This publication interviews authors of a study looking at how to build robust family office structures that withstand inevitable challenges over time.
Dennis Jaffe and Jim Grubman last year produced a paper entitled The Resilient Single Family Office. Jaffe has also undertaken other work to explore what makes family offices last the test of time. Jaffe is research associate at Wise Counsel Research. He is also a faculty advisor of the UHNW Institute, the not-for-profit organization with which Family Wealth Report is an exclusive media partner. (See the Institute’s website at www.uhnwinstitute.org)
Joseph W Reilly, a member of FWR’s editorial advisory board and a regular writer in these pages, interviews both men here. He interviewed them several years ago (see here and here) and it is good to catch up with their work again in these pages.
Joe Reilly - I wanted to talk to you both today about your 2018 paper entitled: The Resilient Single Family Office, and also the massive project Dennis recently finished called Resilience of Hundred Year Family Enterprises, which was done in conjunction with Wise Counsel Research, Merrill Lynch and the former US Trust. One of the things you both have noted is that the first iteration of a family office often tends to fail over time. Why is that?
Dennis Jaffe - There are essentially two ways to form family offices: focusing on the individual property of the wealth creator is one way, and the family office as the collective expression of the next generation is the other. These are very different approaches. One way or another, the family needs to go through an evolutionary process to reach a setting in which the next generation can work together. If the family doesn’t think that way, then it leads to problems. The founder structure is not well-set-up for the next generation because they have different needs and different interests.
Jim Grubman - A founder who sets up a family office nominally “for taking care of the family” still has a very individualist orientation. The family itself may not have a lot of involvement with how the family office is set up. That is very different from having a true collective family orientation in which the whole family is understood to be the client and to have these collective influences. One is for the family, the other is by the family. They are very different.
Is this a new way of looking at the family office?
Jim Grubman – We have always thought of the family’s development as a movie and not a snapshot. There is a dynamic aspect of things changing over time. Often, it seems the family office’s development is said to begin at wealth creation. The nature of our work has been to say, wait a minute - remember there was a time before the wealth creation. You have to take that family line and extend it back in time before the family was wealthy. What culture was it grounded in? Where did they come from economically, before the wealth and the family office began?
Dennis Jaffe - When one generation invents something and puts together a governance structure or family office, it is perfectly designed for that generation, but it is not really designed for the problems and the challenges of the next generation. The idea of resilience is that the next generation has to reinvent their structure and even their purpose and nature. Too often, there is a generational transition and the family does well for a while, but again it is just not set up for good re-adapting. The family then gets stuck during the next crisis when they have to cross generations with a structure that was invented for the problems and culture of the earlier generation. Many family offices are overbuilt for simple family functions because they are based on self-aggrandizement of one generation rather than a real model of what the family needs for many branches and households.
There is a curious aspect to the upper end of the real estate market here in Greenwich, Connecticut, where newly-built mansions sit on the market for years. They are hard to sell because they are too customized by the original owner. Potential buyers don’t want to deal with making all the changes necessary for someone else to live in the house.
Dennis Jaffe - Yes, the houses are monuments to the founder, rather than residences for a growing family community. We accept they want to build something beautiful for themselves, and we can accept some of their rampant individualism, but at some point you have to say, well, what do you want for the next generation? Do you want to start gathering your next generation to define who they are, what they want to do together, and whether they want to do things together? It is like setting up a study group for the next generation while you are still completing the manifestation of the founding generation.
Jim Grubman - That is such a great metaphor - it is what founders often do with their family offices. It is self-focused, they want everything really great because of what they have done, but they are not thinking collectively, they are not thinking strategically for the future. Just because you have had great success at building a business doesn’t mean you know how to build a long-lasting family office.
Why does this happen?
Jim Grubman - Realistically? There is often a degree of self-centeredness for some founders. They really don’t care about setting up the family office more collectively. The family’s needs are to be a reflection of the founder’s needs, just like everything else. My sense in working with those individuals is that you are going to make only limited progress, unless there is something in it for them that will reflect well on them. Clients who have a more open mindset, who are looking for guidance in a genuine way, they may be strong-willed but they are open to feedback and to input. It can go much better.
Dennis Jaffe - Sometimes, I find myself convening the next generation and telling them: Look, you don’t need your parents’ permission to talk about these things, yet you shouldn’t be secretive about it. Let them know you are doing it, you just need to do it. You can’t dictate to them, but you can begin to talk about who you all are and what you want. I find myself inviting the next generation to begin a dialogue rather than asking permission from the elders for all the adult children to talk together.