This week we’re exploring a key question in our industry: When’s the right time to start a family office? Over the years, I’ve heard lots of numbers thrown out — $100 million, $500 million or even $1 billion. But how many assets do you really need for it to make any sense? And beyond the financials, how much time is the family willing to take to build everything in-house themselves? There are many options in today’s world, and Alec Foege talks with experts who suggest things to think about before taking the plunge and starting your own family office.
We also bring you news of industry thought leader Carina Diamond. The former Dakota Wealth Management chief growth officer recently launched her new firm, Stella Secunda, which is Latin for "next star." Diamond plans to help financial institutions navigate and embrace next-gen business opportunities. Issues like succession planning, talent and recruitment management, and diversity strategies will be at the core of the business offering, helping firms become more thoughtful in their approach to growth.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: When is the right time to establish your family office?
By ALEC FOEGE
A growing number of entrepreneurs, professional investors and public figures are exploring the benefits of starting a family office. But many first-generation wealth creators don’t necessarily know where to start.
Industry experts agree that understanding the goals of the family office is a good first step. While generational wealth preservation is a common objective, other diverse areas of interest include general ledger duties, medical care, art advisory, real estate, private aviation and even wardrobe management.
“A lot of people are willing and excited about overseeing their own affairs,” said Natasha Pearl, founder and CEO of Aston Pearl, a New York-based consultancy that helps set up single-family offices. “But they really don’t have the time or the capability to do stuff right.”
Is a family office the right choice?
Contrary to conventional wisdom, no set amount of personal wealth is required to establish a family office. Some families with over $500 million in assets don’t have family offices, and others with around $10 million do. The main determining factors typically are the complexity of the family’s financial affairs and the length of the list of tasks to be accomplished.
However, a significant cost is associated with establishing the family office structure, so the advantages need to be justified.
“There are ways to structure it so that you hopefully can get some tax efficiency and be able to deduct those costs,” said Danielle Valkner, a partner and U.S. family office leader at PwC in Chicago. “But a lot of those costs are not tax-deductible, so there are a lot of considerations to go into thinking through that cost-benefit analysis.”
Thankfully, today’s family offices enjoy the benefits of time-saving technological solutions and hybrid options that make a traditional brick-and-mortar office less of a requirement.
In addition, some families choose to create family offices to handle everything except their investments. Said Pearl: “Because of the Dodd-Frank rules that arose after the financial crisis, many single-family offices have peeled off the investing and put it in a separate entity from the family office.”
One solution that has become more popular in recent years is the multi-family office platform, which allows families to outsource some of the key family office functions to a firm that can leverage common resources for individual family offices.
The top firms offering multi-family office services provide a bespoke experience for families while exposing them to investments that belie their individual financial footprint. For example, such a firm can offer access to exclusive private investment opportunities that a single-family office alone would not be invited to participate in. Multi-family office professionals also can offer advice regarding the best ones to access.
“Access to nonliquid investing is incredibly hard to do well,” said Gregory Brown, co-CEO at Caprock, a multi-family office specializing in wealth management. “If there is leverage involved, there’s a fair amount of work in making sure that you manage liquidity carefully — so that when you deploy capital, particularly into things that are not liquid, you are doing it with a long-term view.”
Taking the first steps
Once a family has come up with a game plan for establishing a family office, it needs to hire professionals to implement that plan. Which staff to hire first depends on what the highest priorities are for the family.
Pearl argues that the first employee hired ideally should be what family office recruiter Linda Mack termed an “expert generalist,” a well-rounded professional manager who also can handle oversight. “This is going to be a highly compensated person who is going to be overseeing all those different pieces and making sure that nothing falls off the table,” Pearl said.
Whether that person is a CFO or, say, a chief investment officer is partly determined by whether the family is primarily preservation-oriented or growth-oriented.
After that, among the broad categories to be covered are administrative services, wealth strategy, investment solutions and consolidated reporting. Subcategories will likely include family governance and philanthropic advisory.
