Joe Reilly interviews Kathryn McCarthy, advisor and consultant to families and family offices, about preparing families, family office structures and how a family should "use" wealth management.

In this vacation month of August, this publication is repeating some of what the editors consider to be the best items to have featured on the website so far this year. 

For his regular series of interviews in Family Wealth Report, Joe Reilly interviewed Kathryn McCarthy, advisor and consultant to families and family offices, about preparing families, family office structures and how a family should "use" wealth management. McCarthy serves on several boards and investment committees.

Reilly:  How should a family think about "using" the family office they already have?

McCarthy:  This sounds like a simple question, but in practice it is a very complex one. I’ll start by saying that in order to figure out how to use the family office, the family (not the staff) has to define what it wants from the family office. Define the family office mission. What is it supposed to accomplish, for whom and why? Is there some person in the family or a group of family members responsible for the outcomes? If this is sounding like Governance 101, it is.    

Is there a plan to guide the family office to achieve the family goals? This plan lays the foundation for the family to assess the strengths and weaknesses of the family office and to determine the true value of the organization. It’s only when the family knows what it wants from the family office, [that it] can build or use it appropriately. I think families are not proactive enough in thinking long term (even five years) about the family office. The tactical day-to-day work drives the mandate. This is backwards and leads to trouble when the inevitable transitions – death, new generations in control, etc – occur.

Reilly: What exactly is a family office nowadays? 

McCarthy: A single family office is very different today than 20 years ago. Many more people know about them. I don’t get the weird look anymore when I tell people about my career. Also, lots more family office services are outsourced versus provided in house. I can remember when family office staff only referred to the family members by initials and the files were all coded by number. That was deep in-sourcing and really doesn’t happen anymore. The family offices I know are generally more professional and open…but as you well know “When you see one family office, you see one family office.”

Reilly: Does the term even have any definitive meaning anymore?

McCarthy: The term family office is actually imprecise and generic. It really says nothing about what goes on in the family office. Insiders  – owners, stakeholders, family office executives, staff – only fully appreciate what the term family office really means.

Service providers more and more use the term for market segmentation for their products and services. Family office has become a marketing term. Also, family offices are losing the real "family" part as many “family offices” are basically private investment companies focusing only on investment services.

Reilly: Do you think a family with the means should try to do it all themselves?

McCarthy: Most families couldn’t even if they wanted to for many reasons, and not just because they lack the financial resources. Some families simply don’t have the will to set up their own family office or don’t have the family cohesion to continue together especially if they have shared a collective asset like a family business for generations.

Those families who do start or have a single family office quickly discover that outside resources are essential even if to supplement the resources within the family office.

If you think of family office services as a three legged stool (investments, financial services, concierge or other services) no family office I know does everything themselves. In fact, these complicated entities rely on consultants and specialist service providers extensively. The highest and best use of a single family office today is the integration of inside and outsourced services, not necessarily “doing it themselves.”

Reilly: If they don't do it all themselves, how should they "use" wealth management properly?  

McCarthy: First, let’s try to define a wealth management firm. I see it as an organization that offers investment advisory services (maybe some direct asset management too) plus planning (wealth planning and income tax planning) and administrative services (trust administration and consolidated reporting).  Here too - when you see one wealth manager, you see one wealth manager. 

Clearly, many families use the investment advisory services offered by these firms as their primary source of investment management. However, many times families don’t take full advantage of the planning capabilities offered by wealth managers. Often other advisors (lawyers/accountants/insurance professionals) also compete for the client’s time and interest. Collaboration among advisors including the wealth manager is important, yet often lacking. The best solution for all is to adopt a partnering mentality in all outsourced activities. Have an advisory board or at least a kitchen cabinet for diverse input. Otherwise, families/family offices don’t get the most out of their relationships and even worse, the advice can be siloed, not integrated.

Reilly: Do you think a family should use the same template for their foundations as for their own assets?

McCarthy: If you mean organizational structure, clearly not. In fact, in the larger family offices (actually family enterprises), the family office provides the infrastructure for the foundation staff - ie, technology, back office administration, compliance.

The foundation staff is generally only doing research, grant making and monitoring the grantee programs. Clearly good legal and tax advice is needed to avoid the complicated “self dealing” rules, etc.

If you mean investing, I’d answer no again. It is as simple as the time horizon, spending rates and risk tolerance for the family members and the foundation are usually different. That’s not to say that they can’t both use the same investment advisors and many do; implementation is different.

Reilly: How can you convince a family that they need or will need to have proper governance structures in place before the second generation takes control?

McCarthy:  The G-2s [generation two] usually need no convincing.  It’s the G-1s. Timing is everything because it’s all about when, or if, the senior generation (usually the founder) is ready. Oddly enough in the US, many times there is a family governance system in place, but it functions sometimes only at the will of the G-1s. Being able to communicate about family issues and shared assets is a prerequisite to “proper governance” and usually a sign that the process can start.

Finding the right opening to begin discussions is really important.  Showing how other families have been successful and meeting other families often helps move things along too.

Reilly: What is the best way to prepare a family for the inevitable changes they will face?

McCarthy: There is no “silver bullet” although many founders are still looking for it. It’s a process. First, understanding the family’s history and its story – the positives and the negatives. Developing good communication patterns and skill sets. If there is healthy dialogue among the family members, transition points and issues can be identified. Change is never easy. I often recommend that an independent facilitator be used to help families over the rough patches.

The family office or trusted advisors can be coaches or mentors to family members in the transition process.   Preparation is one thing, but navigating through transitions needs the support of close and competent advisors

Reilly: Do you think inherited wealth destroys motivation?

McCarthy: It doesn’t have to if the inheritors are able to find their own place in life and in the family system. Wealth is actually an enabler. Many families hide the wealth from the young adult out of fear. Absent any serious condition like substance abuse, most of the secrets about the money actually create more problems than they avoid. It’s sad to say but in an affluent environment, using wealth as an enabler, as opposed to destroying motivation, is an acquired skill. It is important to have a role model – parent, close relative, someone. Likewise, cashed out families (those who have sold the family business) are now realizing that wealth regeneration is important to maintain their wealth over many generations...an important economic reason to use wealth wisely.