Why a Dynamic Family Office
is the most effective model
in the Age of Globalization
By Marc J. Halsema
We are now sitting squarely at center stage of an unprecedented era of global family wealth transfer as the world’s most affluent individuals approach retirement and continue to ponder their family’s succession and wealth transfer requirements and aspirations. Amongst these families, the administrative, investment, wealth transfer and legacy needs are extensive and complex, and becoming all the more so with the passing of time.
As concerns regarding proactive and systematic wealth preservation and succession planning escalate, affluent individuals, entrepreneurs and families the world over are increasingly weighing the benefits as well as the drawbacks of adopting some form of family office structure.
The tax, legal and regulatory horizons for entrepreneurial families and family offices is constantly changing and not always favorably, which presents both important obstacles and significant opportunities for families around the world. Because family offices are by definition unique— involving complex and often idiosyncratic structures—critical decisions reached in one area of importance for the family will invariably lead to consequences — intended or otherwise — in another. With affluent families now facing an ever-growing array of complicated issues affecting every facet of their global business endeavors, it has become imperative for families to develop a comprehensive strategy deeply grounded in their stated values and fully aligned with their cross-generational vision.
A Dynamic Family Office model offers a fresh set of flexible and highly customized solutions for families of both extraordinary and merely simple wealth.
While much has been lectured, written and endlessly parsed concerning the various models—ideal, neutral, outdated and otherwise—that families invariably adopt to preserve and grow their wealth, the hard truth is that each model has its inherent advantages and often overlooked disadvantages, which makes a one-size-fits-all approach an exercise in blind futility at best...and an egregious disservice to clients at worst. For instance, a Single Family Office (SFO) makes sense primarily for those families willing and able to deploy significant financial, administrative and human resources to achieve privacy and versatility. While a standard issue Multi-Family Office (MFO) operating traditionally as a Registered Investment Advisor may offer flexibility, families will inevitably sacrifice a certain level of privacy, confidentiality and uniqueness in the process. A third alternative—a Virtual Family Office (VFO)—similarly offers flexibility although the scattershot and random approach may leave some feeling distinctly underwhelmed and profoundly under-appreciated. While no perfect solution or ideal prototype exists, there is a unique opportunity to take a novel tack. A Dynamic Family Office model offers a fresh set of flexible and highly customized solutions for families of both extraordinary and merely simple wealth.
What then is a Dynamic Family Office and how is it different?
The Dynamic Family Office (DFO) operates as an external "hard drive" for the affluent family combining a singularly objective and independent approach to the family’s investment portfolio utilizing best in class technology while at the same time offering a palette of family office services customized to the strategic goals and aspirations of successful entrepreneurs, families, family offices and privately held businesses around the world.
The DFO will ideally encompass many, if not all, of the following in its service offering to its client families:
1. Customized structure and family experience coupled with DFO Report Card
A DFO stands apart from other family office models principally based upon the customized structure for the individual families it serves and the overall client experience that it can deliver. The DFO exists to serve the family, not the other way around. Accordingly, the DFO should be evaluated on a periodic basis in writing not only in terms of the investment returns that it generates for families but also with respect to the breadth, quality and integration of its ancillary service offerings.
2. Multiple CIO function finely attuned to the character and culture of the individual family that it is meant to serve
Given that families have diverse investment philosophies, a DFO will contour its investment platform around the individual character and culture of its client families. Accordingly, a DFO may consider adopting a multiple CIO model not only to support the various investment styles and objectives of its families— including the increasing trend amongst families to push investment dollars towards private equity, venture capital as well as direct and co-investment opportunities—but also to manage overall portfolio risk across any number of complex investment choices.
3. Seamless and rigorous integration via a dedicated DFO staff
In order to prepare itself adequately for the highly significant wealth transfer that is expected to occur over the next decade, the DFO will deliver a carefully selected suite of core services and establish deep relationships at a level that fulfills the increasing needs of its client families. The DFO will cultivate a correlated team lead by a Chief of Staff that will have at its disposal the skills, tools and strategies to develop a long-lasting relationship not only with the first-generation entrepreneurial wealth creators but also with the succeeding generation that may be in the position of taking over the reins of the family enterprise.
4. Attention to millennials and next generation
The DFO will focus rigorously on serving the millennial and next generation communities. While many millennials are entrusted with high level advisory and administrative roles within their family offices and are comfortable managing significant investments, much has also been written about millennial disdain for financial advisors. However, evidence suggests that most millennials will rely on those financial advisors who combine both experience and empathy to address their most pressing investment requirements.
5. A World View
Families are increasingly global in nature. An internationally calibrated DFO will welcome the opportunity to advise its families—both foreign and domestic— on the critical issues and opportunities that will impact not only family wealth but also perhaps the livelihood of the families themselves. Adopting a world view may take the form of anticipating international political change, mapping cross-border tax and regulatory challenges and creating a global family agenda as events warrant.
The modern DFO exists primarily to centralize, preserve and transfer significant family wealth across generations while at the same time acting as an effective inter-generational safeguard and touchstone for the family’s collective values, aspirations, heritage and legacy.
