Aligning wealth with family values is no easy feat, which is why educating the next generation is paramount. This week, we discovered that while 60% of family offices say they are preparing the next generation for their future, only one in five families have an educational program in place.
Andrew Cohen also spoke with key executives at Northern Trust in Chicago to discuss their approach to family offices. David Fox, president of Global Family and Private Investment Office Services, shared the firm’s views on cryptocurrency and alternative investments.
We also encourage our readers to participate in FOX’s 2024 global investment survey. The survey provides unique and invaluable insights into market sentiments, performance targets, investment strategies and operational designs prevalent among ultra-high-net-worth family office chief investment officers, investment-minded family enterprise leaders and principals, and family members who are active investors. To participate, please click HERE.
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HANDPICKED: Educating the next gen at family offices
By MARCUS BARAM
One of the biggest challenges facing family offices is educating the next generation in financial literacy, governance issues, finding their inner purpose and aligning their wealth with their values.
Yet despite the fact that 60% of family offices say preparing the next generation for responsible ownership was a key concern, only one in five families has an education program in place for that purpose, according to a survey by Citi Private Bank. “Most concerning is the insufficiency of leadership succession planning for families and family offices alike and the lack of educational programs for the next generation,” the authors of the bank’s report wrote.
The need for educational programs keeps increasing amid the great wealth transfer of trillions of dollars from baby boomers to younger generations. “We’re seeing more and more requests for our services,” said Mallory Findley, the head of financial education at Rockefeller Capital Management. The wealth management firm’s program was first used by the Rockefeller family itself, and she and her colleagues are “developing new content and scaling it so that more families have access to our program.”
The Rockefeller program focuses on core areas such as personal finance; wills, trust and estate planning; an investing module that looks at the basics of traditional asset classes as well as alternative investments and portfolio construction; sustainability and impact; philanthropy; and entrepreneurship. The latter functions as a mini-MBA program, Findley said, adding, “So many next-gens have awesome ideas that they would love to get off the ground.”
The importance of such education is clear in the oft-repeated factoid that 70% of wealthy families lose their wealth by the second generation, said Gerry Goldberg, the CEO and co-founder of GYL Financial Synergies in West Hartford, Connecticut. The first step he takes is educating Gen 1 “on the importance of having a sustainable legacy.”
When it comes to the next generations, Goldberg said, “It really starts with making sure everyone has the same tools in their toolbox — at a minimum, financial literacy and basic budgeting skills.” Not having those is like “doing sentence composition without the alphabet.”
The education starts with children in grade school, said Goldberg, teaching them about how to handle their allowance — dividing it up into portions to spend, save and donate to charity. “It provides an opportunity early on to engage in discussions around values and those things that are important in life,” he said.
Along the way, it’s key to tailor financial education to the personality of the family office member. “Some of us are numbers-focused and like graphs and charts," Goldberg said. "Some are auditory learners, some focus on the bottom line, and others want to end up hearing a broader narrative.”
Tutors who work with next-generation family office members are trained to tackle challenges such as bullying at school or neurodiversity, said Mark Somers, founder of the recruiting firm Somers Partnership, which works with family offices and private banks on career development.
“The question is how to help the child in that situation," Somers said. "And parents aren’t always the best at that, and teachers might not be on top of it.”
As the child goes into high school, the focus turns to identifying the child's core passion. "What is their zone of genius, what are they passionate about, what energizes them?" Goldberg said. "It’s about helping them to be better human beings."
That foundation gives young family office members confidence and leads to higher levels of training — from financial expertise in investing topics like derivatives to areas such as governance and management, Somers said. It’s about developing the next generation, “so that there is more of a meeting of minds between the generations as the power shifts.”
That might involve facilitating family meetings where difficult discussions about roles and responsibilities and conflicts can take place, Findley said. That can be a great opportunity for next-gen members to share their ideas and to reveal what is important for each generation through exercises that have participants list their values.
Findley recalls a father-and-daughter dynamic — “what was most important for the dad was the least important value for the daughter” — which initially shocked the father until he started to remember that he shared such values when he was her age.
“Where are the commonalities?" Findley said. "And on the flip side, how can we appreciate our differences?”
In the end, it comes down to understanding how wealth can support the family’s values. “It’s easy to transfer money," Findley said, "not easy to transfer values.”
The goal of such educational programs for family offices is to get next-gen members to understand the core values and legacy of the family, help them to find their rightful place within the family and show them how to have differences of opinion while maintaining levels of mutual respect.
Northern Trust shares its buying power approach to family offices
By ANDREW COHEN
Northern Trust, the Chicago-based bank founded by the Smith family in 1889, is leveraging a hefty financial war chest for its global family office services division, which already counts 35% of the Forbes 400 list among its client base.
