In the evolving world of family offices, the next gen is stepping up, eager to bring their voices to the table. At the forefront of helping them succeed is Danielle Oristian York, executive director and president of 21/64, a nonprofit practice dedicated to empowering multi-generational families and next-gen leaders. She spoke with Crain Currency about the need to professionalize the family office industry and shared her insights on how the next generation can earn a place in the decision-making process.
In your experience working with philanthropic families, where do you see families getting stuck?
Traditionally, decisions were driven by those who held the power in families. This approach could have a number of unintended consequences, such as apathy, resentment and even complete detachment. In the 2000s, 21/64 developed and pioneered a multi-generational approach to family philanthropy. Our approach brings voice and agency to all participants sitting around the proverbial conference room table.
To this day, families get stuck when individuals don’t feel like they can assert their voice. This effect is felt ever more acutely as families grow generationally and through marriage. Whenever new people are added to a system, it’s important for families to reevaluate and ask, “Who are we today?” Through this work, families can articulate their collective identity and find alignment, while respecting legacy and those who came before them.
How do you work with family members to help professionalize the industry?
We work with families in many areas of their enterprise; and for many families, one of the first ways they collaborate is through giving together. With literally millions of nonprofits to give to and innumerable ways to exert one’s philanthropic resources, our clients seek a road map for doing this work. We equip families with the tools and best practices for effectively navigating this world of philanthropy. We challenge family members to individually and collectively get clear on the motivational values that drive decision-making and the guideposts they’ll use along the way to gauge success, whether that comes in the form of a strategic plan, investment policy or a mission statement. Said another way: Where do you come from, and where are you headed?
21/64 also works extensively with the professionals who serve and advance the strategy of multi-generational families, like philanthropic and wealth advisers, foundation leaders, family office staff.
Beyond our client work, as a mission-driven nonprofit, we are committed to elevating the profession as a whole through training and continuing education. Our popular “approach training” is grounded by concepts drawn from psychology and organizational development. It has been adopted worldwide and is today considered a best practice in family engagement, informing choices around wealth, philanthropy, legacy and stewardship. Attendees learn to help clients, donors and families clarify their identities — which in turn informs grant-making, investment, governance and other key areas of decision-making.
How do you work with next gens specifically?
There is an opportunity to influence the trajectory of young leaders when they are forming their own identities. We work with the next gen to help them develop themselves as a leader, which in turn leads to greater outcomes down the road. This is the where the “21” in our name comes from.
Our research underscores that investing in people during a formative stage of their life, and they will gain confidence in themselves to have agency in the world. While a family or organization may be excited to set up a fund or project for next-gen family members to participate in, young people need to clarify their own values, vision and voices before they can confidently join others and decisions. We advise families to invest in laying this important groundwork first, which in turn yields long-term results for decades to come.
What are the challenges that lie ahead for the rising gen?
Global discourse is trickling into families, and we find there is a growing gap in ideology. Compounding this is that conversation and deep listening are not well-developed at any generational level today, resulting in families talking at each other instead of with one another. As the rising generation steps into leadership roles, a geopolitical tinderbox with regional conflicts, environmental crises, racial injustice, an expanding wealth gap and an information crisis grows.
This generation of future leaders will need to learn the art of communication and engagement in order to lead courageous conversations and grow consensus for leading a way forward. Though they are the not the first generation to face a complex web of interlocking social, political and economic issues, they are the first generation to come of age at a time with up to four other generations in roles of leadership. Who will they become? What matters the most to them? What resources will they marshal to lead in ways aligned with their values? We are eager to see how they step up and step in.
How do you discuss and work with the concept of diversity for the family office industry?
Families who are successful, naturally, become more diverse. This happens through marriage and generational growth, as diversity is a natural outflow of growth. A family not prepared to embrace diversity will not be able to thrive.
Ellen Perry has given us a terrific metaphor about “pitching a big tent,” which speaks to our philosophy of connecting on what matters to you, your values; not how you look, went to school, etc. When families invest the time to know themselves and know each other, they can draw upon the deep wells of knowing that are within the family. This knowledge also creates an awareness of what skills and abilities need to be staffed to field a great team. No one needs a team with the same kind of player and skill for each position, and families and family offices are the same.
Better outcomes happen when there is careful attention to growing culture that seeks and values difference, grounded and aligned in a unified vision for the future created together.
From art to whiskey: Can family offices benefit from collectible investments?
By RODNEY SULLIVAN
From fine art and fine wine to vintage automobiles and even comic books, collectible investments have received growing attention as a good investment and a possible hedge against inflation or an equity market downturn. Does the hype match the reality? Let’s review the benefits and potential pitfalls of investing in collectibles.
Many advisory firms have been touting the benefits of various alternative investments, including collectibles. The increase in demand, coupled with a relatively scarce and inelastic supply, has driven prices upward for many collectible assets. Falling under the broader rubric of alternative investments, it is well-known that family offices have long held a strong interest, with ultra-high-net-worth (UHNW) portfolios allocating some 16% to luxury collectibles.
Most UHNW investors state “joy of ownership” as the primary reason for collecting investments of passion. However, the distinction between purchasing collectibles for pleasure or for investment reasons is ambiguous, though surveys show many plan to allocate more of their wealth to it in future years. Whether for joy of ownership, a safe haven for assets or investment return, understanding the impact on wealth is an important consideration.
