Joe Reilly interviews Mary K Duke, an advisor and consultant to families, about firing advisors, why you can’t compare a multi-family office to a single family office, and why overseas families don’t want US ties.

This month, family office consultant Joe Reilly interviews Mary K Duke, former head of HSBC’s Global Private Bank based in Bermuda and head of private wealth solutions, Americas - and now an advisor and consultant to families - about firing advisors, why you can’t compare a multi-family office to a single family office, and why overseas families don’t want US ties.

Between 2005 and 2008, Duke served as managing director and head of wealth advisory, Americas, at HSBC Private Bank. Before that, she was head of family wealth advisory, Americas. 

Joe Reilly:  Do you find overseas families wary of having a US presence?

Mary K Duke:  This is a very real consideration.  With the ramping up of regulations requiring special processing and reporting for US persons, fewer and fewer offshore institutions want to have these complications.  Many have made a point of going through their existing book of business to identify any such connections, and are reconsidering those with US relationships.  

This has many implications. US persons are finding it harder and harder to open legitimate and properly reported bank and investment accounts because many firms no longer accept US persons.  This impacts not just account owners, but also any US connection – including US directors of offshore companies, trustees, protectors and advisors.  Even holding US assets can trigger issues and result in rejection by offshore firms.  While publicly-traded US securities are generally OK, real estate or personal property located in the US is very often not.

I am not sure many people in the US really appreciate the broad reaching implications of the US regulatory framework on the ability of US persons to play on a global field.

Joe Reilly:  You have extensive experience with overseas family offices.  What are the major differences between the ways overseas families organize their wealth from families in the US?

Mary K Duke:  Well – the first thing is that there are as many shapes and styles of family office outside the US as there are within -  it is a hard beat to define! The one thing I find that is universal is the extraordinary diversity of family offices.  Whether they are here in the US or abroad.

But there are a few things I came to appreciate as I worked closely with families and their family offices outside the US.  First, many are even more discrete and low profile than families in the US.  They often have a deeper sense of their family legacy, it might be further down the generational lineage, and have a long history.

And one big surprise is that I find that international families rarely name their drafting attorney as their trustee.  And, while the use of institutional trustees is far more common, families outside the US do not often use their institutional trustee to manage the money.   It was a real awakening for me – coming from the US where many attorneys will write wills where they are appointed executor and trustee.  Likewise in the US many institutional trustees require the management of the investments as part of the terms of accepting a trust.

Joe Reilly:  Family offices by necessity have to find and secure good advice.  How can they navigate the many conflicts in this space?

Mary K. Duke:  Actually, I would suggest we back up one level and address how family members themselves can find and secure good advice.  I have been very lucky in my career to sit in many “chairs” around the family wealth table, and that experience has taught me that there are conflicts present in virtually every relationship – even the relationship between the family members and the “ivory snow” family office executive.  Conflicts, or their less insidious cousin bias, occur very naturally in life and I think it is critical for wealthy family members to develop a keen sensibility about them. 

Because there is no way to eliminate all conflicts and bias, I know this will sound heretical, but there is no truly independent advice.  Everyone speaks from their own perspective – which is informed by their knowledge, experience, preferences and motivations.  So families should work to understand what gives rise to a conflict, and what creates a bias, and how to put controls in place to minimize, manage and, where possible, mitigate them. Family members should ask a few key questions:

What’s in it for the other guy?  Which usually boils down to “How is this person being paid?”  If hourly, is the advisor likely to drag things out?  If by the transaction, is an advisor likely to rush things – or repeat things?  If on salary, what might they be doing to preserve their position?

These types of rewards may not even be direct.  It might be a family member or even a friend or colleague who stands to benefit economically – and who may reward the family advisor with referrals or even a share of their fee.  Even in this day of heightened sensitivity to conflicts of interest, I am still stunned to occasionally learn someone has paid family advisors for referrals.