When properly architected and thoughtfully assembled, a DFO will (i) frame a comprehensive solution to preserving a family’s wealth and managing its financial affairs and (ii) manage myriad related and parallel issues for the families that it serves, including wealth advisory and investment services, data aggregation and performance reporting, corporate and family governance, accounting, tax and legal advisory, estate planning, philanthropy, risk mitigation, cyber security, family education as well as integrated personal financial planning. A DFO may also specialize in stewarding the wealth of multiple generations within a family as well as advising on inter-generational wealth transfers and the financial security of family members.
During the next decade approximately US $4.0 trillion of global wealth will be transferred to the next generation. The United States alone will see the greatest level of wealth transfer, with US $1.6 trillion changing hands over the next 10 years, accounting for nearly 40% of the global total. This tectonic transfer represents 14,000 ultra-high net worth families and individuals with an average net worth of US $272 million, resulting in an entirely new breed of ultra-high net worth individuals and affluent families around the world.
These projections not only underscore the importance of early and proactive planning to ensure a successful transfer of assets, but also flag the related issue as to how entrepreneurial families around the world should best execute this unprecedented transfer of global wealth. The family office models that worked reasonably well in the past may not operate in the best interests of families going forward.
Moving Up to a DFO
Engaging a DFO to custom-fit a family's unique circumstances and strategic requirements will almost certainly involve thoughtful discussion, careful preparation and nuanced execution, including consideration of key threshold questions that should ultimately help to frame an earnest and honest conversation amongst members of the family:
Where is the family in the life cycle of wealth (i.e., first-generation entrepreneurial wealth versus multi-generation established family fortune)?
What is the family’s collective vision and strategic plan for the next 5, 10 or 15 years, and what is the family’s collective vision and family prepared to sacrifice in order to achieve success?
What are the family’s specific financial and personal goals and how do they align with one another?
Is the principal objective to preserve family values or family assets, or both?
Is the family genuinely and thoroughly united in its desire to outsource its most sensitive functions to a DFO?
Experience reveals that a number of discreet indicators (perhaps better stated as “pain points”) may often prompt a family to take deliberate and immediate action towards adopting some variety of family office model, whether it be to form a stand-alone SFO or to confederate along with other like-minded and value-oriented families on a DFO platform.
The family’s immediate financial horizon has become increasingly murky and uncertain, and family leaders have become overwhelmed with the details and financial minutiae required to manage increasingly tangled family matters and business operations, spurring a strong desire to achieve heightened alignment between family advisors and family members.
The family wealth creator is considering alternative goals and benchmarks for the family business and requires a formal roadmap and aligned team in order to pivot successfully to the next stage.
Although the family has multi-generational intentions and objectives, it can no longer clearly and cogently articulate its long-term vision. Moreover, certain family members have moved in different and often incompatible directions from the strategic goals and aspirations originally embraced by the family.
Following a liquidity event or anticipated transfer of family wealth, a DFO model can serve as a focal point of identification and cohesion for family members regarding any number of critical issues, including business exit planning and value acceleration considerations.
Privacy and Confidentiality
The overarching priority for the family has become to ensure absolute privacy and preserve strict confidentiality on all levels.
The family has not selected a qualified successor, and no clearly defined succession plan has yet to be considered.
While the family has been traditionally focused on cost control, allocation, investment returns and dividend policy, wealth preservation is now becoming a rapidly growing priority owing to deep-seated concerns surrounding family cohesion and inevitable generational transitions.
Multi-generational family members are becoming increasingly concerned that no formal governance architecture has been put into place to provide an effective and efficient operating structure by which to guide the family to the next level.
Critical family information has evolved into an eclectic amalgam of current and relevant— but also outdated and often useless— information that is frequently impossible to decipher. The personal coordination of various investment managers, tax information and estate planning documentation has become overwhelming, chaotic and confused.
The domestic and international tax, legal and regulatory regimes are constantly changing and have become more complex to manage, as the family’s social and business relationships similarly evolve to include other like-minded families around the world.
Conclusions and Recommendations
Highly successful families and family businesses the world over face an increasingly diverse and distinctly challenging array of risks and opportunities in today’s hyper-connected global business environment. Entrepreneurial families clearly have unique needs and requirements in comparison to corporate business operations.
The breadth, scope and focus of a DFO can be as unique, personal and varied as the family that engages it. While the primary function of a DFO will be to centralize the management and preservation of the family fortune and to effect over time a financially astute and tax-efficient transfer of the family’s wealth, additional critical DFO functions include family governance, estate planning, philanthropy, education and maintaining a critical complement to the core family business to the extent it continues to operate in family hands. Fashioning a successful DFO function for highly successful families is a customized business process requiring a clear vision, a realistic needs assessment on the part of the family, a thorough understanding of the resources available internally and externally for the family and a granular roadmap by which to design and customize the DFO around the immediate needs and desires of its family clients.
The decision whether to outsource all or part of the functions of the family to a DFO can be as weighty as many of the decisions that led to creating the family’s wealth in the first place.
It is truly in the best interests of a family to seek out the broad experience and wise counsel of recognized experts and trusted advisors in the family office community as it evaluates the benefits and opportunities to engage a DFO.