As support for investing in prized tangible assets, some here and here are promoting their ability to also enhance returns to portfolios. Have, however, collectibles produced attractive returns historically, and as such are they worthy of investor attention beyond their psychological benefits?
A closer look reveals a more intricate story. What we find is that success over time requires that one go beyond the passion to develop skill, patience and perhaps a healthy dose of luck.
Unlike stocks and bonds, collectibles, of course, do not create a stream of future cash flows, only the hope that you might one day sell it at a higher price than you purchased it. This means there is no intrinsic value associated with the asset, making it speculative. This leaves investors who wish to own prized tangibles speculating that the price is going to go up in the future and being willing to wait for that to hopefully happen.
Like other investments in the portfolio, the performance of collectibles should be assessed with two things in mind: What is the return on investment, including the cost to buy in and cash out, and will it provide a safe haven and possible hedging benefits against market volatility?
Quantifiable considerations
So what about the investment performance of collectibles? Given the broad spectrum and heterogeneity of collectibles, analyzing the returns of an overall composite index provides little meaningful guidance. Instead, let’s concentrate on three of the most popular investments: art, classic cars and fine wine. The table below summarizes the returns to these three categories as compared with traditional markets of stocks, bonds and gold.
Performance of Collectibles: Average Annual Returns Jan. 2002-Dec. 2023
As can be seen, collectibles appear to provide returns roughly in line with U.S. stocks. Reassuring, for sure, but this is not the complete picture. Why so?
Importantly, the returns to each of these reported asset classes is shown gross of all costs and expenses. An investor’s net performance will assuredly not match the reported gross returns over time. This is especially of concern for investing in illiquid alternatives. Maintaining an inventory of collectibles is rarely a low-cost endeavor.
While detailed research is scant, it is quite clear that the all-in costs of investing and holding collectibles will be much higher compared with traditional stock and bond counterparts. For instance, sales commissions alone will be 10% to 20% of the gross sales. One would also need to add search and information costs, storage and insurance costs to that as well. So while not clear what the various costs add up to, they will assuredly be much higher for collectibles.
Even assuming historical gross returns consummate with traditional assets, as the figure above suggests, it seems pretty clear that passion investments have unlikely yielded appealing net-of-costs total returns versus traditional assets. Impossible to measure, but transaction costs are a very real aspect of collectible investing. Taken together, the costs of buying and holding collectibles drive their net returns to fall meaningfully below those of traditional markets.
The takeaway message here, as famed investor Jack Bogle has aptly demonstrated: Net return to investors is what matters.
Let’s now dig into whether other quantifiable characteristics might improve their attractiveness. Some have suggested low correlations of collectibles to traditional markets consequently make them appealing. Research has indicated that collectibles do appear differentiated with respect to traditional assets as well as to each other, thus leading to potential diversification benefits. Such findings do strengthen their case for inclusion within an overall portfolio.
However, as everyone is well-aware, alternative investments are notoriously difficult to value, and any valuation happens with a delay. Such lags in estimating and reporting valuations, in turn, impact any resulting return series compiled over time. In other words, the reported correlations of returns for alternatives — collectibles included — are not quite what they might appear at first glance.
This fact hasn’t deterred many from making the claim that alternatives provide an excellent source of diversification. The wide touting of the seemingly low correlations of alternatives broadly has led the CFA Institute to say:
“Correlations are like icebergs floating in the sea: There is a lot hiding beneath the surface."
That is to say, contrary to expectations, adding alternatives to a portfolio will not likely improve overall portfolio diversification. When coupled with the high after-fees and expenses of holding collectibles, the investment case for including collectibles comes under meaningful threat.
Nonquantifiable considerations
So wine, art and other collectibles share the same risk for dropping in value as stocks and bonds and are unlikely to yield excess returns over time. Furthermore, collectibles also do not share the same ample liquidity of traditional assets. Like other alternative investments, including private equity and real estate, collectibles are illiquid and as such more expensive to buy or sell. It takes longer to convert all alternative investments into cash. Their illiquidity makes them susceptible to liquidity squeezes, price bubbles (like the overheated art market in the 1990s or Bordeaux wines in the early 2000s) or challenges in making a timely trade.
Informational and liquidity concerns also lead to valuation issues. Each single case of wine, classic car or piece of art is unique, and its value will depend on its condition, its provenance, sales channel and location.
For all these reasons, the case for collectibles rests largely on the psychological benefits from owning them. Measuring the value of any intangible dividend is a challenge, but as investments of passion, investors buy things that they like but that they hope will also increase in value over time while in the meantime displaying it in their home or leaving it in the care of a museum.
Being knowledgeable could help informed investors detect market trends or source collectibles at lower prices through a private network. So if you have that fine wine in the cellar, and you go to sell it on the market and realize it’s not really worth what you had hoped, one could instead open it for sharing with guests at a dinner party, thus deriving a tangible benefit. Investing in passion assets means you have to be comfortable with whatever the outcome.
One final potential financial advantage of collectibles worth mentioning is related to their potential tax treatment. In several countries, like the UK, certain collectibles are considered wasting assets and as such are often exempt from wealth or capital gains taxes.
Even with spirited and often contradictory pronouncements about their success, many UHNW investors are increasing their exposure to the exotic world of collectible assets. Accounting for costs calls into question the investment thesis for expecting excess returns for allocating to collectible investments.
In the end, investing in tangible assets favors those with a love and a passion for a particular class of collectible and patient capital to invest. Perhaps it is by pursuing this passion that the category offers strong returns in the form of happiness.