Family Capital has come up with five big ideas for family offices.
Due diligence doesn’t matter as much as some say
As Family Capital has said on numerous occasions, direct investing is the name of the game these days. Every family office, it would appear, wants to be a mini-Berkshire Hathaway. Well, if that’s the case, follow a Warren Buffett approach to due diligence - that is, don’t get overly concerned about it. Many advisors will say otherwise, but maybe they’re saying this to cover their own backs and earn a big fee in the process. Buffett wins on investment because of his instinct - and his ability to buy undervalued companies at a good price. And the art of the deal, backed by instinct is more important than rigorous due diligence.
Push down fees on everything to do with finance and tax...
Push down the fee of your banker, private equity advisor, accountant and lawyer. Most of these groups earn at least some of the through economic rent. And if one group because of their financial muscle can ensure they are paid a fee that is more related to their actual factor of production then it must be family offices. OK, bankers et al, aren’t all overly paid, and they need to earn a living just like everyone else, but family offices can bargain hard on price when it comes to their services.
How much family offices pay their own staff is up to them. But be wary - pay can be inflated by the old adage of attracting the best. And that’s not always the right strategy, because the best on paper, might not be the best for the family office, as the next point says.
...and hire trusted advisors, before anyone else
Seasoned investors will almost always say that the most useful investment advice is that which minimizes losses, rather than maximizes gains. Families hiring staff for their family office often want to recruit the best and the brightest from investment banks and asset managers to maximize their investments. But it might not be these individuals that deliver the best results for the family.
In fact, agent-principal difficulties can be greater when the best and the brightest are recruited. Big egos are more likely to rise to the surface and clash with the egos of the families owning the family office. But that doesn’t mean recruiting a compliant, mediocre individual is the best strategy, either. Always look for someone that might be prepared to take a long-term approach to building the family office - they are more likely to minimize the losses when times are tough.
Hire someone where trust has been built up over years - and someone who has the patience to deal with the family principal and other members of the family over an extended period of time. Of course, this isn’t an easy task, but it will pay in the long run to recruit someone where trust is the primary factor, rather than the Harvard MBA who’s worked for Goldman Sachs, and has no previous relationship with the family.
Family offices are becoming more transparent - it would be a good idea to follow the trend. OK, some of that transparency is to do with playing a more active role in corporate governance to improve the value of investments. But because family offices control trillions of dollars of capital flows, the pressure on them to become more transparent will only increase. Better get use to the fact and start preparing for a more transparent future.
...and get public relations advice
Transparency will mean much more scrutiny of family offices - not all of this scrutiny will be positive, in fact, much of it will be negative. If that’s the case then it might be about time to consider getting some public relations advice. Yes, even family offices, at least in Europe and North America, will be forced to manage their public reputations - at least, more than they have in the past. Public relations firms will be salivating at the opportunity to work with family offices - that might not be such a good thing. But a good PR might just help to ensure reputations stay good.