Every family has its pain points. For large multigenerational families, the key question is whether they can identify and resolve them, Dirk Jungé, chairman of Pitcairn, believes.
Back in the early 1980s, the Pitcairn family office faced a perfect storm. At that point, 50% of Pitcairn’s assets were in the stock of PPG Industries, the plate glass and paint company co-founded by John Pitcairn in 1883 and the primary source of the family fortune. Another 30% was in publicly traded stocks. The remainder was in venture capital, oil and gas investments, real estate and car leasing dealerships.
Fourth and fifth generations of Pitcairns were becoming adults, swelling the clan’s ranks to more than 300 people. While the company had always paid dividends to family shareholders, many in the younger generations wanted more liquid investments. With sweeping changes to the tax laws looming, it began a series of restructurings—some of which were to take advantage of capital gains tax laws at the time—that resulted in Pitcairn liquidating its holding company and selling the nearly 15% stake it still held in PPG Industries.
The holding company also decided to liquidate at that time partly to take advantage of the way property sales were recognized. The tax code was about to change under the Tax Reform Act of 1986 and the company had a window of only 15 months to act. “It allowed us to liquefy the assets for the family and enter a new relationship with members of the Pitcairn family which is called ‘free association.’ If their assets are now freed up, they [could] decide whether they want to stay or they want to go,” says Jungé, a fourth-generation Pitcairn.
Many stayed, but many left. Painful and arduous as the process was, the experience provided Pitcairn unique insights into complex multigenerational wealth transfers, giving it the ability to see around corners and anticipate problems other affluent families could not envision.
“The family office really had to shift gears,” says Leslie Voth, who succeeded Jungé as Pitcairn’s CEO in 2012. “We as a family office had to work with each household to understand there’s no more operating business, this is what you’ve inherited; it’s a combination of trust assets and partnerships—some things collective and some things individual.”
Thomas Livergood, CEO and founder of the Family Wealth Alliance, commends Pitcairn for surviving their rocky period in the 1980s, when the company sold its stake in PPG. “Some families stubbornly hang on to their family-origin stock and for too long. The Pitcairns made a tough call and got it right,” he says, noting that selling family-origin stock is always a momentous occasion for a family. “I doubt it was a unanimous decision. Having said that, they did decide as one voice, which is quite commendable and not all that common that they held together on this critical move.”
American economic history is riddled with tales of families going from shirtsleeves to shirtsleeves in a few generations. Take the famously wealthy Vanderbilts. When they held a family reunion for 120 members at Vanderbilt University in 1973, there were said to be no millionaires left. Today, the Pitcairn family’s wealth has not only made it past the second and third generations intact, they’ve now reached the sixth—with 672 family members. They now capitalize on that success to help other clans through their multifamily office, organized as a trust company known simply as “Pitcairn.”
Back in 1987, Jungé was enthusiastic about the conversion to a multifamily office (MFO) format. Pitcairn had been networking informally with other family offices for decades. As some of the country’s big industrial families began to struggle or meet challenges, they would call Pitcairn for advice. “A steady stream of families that either had a single-family office or were thinking of launching one would say can you help us?” Jungé says. Given the scalability of Pitcairn’s resources, management was confident there would be a market for its services.
Launched in 1923 by John Pitcairn’s three sons—each of whom had nine children—the MFO has been growing its non-family business ever since 1987. It currently serves 41 multigenerational families and 110 families, outside of the Pitcairn family. Less than 30% of its revenue now comes from Pitcairn family assets.
It offers estate planning, trust and asset management, tax counsel, accounting, insurance and financial planning specially crafted for its wealthy family clients. The minimum investment is $10 million, though for the firm to provide a full array of family office services, it looks for families with at least $50 million in net worth. The average client falls somewhere in between, with about $36 million in assets. Currently, the firm has $4.1 billion of assets under advisement.
Open Architecture Investing
Almost a decade ago, the firm initiated another major change, jettisoning its in-house investment management unit, Pitcairn Investment Management, after using both proprietary and outside investment solutions for decades. “We decided as a family office, in order to offer fair advice, to have a proprietary investment product wasn’t very objective,” Jungé says.