Who do they represent?  In the legal profession there is strict clarity about representation of one client, and lawyers simply cannot represent more than one person or legal entity.  So it is important to know exactly whom a lawyer is representing.  But there is less clarity with other professionals. 

One of the big challenges in families is the extraordinary influence the wealth creator exerts on the family dynamic and the family’s advisor network.  It is important to be mindful of the influence of the powerful wealth creator – very often arranging a constellation of advisors and providers to suit his or her own vision of the world. 

What is their knowledge or experience?  Is their knowledge and advice based on true holistic experience with many alternatives or might it be limited to one or two experiences?  Sometimes bias occurs with an advisor simply doesn’t know enough about an area to form an opinion and hesitates to stray from the known path.

Is there any unspoken bias?   Examples: the advisor’s son just applied for an internship with the provider, or they play golf with the partner of the firm, or they sit on the board of a charity.

And a family can expect that any advisor they have hired is going to seek to please and may not be completely frank with the family about issues or weaknesses. 

Joe Reilly:  So how do you advise families dealing with this?

Mary K. Duke:  A wealthy multi-generational family must concede that they need a veritable army of experts to navigate the complexities they face.

They must be thoughtful about choosing, managing and deploying that army. Consider the defense of a medieval castle.  Are soldiers all lined up in one corner of the battlements looking out in the same direction?  No - they are spread out, some focusing on the immediate threat, while others are scanning the far horizons and the skies for new risks and others even monitoring internal risk. 

They have diverse weapons and armaments to deal with different threats.  My message here is to diversify advisors and embrace the fact that not everyone on your team should be the same.  I have seen it all too often where a family’s team of advisors looks like a band of clones.  They went to the same schools, belong to the same clubs, wear the same brand of suits, practice the same religion, play the same sports, and are from the same generation and cultural background.  Different perspectives and a culture that welcomes informed and positive dissent is a much more powerful environment for navigating the challenges of change.

And all of their efforts are tied together by a strategy that was decided at the top. Advisors have lots of input and help shape that strategy, but the family has to maintain ultimate control over the big picture.

Joe Reilly:  How do you know when to fire an advisor?

Mary K Duke:  Actually it’s a very hard decision.  Families are generally often loath to change advisors. 

The reality of having to bring a new advisor up to speed is painful, and the risk of having family secrets seep out with a former team member is a worry.  But there are times when it is necessary.

What I do caution is a family should think very carefully before firing the advisor who brings bad news, upsets the apple cart or challenges the status quo.  First, it will send a chilling message to all the remaining advisors.  And it may also allow the family to avoid asking some hard questions that could be critical to its future.  They should welcome and foster open discussion of different points of view.  This does not suggest anarchy, but rather open minded diversity of thought.

I actually suggest that in any major family meeting there be some time set aside for “worst cast scenario” planning.  Asking the team what are all the things that could go wrong with our current approach, and how will we recognize it and what can we do to steer clear?  This helps to de-stigmatize talking about failure or problems and helps get everyone in a solutions-oriented mindset.

They should talk about reputational risk; talk about selling the family business; talk about becoming obsolete; talk about market crashes, etc.

Joe Reilly:  Do you think the MFO as a full-service model is sustainable in the US?

Mary K Duke:  I think it is a very challenging business model and for many years I was pretty certain it was doomed to failure.  And there is plenty of road-kill along the super-highways of private wealth management as evidence.  There is a very significant difference between an SFO and an MFO.  The MFO is not just an SFO for smaller families.  It has a commercial objective – which is not the case with an SFO.  This is so fundamental that the two can hardly be compared.

But there is an emerging and more pragmatic MFO approach that balances the need to provide advice from a platform that does not sell product – along with a need to charge real fees for the so-called “soft” services, which are in fact anything but soft.  In my mind, these are the two keys to a sustainable MFO model.   And over the last decade, families have moderated expectations around what the MFO can and can’t do for them.