An Institutionalized Single Family Office may become operationally efficient, but still fail in its primary purpose.
Alan Russ Prince, in Forbes, reports that only about one in five Single Family Offices can be defined as high functioning. With the intense interest in the ultra-wealthy in Single Family Offices, coupled with the growing collection of best practices data, it is no surprise that a lot of effort is going into ensuring these organizations are running extremely well and delivering exceptional results. Prince writes, “As Single Family Offices become increasingly institutionalized, many are critically evaluating their operations and performance.” Prince goes on to recommend that Single Family Offices take the requisite steps to improve.
- Evaluate results to identify inefficiencies. This encompasses a broad range of issues from areas of inconsistency with goals to deliverables that are subpar based on industry standards.
- Discern the causes of the inefficiencies. This often entails conducting a deep dive into the methods and processes being used by the single-family office.
- Specify a solution set. Derive possible ways to correct and/or improve the functioning of the single-family office.
- Select a course of action. The ultra-wealthy family makes the decisions concerning which solutions to implement.
- Assist with implementation. Many times—but not universally—the single-family office will request some degree of support in making changes.
This assumes that the problem facing Single-Family Offices is the same as the problem facing institutional family offices—namely how to deliver exceptional results without the constraints of operational inefficiencies. Is this assumption true? If it is not, what then are the steps needed to improve a Single Family Office?
On the first point, as to whether operational efficiency really is the problem facing Single Family Offices, Russ Prince has supplied the answer in his book co-authored with Hannah Grove, Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy. The reasons families gave for the formation a single family office are:
- Control (100%) realized through the family-office structure and wealth management
- Economies of Scale (72.8%) realized through savings on investment management and related services
- Protection of Family Members (63%) realized through directing and coordinating legal actions and structures as well as preemptively combating litigation and ensuring anonymity
- Investment Opportunity (61%) realized through pooling wealth to become an institutional investor and pooling the family’s personal and professional connections
- Education of the Family (52%) by instilling a sense of family traditions and values
- Strategic Giving (36%) in a thoughtful and concerted manner, and,
- Tax efficiency (34%) through non investment portfolio action and coordination
Only three of these goals—economies of scale, investment opportunity, and tax efficiency—in forming a Single Family Office can be said to be the result of greater institutional level efficiency in their operations or could be measured by their financial performance. Focusing on just the efficiencies leaves a great deal out of the big picture.
For the other primary purposes for forming a single family office—control, protection of family members, education of the family, and strategic giving—the office becomes more institutionalized and these goals are subordinate to the drive for greater efficiency and returns. The result is that, as the Single Family Office becomes an institution, the family—individually and collectively—are facing a difficult decision that has nothing to do with efficiency. In Smart Choices: A Practical Guide to Making Better Decisions a different series of steps is laid out:
- What’s my decision? What, broadly, do I have to decide? What specific decisions do I have to make as a part of the broad decision?
- What are my fundamental objectives? Have I asked ‘‘Why’’ enough times to get to my bedrock wants and needs?
- What are my alternatives? Can I think of more good ones?
- What are the consequences of each alternative in terms of the achievement of each of my objectives? Can any alternatives be safely eliminated?
- What are the tradeoffs among my more important objectives? Where do conflicting objectives concern me the most?
- Do any uncertainties pose serious problems? If so, which ones? How do they impact the consequences?
- How much risk am I willing to take? How good and how bad are the various possible consequences? What are ways of reducing my risk?
- Have I thought ahead, planning out into the future? Can I reduce my uncertainties by gathering information? What are the potential gains and the costs in terms of time, money, and effort?
- Is the decision obvious or pretty clear at this point? What reservations do I have about deciding now? In what ways could the decision be improved by a modest amount of added time and effort?
- What should I be working on? If the decision isn’t obvious, what do the critical issues appear to be? What facts and opinions would make my job easier?
If you adhere to Prince’s set of steps, I predict that your Single Family Office will be a very efficient institution that fails in the primary purpose of the family that founded it. If you follow the second set of steps, the Single Family Office may not be as efficient, but it will not fail to achieve its primary purpose—be it control, protection of family members, education of the family, or strategic giving.