“Just pretend you have this pizza where all the different slices are various resources that fill important roles in your life — such as your financial adviser, your CPA, your tax attorney, your T&E folks, your corporate attorneys, your lenders, all your relationships,” said Robert Sechan, co-founder and CEO of NewEdge Wealth, which offers outsourced services to family offices. “Who sits at the center of that? It’s usually going to be a multitude of experts.”
Management and maintenance
Though putting the building blocks in place certainly represents the most challenging step in establishing a family office, the ongoing operation and monitoring of the office poses formidable hurdles as well.
“The number-one issue for single-family offices is people not really understanding how costly it is to build a family office and/or not properly scoping out what they want out of that family office,” said Caprock’s Brown. “They may set out to build investment access across all access classes and concierge programs and then realize that the CIO they hired to manage the investments has relatively narrow coverage.”
Managing the expectations of different family members and generations can also be a full-time occupation.
“This is really where governance comes into play,” said PwC’s Valkner. “And the key to successful governance is putting it into place before you need it.”
Once a conflict develops or somebody begins raising questions, it’s too late to try to put a process in place around it. Making things crystal-clear at the outset — on who’s making decisions, who's to benefit from those decisions, who has a say, who doesn’t have a say, and getting all of that documented — is paramount.
Many of today’s high-net-worth families view themselves as impact investors and have a desire to invest in and contribute to environmental or social issues. Such missions require ongoing maintenance and realignment, whether through a third party or internally.
“The sole intent of starting a family office is to drive a better outcome for you and your family,” said NewEdge’s Sechan. “The first step that you take is the most important one. So if that’s a hire or that’s a partner, that’s where you should spend your time. You shouldn’t design the family office without an expert.”
Diamond launches next consultant biz to focus on next gen and diversity
By KRISTEN OLIVERI
Wealth management veteran Carina Diamond has launched Stella Secunda, a firm providing consultative strategies to help financial services firms embrace next-generation business opportunities.
Diamond, who most recently served as chief growth officer at Dakota Wealth Management, knows what’s missing in the wealth management space: mentoring and nurturing diverse young talent.
“Next-gen talent will be the future of our profession,” Diamond told Crain Currency.
While working as a founding board member with the University of Akron’s Diversitas program, whose mission is to expand diversity in wealth management, she saw firsthand the impact that bringing underrepresented people to the table would have on the industry at large.
“After several decades of leadership and client adviser roles, I saw a higher purpose in what I could bring to the profession. It became very clear to me that my success in identifying, mentoring and growing young talent was not a common skill in the field," she said. "While the industry at large struggles to find appropriate candidates for a wide variety of well-paying and engaging jobs, we collectively haven’t always engaged younger professionals."
Stella Secunda plans to develop nascent talent to support succession planning while also guiding owners through transitions in the natural life cycle of their businesses. The company serves an array of financial services clients, including fintech and insurance companies, advisory firms, broker-dealers, banks and accounting firms with wealth management divisions.
“Without properly integrating, training and nurturing them [next gen], our ranks will continue to dwindle.," Diamond said. "Age is actually a form of diversity. We need people of all ages to advise clients and provide different perspectives so we reach better outcomes. I’d like to suggest that everyone take on the responsibility to mentor at least one younger person. The world will become a better place for everyone.
"It really is a moral imperative.”
LOOSE CHANGE
Billy Joel’s 'New York State of Mind' home hits market for $2.5 million: The singer rented a home along the Hudson River in Highland Falls, New York, during the 1970s; and on the way to the house while riding a Greyhound bus, the now-iconic song came to him.
Luxe New England resorts to visit this fall and winter: The region’s allure is most inviting during fall and winter: Oversized fireplaces, leisurely meals and endless spa days with no agendas are no doubt the main attraction.
The Menhaden brings luxury to the North Fork: The 16-room property in Greenport comprises rooms and suites that boast views of the harbor and Shelter Island in the distance, making it an oasis for those seeking a coastal retreat.
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