The move to open architecture aligned the firm more closely with the families it serves, says Rick Pitcairn, chief investment officer. “I felt then, and I feel now, that it’s really hard to be an advisor to these large firms where you’re trying to sell a product at the same time,” says Pitcairn, who joined the firm in 2003 after spending his career as a long-only, large-cap equity partner at another firm. “I think once you get to those larger families that we specialize in serving, the ability to be a dispassionate advisor rather than selling them a product is an important thing.”
Many firms in the MFO arena want to transition away from the AUM model and become conflict-free. But they can’t because the revenue loss associated with eliminating proprietary asset management would be too big, he says. Families working with Pitcairn typically pay annual fees of between $125,000 and $150,000, though precise amounts vary.
Pitcairn found other ways to deliver value. Since the firm’s clients pay taxes at the highest rate, Pitcairn offers a lot of complex tax management solutions for their equity portfolios. It pioneered tax overlay solutions, introduced in 2007 and 2008, that were so successful many competitors have imitated the strategy. Pitcairn estimates the solution will increase clients’ after-tax returns by 100 basis points annually going forward.
While Pitcairn sees its job as finding the best managers in different asset classes, that doesn’t preclude it from holding investment opinions. In 2008 and 2009, for instance, when many managers and clients alike were saying the markets were unlikely to recover, the firm disagreed. The investment team felt their clients had reasons for choosing their individual investment policies, which dictated certain exposures to certain assets over a period of time, and they were going to stick with those investment policies and not abandon ship just because of a market glitch.
It was a very lonely time as the global economy suffered its first balance sheet recession since the Great Depression, but the firm stuck to its guns. “You don’t have an investment policy until things get a little shaky one way or the other and then change the rules. Investment policies exist for a reason, which is to hold you to that discipline,” Pitcairn said. “We think valuations matter and in 2009 stocks were comprehensively cheap.”
Today, the market and the economy are in a different place. Business and equity market cycles aren’t identical but both often run for seven or eight years. That said, Pitcairn doesn’t see the excesses or other signs of froth typically associated with a market top.
This year the hot sectors have been utilities and dividend-paying consumer staples, not the glamour growth names investors flock to when bubbles occur. “We think there is still some time left out there,” he says. “We continue to encourage to remain [invested].”
Focusing On Multigenerational Families
Preserving and growing wealth for multigenerational families has emerged as Pitcairn’s sweet spot to outside prospects. “Most people think bad investing, too much leverage or taxes are the main contributors to the ‘shirtsleeves-to-shirtsleeves in three generations’ phenomenon,” Jungé says. “Research reveals that it is mostly a result of poor communication, lack of conflict resolution and undefined family governance.”
The firm works with families that still have an operating business as well as those that have liquidated businesses and are now just managing financial assets. It also works with those who have come into an inheritance, such as a trust or partnership, as well as with single-family offices that may not have all of the services Pitcairn does.
“They can access our investments, they can access our technology or suite of services around accounting, any number of things that they might need help with,” says Voth, noting that these partnerships with family offices are a growing part of their business. Running a family office with quality people can be expensive, and some families don’t want to take the time and expense to build their own. So they can either hire Pitcairn to be their family office, or run their own firm and buy Pitcairn services on an a la carte basis.
The firm also works with mature single-family offices, helping them make generational transitions. Voth says they have worked with a New York family that has had a family office since the 1940s. As their next generation came into the family governing structure, the family wanted to take a look at what their office was costing and assess whether they wanted to continue with it. Pitcairn helped them do that assessment, and the family decided to close its office and merge it into Pitcairn’s. “It is not a decision families make quickly,” she adds.
Many times a family retains the best attorneys, accountants and investment advisors they can find, but they rarely get them to work together. Voth believes Pitcairn’s advantage is that it works in a more holistic way, integrating and coordinating those disciplines, which often results in better outcomes.
