With the growth in private wealth creation at the high end, single-family offices are being established at a faster rate than ever before. This expansion is apparently producing some single-family offices that are unlikely to be able to do even an adequate job for the founders. As only about one in five seasoned single-family offices can be defined as high functioning, there will likely be a proportional increase in deficient enterprises.
Most single-family offices are for super-rich clients worth $500 million or more, who have created their fortunes through the growth and often sale of private businesses. Although they had the “smarts” to build and possibly profitably exit these companies, this does not always translate into putting a high-functioning single-family office in motion.
In evaluating the operations and efficacy of single-family offices, a number of mistakes tend to inhibit their effectiveness. These are three of the bigger ones, often associated with start-ups:
1. Failing to specify overarching goals: While the most pronounced goal for establishing a single-family office is control, this translates into different things depending on the family. Family offices need to clearly articulate goals as well as other motivations. This way it is possible to manage against specific criteria. Without specifying overarching goals, the single-family office habitually fails to achieve its promise.
2. Not understanding the myriad options available to them: Setting up a high-functioning family office is not a cookie-cutter process, even though many in the industry act as if it were. Everything needs to be carefully customized to the family, including how to run the family office. For example, some professionals are increasingly involved in acting as the interim executive director of newly established single-family offices. They have extensive experience and capabilities to cost-effectively put all the pieces in place, including maximizing relationships from providers. The single-family office becomes significantly easier and more efficient to manage when an executive director is hired.
3. Being exploited by providers: Tied to the previous mistake, it is increasingly common for super-rich families to fail to structure the best arrangements possible with providers. While some single-family offices are being very smart about this, many are hurting themselves by allowing providers to overcharge them and deliver substandard services and products. Only by understanding the business models of providers and being well integrated into the family office ecosystem can super-rich families make sure they are getting the best, appropriately priced solutions. This is often a learning experience. However, becoming proficient in this area can be dramatically quickened.
These three mistakes are not restricted to single-family office start-ups. They can and often do adversely impact established single-family offices. It is so important for the super-rich family to be very cognizant and ready to take appropriate action to correct these mistakes when they occur.
Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.