Finding the right executive director for the family office.

The following is drawn from the authors' latest book, Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy.

In the past two columns, we've taken a close look at America's family offices-the assets and motivations of the family members, as well as the financial services and products they use and want to use down the road. Now we'll take another tack, looking at what's expected of the person in charge of the family office, the executive director. For those advisors who aspire to take this step up, they should know that they have to be equal parts investment counselor, headhunter, diplomat and shrink. In this case, interpersonal skills are just as important as professional qualifications.

Our study encompassed 653 family offices with a combined net worth of more than $2 trillion, including investable assets of $1.2 trillion. The offices were divided into three categories: the traditional single-family office, which had an average net worth of $773 million; the multifamily office, which had an average net worth of $260 million and was built around an "anchor" family that has at least 30% of the total assets; and the commercial family office, where there was no anchor family and where the average net worth was $53 million.

The research was motivated by the need to get a grip on this rapidly evolving segment of the financial services industry. The family office had long been the province of the super-rich, the Rockefellers and Gettys, but the desire on the part of affluent Americans for preferential treatment, financial and otherwise, has led to a lowering of the bar to entry. Where a family office was once thought to be only feasible for families with $100 million or more, the advent of the multifamily office has opened the door to families with "only" $5 million. And with more firms offering family offices and more affluent families looking to open or join a family office, there's also a growing demand for the people who can be at the helm (not to mention the number of financial advisors looking for a promotion to executive director).

Though the name on the door may change from family office to family office-it could read "Executive Director," "CEO," "President," or even "Chief Investment Manager"-our research shows that the person in charge is critical to the office's smooth operation and success. The executive director, as we'll refer to him or her in this article, is as indispensable as the family fortune itself.

Consequently, in the course of our research, we asked the executive directors of the 653 family offices in our study what they considered to be the key criteria for success, covering their business and interpersonal skills as well as their experience. We also asked them how they got the job to begin with.

First, however, we should briefly recap what it is that an executive director is expected to do. The job description would include overseeing the day-to-day operations of the office and other employees; managing, or finding someone to manage, the family's investments; deciding which financial products and services to use, as well as where to get them; tax management and reporting; and administration. That broadly constitutes the business side of the job, but there's also the personal side, which would cover interacting with the family or families and serving as an intermediary between family members or, in the case of a multifamily office, between several families vying to be heard and obeyed.

In a single-family office in particular, there's no buffer between the executive director and the family, so when something goes awry, he or she takes the blame. As a result, the executive director has to work overtime to understand and connect with the family, to develop a relationship that can help insulate them from error. By way of example, one executive director studied horology-clocks-because the family had a large collection and tended to make references and analogies that involved clocks and clockmakers.

In other cases, family meetings take place in foreign countries and involve passwords and aliases requiring the executive director to "play secret agent." The moral of the story: Understanding the way that money works on the psyche of the wealthy is a must for any executive director who wants to succeed-and hold on to his or her job.

When more families are in the office, however, the position is understandably less precarious. In a commercial family office, for instance, there's a lot of distance and not a lot of contact between the executive director and his or her client families. Furthermore, the products and resources selected are often from the parent firm, so the director is less likely to be seen as culpable.

When we asked which skills were most essential, management ability was, not surprisingly, at the top of the list (Exhibit 1). But in an indication of just how challenging the job can be, there were five other attributes cited by more than four out of five respondents that put great emphasis on the executive director's ability to relate and work with others, whether those others are employees, financial specialists, vendors or, most importantly, family members. As we have already indicated, when working with the very wealthy, the ability to listen, understand and convince is indispensable.

Next we asked which technical skills were most important, and investment management expertise was the only response cited by more than half of the family offices-and narrowly so at 56.4% (Exhibit 2). Expertise in administration, accounting and advanced planning were also mentioned, but by only a handful of executive directors. Such services are usually outsourced so the executive director only needs a working knowledge of them-that is, enough to hire someone else to do the job.

When it came to experience, it was far less important that the candidate had worked for a family office per se than it was that he or she had worked with the wealthy in any capacity (Exhibit 3). This is very much in line with the motivations cited for opening a family office that we discussed previously, and with our research among the affluent in general, especially those with $25 million or more in investable assets. When people are wealthy they want all of the perks and products that come with wealth, and the person best suited to provide those perks and products is a financial expert who is familiar with the high end and the needs of people like themselves.

Finally, we asked the executive directors how they got their jobs. There were four responses with similar percentages: intrafirm transition, previous professional relationships, executive search firms and professional contacts or referrals. Surprisingly, given the industry's emphasis on networking with clients, personal contacts or referrals finished a distant fifth (Exhibit 4).

However, it should be noted that when we broke down the responses by family office type, almost half of the single-family and multifamily offices relied on previous professional relationships, far and away the dominant answer, whereas intrafirm transition was the number one answer for commercial family offices as it was the firm, not the family, that did the hiring.

Furthermore, we found that as a result of the intense and myriad personal and professional demands made upon executive directors, portfolio managers are seldom considered to be top-tier candidates. Family offices are looking for individuals with a broad range and command of professional and personal talents, what we would call a wealth manager. And in order to land such qualified and coveted prospects, compensation is often directly linked to the executive director's abilities, responsibilities and effectiveness. The challenge is formidable-but, then again, so is the potential payoff. 

Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.