In fact, she believes the Pitcairns have been able to hold onto their wealth for six generations because they adopted an integrated approach early on, when the three sons of John Pitcairn pooled their resources back in 1923. “They really benefited from that because they got the investment ideas coordinated with the tax accountant coordinated with the legal structure coordinated with the planning for the next gen,” Voth says. “Families that did that in this country have wealth down in that fourth, fifth, sixth generation.”
Managing family wealth is a good business to be in. It’s a growing market because there are more rich families in America than ever before. The number of households in the U.S. with more than $25 million has grown to 145,000, according to the consulting firm Spectrem Group.
Jamie McLaughlin of J. H. McLaughlin & Co. in Darien, Conn., says Pitcairn will benefit from this trend because it is among just a small group of firms that can deliver what he calls “authentic integration,” of investment management, advanced tax advisory, and technology systems or data architecture for reporting and tax compliance, where those services are in-house, “in-sourced” rather than outsourced. “It is sitting in a very, very strong position, and market demand favors what they have,” he says. “They will be a big winner going forward. I’d bet my career on it.”
Moreover, there’s something to be said for a family that has bucked the trend of “shirtsleeves to shirtsleeves in three generations,” McLaughlin says. They’re not alone, but they are part of a small group of families who have taken on other clients as a multifamily office, as opposed to being a commercial provider that services the ultra-high-net-worth segment but never had a family business or family office of its own, he says.
Many RIAs and MFOs talk a good game about multigenerational planning, but the universe of firms approaching it in a comprehensive way is still relatively small. “We’re one of about a dozen firms that even do this work and do it in a way where we don’t have products to sell,” says Voth. “It’s [a] really rarefied space in terms of working with families and knowing how to work with more than one generation at the same time.”
Pitcairn sometimes holds educational events where clients and prospects debate issues with no easy answers, like when should families speak to their children about wealth. “It’s fascinating,” Ronna Gyllenhaal, director of marketing, recalls. One guest argued that they didn’t want the children to know because they might be de-motivated to work, while another argued that they feared their child might give up a career at a charitable non-profit for investment banking to sustain their lifestyle. A third participant finally brought up a fact of modern life: that it’s virtually impossible to keep the family finances hidden from the kids. “There is this thing called the Internet,” says Gyllenhaal, adding children today can find out about their family and wealth on their own.
Lack of communication can cause problems down the road. In many wealthy families, there’s an operating business that kicks off money and a patriarch or matriarch who runs the operation, making all of the decisions. They set up trusts, partnerships, usually some tax-advantaged entities, to contain the wealth and help transfer it to the next generation. Over time, they may want to sell the operating business or merge it into a larger company and then create new entities to contain the profits and direct the wealth to where they want it to go—whether it’s to the next generation, two generations down or maybe to philanthropic endeavors.
This may seem easy on paper. But in practice, when people are involved with frequently divergent interests, it can be like herding cats.
Voth says Pitcairn will work with the patriarch and matriarch and with the next generation to help them understand what they are inheriting, whether it’s liquid, who the decision-makers are and what control the younger generation will have over their inheritance. “If it’s a trust, who’s the trustee? What does that mean? What is the payout? When does that happen? There’s a lot of communication that has to go into helping someone understand what they’re inheriting. Some families are better at that than others,” Voth says, adding that part of their job is to help the senior generation do the planning but also tell them that they have to communicate. “And we’ve learned through the Pitcairn family that, as wealth moves through the generations, sometimes there’s breakage.”
Thomas Livergood of the Family Wealth Alliance in Wheaton, Ill., says Pitcairn understands both the nuances and the complexities of multigenerational wealth. Complexities can come with lots of entities to keep track of, as well as the human side and dealing with disparate generations and households. It’s a lot to keep track of and report on, much less manage smoothly. To get the various parts of a family to move forward in one direction and at the same time is a feat, he says.
“They’re able to just sift through all that, deal with the family dynamics and keep the family together. They’re very good at that,” Livergood says. “The more complex, the more thorny, the better. They love that stuff. And yet they’re a boutique that’s privately held, and families relate to that. They relate to one of their own.”
