A good problem to have

Single family office principals, well-known in finance, state politics and philanthropic causes, were grappling with their own success. The overwhelming good fortune brought by their investment prowess also brought on work compression compounded by inefficient work flows, inconsistent quality of performance reporting, and the rising costs of multiple external advisors to their family office.

Growing pains

Since leaving Wall Street, the family principals had grown their family wealth substantially by investing directly in companies, real estate, land, and natural resources as well as hedge funds and private equity funds. Not surprisingly, as their wealth grew, the number and the complexity of their investment assets and the entity structures holding their assets in the family office also grew. Further, the family was expecting to realize a significant inflow of cash over the next couple of years due to a series of maturing investments.

As sophisticated and experienced investors, the three family principals concentrated on investment strategy, asset allocation, portfolio construction and due diligence. They also directed four staff to focus on banking and cash transaction processing, investment support, performance reporting, financial accounting and reporting, record keeping, philanthropy, and tax compliance.

Coming from Wall Street, the family principals continued the common practice there of outsourcing all non-core business functions. As such, the single family office had long-standing, trusted relationships with several outside professional firms that provided investment consulting, tax planning, financial planning, and partnership accounting and reporting.

Clearly at an inflection point in its development, the family office was facing the perennial problem faced by many growing businesses - “build” or “buy?” The family office engaged Family Office Metrics to assess their current business situation, recommend alternative “build” or “buy” solutions, and implement proposed changes.

Assessment

In its strategic business assessment, Family Office Metrics examined the entire business by: interviewing family members, principals, family office staff and all external professional advisors; analyzing operational workflows, internal controls and risk management; and, documenting the operating costs of the office including personnel costs, consulting costs and principal opportunity costs. A cost benefit and return on investment model was created and used to analyze the risks and rewards of different solutions.

Following six months of evaluation, Family Office Metrics identified three solutions as most viable in the near-term.

1. Re-engineer internal operations with enhanced systems and processes resulting in immediate labor productivity gains;
2. Consolidate outsourced professional services to control increasing consulting costs; and
3. Hire an accomplished financial and operations officer to oversee all finance, operations and administration, stem the tide of outsourcing accounting and reporting to high cost external professionals, and improve internal controls.

Of the three alternatives, the ROI modeling showed that the third alternative yielded the highest risk adjusted return for the long term to the family, the principals and the family office.

Executive search

The principals directed Family Office Metrics to identify a qualified candidate for the role of financial officer. Within three months, Family Office Metrics designed the position description, identified several candidates and qualified the successful executive for the new position in the family office. The search and selection process went quickly because the principals understood the need to act fast when it comes to human capital, and went smoothly because the ROI modeling gave clear market-based signals on executive compensation to the family.

Main takeaways

• Recognize when your family office is at an inflection point in its development;
• Model your alternatives with an eye to short- and long-term risk adjusted returns; and
• Do your due diligence, but act fast when it comes to human capital.