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Updating Family Office Guidance For Uncertain Times

Joe Reilly, December 7, 2020

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The author of a handbook aimed at family offices has updated the first edition, and with so much change in the sector, the revision was necessary. Kirby Rosplock talks to one of our regular correspondents and industry experts.

Family office consultant and regular Family Wealth Report commentator Joe Reilly talks to Kirby Rosplock, PhD, author of the newly reissued and expanded The Complete Family Office Handbook: A Guide for Affluent Families and the Advisors Who Serve Them.

The first edition came out in 2014 and was very well received. Why the update now?
We thought we would just revise the first edition, but then as we started to get in there, I realized just how much we needed to update. I feel really good that this keeps the spirit of the first book and brings in fresh and new insights from the leaders out there. Many were excited to talk to us and many were very understated and said, hey, please don't even put me in the acknowledgments, but this is what I think you should have. There's a lot of new information that we didn't get in the first edition, and then I can only say that six years of my consulting to some of the largest families has greatly enhanced our exposure and experience. I feel like we've been able to indirectly share a lot of that wisdom that we’ve learned from working with clients, but that we've grown and learned from seeing some incredible family offices that are at their peak - and we've also learned from so many of the ones that are in peril.

We added a new chapter on private trust companies with Don Kozusko and Miles Padgett. We revamped the chapter on investment, with collaboration from Kathryn McCarthy and Kevin Morrissey, where I have added sample investment policy statements and investment committee charters and investment committee policies and protocols.

We also got some very detailed and recent case studies. For example, we have a great case study thanks to Grant Kettering and his father, Charles Kettering, who were both interviewed. They literally dug into the family’s archives to give me a completely accurate account of the family office formation. Thus, I have an historical accurate account and a sort of play-by-play of the build-out of their family office that you won't find anywhere. They have what I would say is the true virtual office, which has a family office head and staff, but they are enabled by several third parties including a commercial trust company, banks, and investment advisors. To accomplish this, they have a formalized and adapted, and I would qualify as a robust process, for making the governance within the family work with the family office. Those are the kinds of advancements that I think make the book far richer.

What are the biggest changes in the six years since you did the first edition?
Family offices in the past have been somewhat parochial and now there is a massive professionalization on so many levels. They are more systematic and focused on process and protocols. The way families ramp up and started a family office in the past was often all related to one brainchild or sparkplug who was usually hired to start it and then by piecemeal filled everything out over time. Now families are expediting the process because they already have better legacy systems than they did 20 or 30 years ago, and the new systems are more compatible with legacy systems. So, I think what's most materially changed is the sophistication, professionalization and the expectations going into what they create. The patriarchal kind of approach is still around, but now the second and third generations are often creating an office with a much longer-term view, as well as a view of how to leverage it.

So, you have been talking to everyone. The classic question must be asked - how much do you need for a family office?
You know, we covered that in book number one, and I was curious to see if the range would go up or down six years later. So, I asked Tom Livergood, head of Family Wealth Alliance and Kathryn McCarthy, family office advisor and consultant and got their insights. 

When the first book came out, the concept of the virtual family office was pretty novel. People were saying you could build an office with 50 million dollars, no problem. So, when we went back to Tom and others to confirm some of these initial numbers, we needed first to have criteria on how we were defining family office. The fact that some single-family offices are now registered investment advisors and broker dealers or former hedge funds, means that many define themselves as a family office, but may not appear at first glance as a traditional one. You might have tens of billions in the main operating business that Tom has surveyed, and the family office was actually relatively smaller, say a half a billion.  Kathryn said in the book that the economics are difficult with only $50 million but are more feasible when you get to a threshold of $200 million. It is harder to call a $50 million office a full-service office. Many of those are what Kathryn calls “coordinator offices.” These coordinator offices might be a hundred or two hundred million plus, but they're a much leaner skeleton and have to be heavily outsourced to make them functional.
   
I think you must ask yourself what is it that you're willing to pay? It only starts to become economical and worthwhile for families in the range of a half a billion. Otherwise, you have issues of continuity and sustainability. One catastrophic market cycle could take you out at a lower threshold. If you're a family with $50 million, it is difficult to make it financially feasible over a five-year period, with modest returns, and keep three to five people gainfully employed. If you want an office that's designed to be here for a few decades, and have the resources to weather some pretty difficult market cycles, then you have to have the buy-in from the family to keep it going and operated. 

What about families who have sold businesses or gone public?  There has been a great deal of private equity money chasing family businesses over the past few years. Are the families retaining concentrated positions or diversifying away?
In The Complete Direct Investing Handbook I discuss how a lot of wealth is obviously created as a function of a concentrated stock position, and or a closely-held business position.

We are seeing that there are a lot of families who have businesses, and their ownership is being transferred or assigned to future beneficiaries. There is obviously massive change happening in our business owner landscape, and some of those businesses will continue and some of them sadly won’t perpetuate, and some of them are intended not to. So, it's not necessarily a sad thing. It is just the way business cycle is done.

A concentrated position in the family’s holding is still one of the biggest planning challenges and we must find better ways to manage the risk that are associated with such high concentration. This barbell investment approach continues for a lot of families, while at the same time they may need to fund their operating entities, continual capital calls and reinvestment into the businesses. These positions are often essential, as they are the cash cows that fuel the other side of the barbell.

When reviewing research from Wealth-X’s studies, they predict an increase in liquidity in privately owned businesses, not necessarily from IPOs or private equity fund investments but through families selling out to one another. Other interesting data points researched for the book revealed that overall shares of private holdings dropped slightly, to less than a third (32.1 per cent) in recent years. Meanwhile, public holdings remain steady at about a quarter (25.3 per cent).




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