Family Office

Family Offices' Governance Can Do Better, Sector Needs Rebrand – Advisor

Tom Burroughes Group Editor April 20, 2023

Family Offices' Governance Can Do Better, Sector Needs Rebrand – Advisor

This news service talks to a family business consultancy about family offices and some of the big themes, challenges and problems that arise.

Family offices are more populous, they’re getting a higher (not always easy) profile and are increasingly important players in the investment landscape. Yet they often aren’t governed well enough and need help to keep a coherent structure together, an advisor in the space says. 

The number of family offices globally grew by 38 per cent from 2017 to 2019 and today they collectively control $6 trillion in assets (source: Campden). In 2021, family office-backed deals accounted for 10 per cent of the entire deals market. Big banks such as JP Morgan and UBS provide services to family offices and know that they are important clients. 

However, governance structures at these entities aren’t up to scratch, according to Liza Truax, partner at family business and family office advisory firm Wingspan Legacy Partners. The firm is formally based in Boston – Truax is in New York – with a total of nine staff.

Truax doesn’t like the claim that family offices are all different, citing the oft-repeated line “When you’ve seen one family office, you’ve seen one family office.”

“We don’t think that’s a good thing – much of the differences are due to lack of planning, governance, or expertise when setting up the family office rather than intention,” she said. “We’d like to see more of a playbook emerging with best practices for family office teams. These entities have unique advantages from their generational time horizons and concentrated ownership – however, more often than not a family offices can’t take advantage of this due to chaotic decision-making processes.”

Her comments come at a time when family offices are important players in areas such as venture capital and private equity – and likely to be even more so after the Silicon Valley Bank collapse and worries that bank finance could run dry. They face the continued challenge of working out what services to farm out to outsourcing firms, such as outsourced chief investment officers, and what to do in-house.

Truax thinks the industry needs a makeover.

“We find many employees are sheepish about admitting they work for family offices and feel the need to qualify that they previously worked for an elite institution. Historically FOs were thought to have second rate investment talent, or just to be about booking private jets and managing family conflict. That’s certainly not the case anymore, and we think that as FOs continue to professionalize this stigma will wane materially,” she said. 

Investment work
“By virtue of being investment-oriented firms, there are always market opportunities and risk management needs to attend to. Today, that’s obviously shoring up cash positions, being thoughtful about potential impact of rates, re-evaluating marks for private investments, etc,” Truax said. “A strong family office however should already have the investment leadership and governance in place to adapt to and get in front of these issues, rather than needing to face them ‘urgently.’”

“Where more family offices are urgently behind is preparing for the great wealth transfer that is already upon us and will be accelerating to the tune of $84 trillion in the next 20 years,” she continued. “As the Millennial generation starts to take the helm with values and lifestyles that are materially different from their predecessors, family offices will find themselves needing to pivot materially – both in terms of how they operate and what they invest in.” 

“Most family offices are minimally prepared for this transition which is alarming as these inflection points are when the greatest risk for conflict and value destruction occurs,” she continued. 

Truax has experience in the sector. Before joining Wingspan, she ran her own advisory practice working with family businesses, family offices, and entrepreneurs. During this time, she advised the principal during a generational transition at a single-family office, was chief operating officer of a family-owned enterprise technology business that supported the operations of nearly 1,000 asset managers, and designed and implemented a banking product for a fintech startup. She spent the early part of her career at AQR Capital Management. Previously she was a management consultant at Bain & Co. and an equity capital markets analyst at Bank of America Merrill Lynch. Besides her wealth management experience, Truax competes as an endurance athlete completing myriad half-marathons, marathons, and triathlons. 

There's also a growing body of academic work and thought leadership about how to run family offices, set them up and explain what they do. For example, in 2021 Ed Marshall and Bill Woodson published a book outlining the territory. A new and comprehensive wealth management program is being launched, hosted at the Columbia University School of Professional Studies – the first time an Ivy League institution has done so. Family Wealth Report is also exclusive media partner with US-based UHNW Institute, an organization developing methodologies and best practice ideas for advisors and families. Another partner firm for FWR is Highworth Research, which has a database on single-family offices around the world, including those in the US.

Why they exist
It is sometimes said that family offices are founded by people unimpressed by the service they get from banks. Is this the case?

“It’s not that UHNWs are unhappy with banks – banking relationships can be important relationships for family offices due to lending, investment access, etc,” Truax replied. “The challenge is really that there are many trade-offs which are important to understand and actively manage when partnering with a bank – these include potential conflicts of interest, hidden incentives, etc. Furthermore, while banks can provide broad access they don’t always provide the best access to investment opportunities, at least as it pertains to family offices. Investments that could be very interesting to a family office may not make sense for a bank to source and support either due to economic reasons (e.g. investment opportunity size is too small to ‘move the dial’ for the bank to diligence) or risk reasons (e.g. too complex or too illiquid for most of the bank’s customers),” she said.

“As a result, we see this trend emerging where families will put a meaningful portion of their assets across several banking partners but retain a significant portion in-house focused on unique alternatives that they hope will either provide outsized returns or advance other goals such as impact or personal interest,” Truax said. 

The future
 Truax said that a change already well underway is how family offices are disintermediating lower middle-market and middle-market private equity firms. 

“Family offices have long been avid investors of PE funds and co-investments, but more and more we are seeing these families bid for deals directly – and frequently win. While they tend to move more slowly than a PE firm, business owners like the idea of selling to a family rather than PE – the long time horizon and espoused values give sellers comfort that the teams and companies they’ve built will be treated with respect,” Truax said.

Register for FamilyWealthReport today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes