just simply not a fan of certain asset classes. 

However, the chance of achieving some of the Qualitative Investment Goals might actually greatly benefit from the presence of a family office - or in some cases, even depend on it:

Independence from service providers / building inhouse capacities: More often than not, owners don’t have significant professional investing experience. Making the transition from entrepreneur to investor is more difficult than some may think - yet they still might want to take charge of investments directly, rather than outsource them to an external party.

Some of those things can be insourced by taking care of investments personally - I know many affluent individuals that take care of their personal investments. But as investable assets approach nine or even ten figures, the work associated with managing complex asset allocations becomes too much for even an experienced investor to take care of themselves. The same applies for non-investment matters, such as legal work, accounting and bookkeeping, or personal services. Having experienced staff to help with those tasks offers not only more personalized service, but often also significant savings relative to the fees that service providers would charge.

Active involvement investments / complex investments for potential outperformance: As outlined earlier in this article, a family office is no guarantee of achieving outperformance. (Unfortunately) more often than not, former high-energy entrepreneurs hire family office investment staff in order to tackle highly complex investments ranging from buyouts to VC investments to direct real estate.

Mostly, the goal is outperformance. But in an unfortunately high number of cases, people dive into complex investments without first considering whether they can actually generate alpha. Yet sometimes, that might not even be the goal: As entrepreneurs move from one chapter of their professional life to the next, they have the same pursuit of purpose as everyone else out there - and being able to once again surround themselves with highly motivated and qualified individuals to now tackle investment-related challenges is a more than adequate purpose. 

And especially as they gain experience as an investor, they might find the asset class or area of the market where their family office, together with their expertise, can generate Alpha that might not be open to institutional investors. (Family offices might be misunderstood by many, but their 'irrationality' might be their driver of success.) That, of course, doesn’t even take into account the financial benefits that a well-run investment team of a family office might bring.

Achieving Your Aspirational Goals

To summarize:

• Family offices are no guarantee to help you achieve your Quantitative Investment Goals, such as your target return or a certain risk budget. But they can help you best set your goals, and ensure that you stay on tack.
  

• Family offices manage risks and costs, both indirectly (by helping negotiate better fees with the managers and service providers you use) and directly (by sometimes insourcing processes and investment services).
  

• Family offices give the owners the chance to be directly involved in their investments, even if direct investment might not be the most rational way to do it - but in the end, it’s their money.

But more importantly, to me, is how a family office can help an individual spend time on their Aspirational Goals.

It's some of the qualitative benefits that I spoke about - such as helping owners with menial tasks such as legal work, bookkeeping, or even cleaning their house, that they might be able to do themselves, but for which they are happily ready to pay someone to do it for them.

But it goes beyond saving them time, but to what they can do with this time saving.

For one, it could be how they can better spend their time within their professional endeavors. As mentioned before, being a successful entrepreneur doesn’t guarantee success as an investor. But that’s where a family office comes in: For successful serial entrepreneurs, I like to say that it doesn’t matter if they return 6, 7 or 8 percent per year - because if they have success again with their next endeavor, that investment might offer a return on money and time that non traditional investment opportunity can match. It’s exactly where a family office can add tremendous value by releasing a successful entrepreneur from the mental and time burden of managing their assets, instead allowing them to focus on tasks that offer the highest financial upside.

But more importantly, a family office might help them completely free themselves from any financial and professional burden at all.

Yes, most of us strive to make more money. But at some point, even a serial entrepreneur might decide that they are done, that they have made enough money. And once again, having a trusted family office on their side might offer unparalleled return: By freeing them completely from investments, taxes, and bookkeeping, instead allowing them to focus on might matter most to them: Family, friends, hobbies.

Those might all be things that are hard to quantify. But perhaps that’s exactly what they are at that moment, priceless - and thus, perhaps, an indicator of the value of a good family office.

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