“The buying power I have as a $800 billion multi-family office with any vendor is going to be a lot greater than 99% of the family offices that are out there,” David Fox Jr., president of Northern Trust’s global family and private investment office services, told Crain Currency. “Even though they have a billion dollars, they don’t have $800 billion in buying power. We put a solution together for all aspects of how you run a family office, not just the investments side.”
Fox, who previously worked at JP Morgan for 30 years, joined Northern Trust in 2012 after his father, David W. Fox, served as the bank’s chairman and CEO in the 1990s. David H.B. Smith Jr., a great-great-grandson of founder Byron L. Smith, remains on the board of Northern Trust.
Now, Fox said, his average family office client at Northern Trust owns more than $1 billion in assets, with over 500 families served across 30 countries. Some of the family offices consist of 200 members, in which case Northern takes care of accounting, taxes, pooled investments, partnerships and other operations within the family. Fox said he sees $500 million in liquidity as the minimum threshold needed for a family to start a well-staffed family office.
“The size of the wealth to me is very important, or it’s just not cost-efficient,” Fox said. “If you have $500 million in liquidity, it usually generates enough excess income and cash flow to be able to afford to have your own staff and cultivate that staff and also keep them motivated.”
An appetite for risk, except crypto
“When we think about what we think will happen over the next 12 months, we have a preference right now for risk — which is a slight tilt toward equities over fixed income, with some expectations for near-term volatility,” said Trish Halper, chief investment officer at Northern Trust’s global family office practice. “We’re expecting 12% earnings growth next year in the S&P 500.”
Halper identified increased allocations toward strategic cash and alternatives as broad family office investment trends, as well as “regular conversation in the public markets around concentration, particularly in the U.S. equity market, and concerns around how concentrated that market has gotten,” she said.
Securities and Exchange Commission approval has led financial giants such as BlackRock, Fidelity, Franklin Templeton and Grayscale to launch exchange-traded funds for bitcoin and ethereum. But Northern Trust has taken a more apprehensive approach to its investment services around cryptocurrency.
“Risk-adjusted returns don’t support [crypto] to be its own asset class; it needs to be diversifying relative to other asset classes," Halper said. "That doesn’t mean we don’t have our finger on the pulse, and we don’t talk about it. We don’t have any strategies on our current platform that would be an ETF.
"Does that mean it won’t be eventually? Perhaps. But we don’t find value to that right now in its current structure.
Said Fox: “If the dollar had moved in value the way bitcoin has moved over the last two years, it wouldn’t make you feel too good. The underlying technology [blockchain] behind it is more interesting than the crypto itself. Understand it and be a part of it, but don’t make it a huge part of your portfolio unless you really could suffer a lot of that volatility.”
A hedge on family offices
Family offices face lighter government regulations than hedge funds, opening the door for some financial managers in recent years to set up “family offices” that in fact trade like hedge funds.
One notable example is Archegos Capital Management, the family office of Bill Hwang that collapsed in 2021 after being valued at $36 billion at its height. Hwang was recently found guilty of manipulating stocks and defrauding Archegos counterparties like Credit Suisse Group and UBS by lying to them about the firm’s trading activity and the level of risk in its portfolio.
“I think a lot of the conversations around family offices were brought to the forefront when a lot of these hedge fund managers decided to convert their hedge funds to family offices,” Fox said. “The reporting requirements are very different. You don’t necessarily have to disclose everything you’re doing, you don’t have to register with the SEC. It’s a vehicle that’s a great way to manage wealth; you can deduct the expenses of the office and things of that nature.
“It gave family offices a bad name, unfortunately,” said Fox, alluding to Archegos’ demise.
Northern Trust says that of its family office clients, 77% have a family foundation, 42% own an operating business, and 15% have a private trust company. In March, Northern Trust published Secrets of Enterprising Families, a 300-page book that covers wealth planning strategies and guidelines for communication, aligning on values and setting up a family’s next generation for success.
”Most of our clients, almost all of them, are single-family offices; and they were created for asset protection, pool investment expertise, estate planning taxes, reporting, control and messaging out to future generations of how to steward the wealth,” Fox said. “That’s really what they were formed for.”
LOOSE CHANGE
$6.6 billion given to charity using donor-advised funds: Clients of DAFgiving360, formerly known as Schwab Charitable, supported 141,000 charities through their donor-advised fund accounts.
Sotheby’s auctioning Kobe Bryant’s locker: The Staples Center locker of the late National Basketball Association legend is being auctioned off with an estimated market value of between $1 million and $1.5 million.
Hedge fund: Family offices feel ‘globalization has peaked': Investment strategies for family offices are expected to focus more on independent markets moving forward, says Welton Investment Partners’ senior managing director, William Marr.
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