An interesting take on the problem of double agency costs for a single-family office has recently been provided by research done by Michael Gaska at the Center for Family Business at the University of St Gallen. Double agency costs at an SFO are associated with the non-alignment of interests between the principal, his staff and external managers.
These costs arise when decision-making is delegated from the family to the family officer, and onwards to external asset managers. And these hierarchies do not always allow for an alignment of interest between the various parties involved in the investment decision-making. For example, the family is often driven by long-term goals, whereas the family office staff can be driven more by short-term goals, like maximising quarterly returns.
Gaska also talks about family blocker problems - this is when one or more members of the family don’t necessarily share the same set of goals as the principal, and/or the wider family. Individual family members can have opposing opinions and attitudes on the overall investment philosophy of the office and the strategy of the family office.
These non-alignment issues can often pose a real problem for families, leading to inefficiencies, and representing a real cost to the family office. Gaska reckons that these costs are more likely to be found in bigger family offices, or at least more complex ones where there are many family members being served.
Maybe a way of dealing with the problem, at least where there is a misalignment of interests between senior family office staff and the family, is to create an incentive system, says Gaska. But, he adds, this approach is rarely followed, because of the problem of false incentives. But the lack of incentives is probably the most serious cause of opportunistic behaviour at family offices, says Gaska.
Gaska elaborates on these problems in a piece he wrote for a Swiss publication called Private Banking Magazin...OK, it’s in German, but maybe worthwhile to do a Google Translate on it for those wanting further analysis of the issues.