Many wealthy entrepreneurs achieved their success partly because controlling their own destiny was a paramount goal. That fierce desire for control often creates its own set of issues. Voth recalls a situation a number of years ago where the patriarch was always in a very controlling position in the family, and despite being in his 80s, he maintained his role as the bridge between the operating business, which was a complex set of businesses in and of itself, and the family wealth structure, which also had a lot of moving parts. He was also the relationship manager, so if you wanted to buy a house or a car, he figured out where to get it.
When he died unexpectedly, it blew a hole in the structure and his five children didn’t know what to do, Voth says. “And the gentleman who was running their operating business was like, ‘I can’t take care of his widow and his children. I don’t even have a relationship with them.’ He was more of a tax accountant,” she says.
Pitcairn now partners with their family office and provides investment advice, collectively and individually, and has helped each household stand on its own. They’ve also helped the family as it tries to sell off some of its illiquid assets.
And they continue to do what family founder John Pitcairn did in his days in Pittsburgh as a glassmaker: anticipate people’s needs—and then fill them. Whether it’s a product, service or solution, just make sure it is better than your competitors.
A Global Network
At 2:30 a.m. on June 23, Rick Pitcairn was in a Miami hotel talking with fellow CIO members of the Wigmore Association, a network of eight MFOs and single-family offices from four continents, discussing the implications of Brexit. Others on the call were from MFOs in London and Australia.
Wigmore was formed in 2011 and originally consisted of chief investment officers meeting in person twice a year and connecting virtually far more frequently. While Pitcairn executives have always been active networkers in the U.S. family office world, Wigmore has provided them with a global perspective in an increasingly interconnected world. Moreover, since they don’t compete for clients, information sharing and candor are very high.
In 2015, the group added a CEO track, which meets once a year. Voth reports that the network has been particularly valuable to her in areas like talent management and developing marketing messaging. This September, they are meeting in India.
Beginnings
The Pitcairn family’s wealth began with John Pitcairn, a former telegrapher from Pennsylvania Railroad who established a glassmaking plant in western Pennsylvania in 1883. Born in Scotland in 1841, Pitcairn, the son of a mechanic, emigrated to America at age 5. At 13, he took a job as an office boy for the Pennsylvania Railroad in Pittsburgh.
“He was very fortunate to have one of his best friends be Andrew Carnegie,” says Dirk Jungé, chairman of Pitcairn. “Andrew Carnegie got all of his chums jobs at the Pennsylvania Railroad.”
It put John Pitcairn at an epicenter of industry and transportation at the start of the oil and gas industry. He saw firsthand that his employer was looking to lay track out to the countryside to bring the crude back to the refinery in the city. An entrepreneur by nature, he started buying up some of the real estate on which he knew track was going to be laid at 17. Soon, he began investing in oil- and gas-producing properties while owning and co-managing several businesses.
While on a trip to Europe, he saw that E uropeans made far better glass than what was made in the U.S., so he purchased the rights to produce better quality glass in America. He bought 10 glass plants in the 1870s at depressed prices, and with the new technology he launched Pittsburgh Plate Glass Company in 1883. Ten years later, PPG was producing more than 65% of all the glass made in America.
Because an increasing number of contractors who came to him for glass to glaze their office buildings or homes also needed paint, he began warehousing paint and selling it—until he realized he could make paint better than his suppliers, Jungé says. And so began Pittsburgh Plate Glass and Paints.
His life reads like Forrest Gump’s. He guided Abraham Lincoln on a circuitous railroad route from Harrisburg to Washington in 1861, just before Lincoln became president. Ninety years later, his son Raymond Pitcairn would be among a handful of Republican party insiders to convince General Dwight D. Eisenhower to run for president.
At the age of 74, John Pitcairn risked his life during World War I to deliver 25,000 francs to workers at one of his plants in Belgium because the German army had commandeered the factory and the employees had not been paid.
Though PPG was already a big successful company when he died in 1916, it would enjoy blistering growth in the 1920s as the demand for plate glass soared with the automobile industry boom and the advent of high-rise buildings.