Business

Why shouldn’t single-family offices become virtual family offices, says top expert

Digital disruption is changing the way business is done across the world. So why should family offices be any different?

Stephen Martiros, founder of Martiros Strategies, expects a surge in virtual family offices, where tight teams of risk-aware professionals select and supervise tech-driven service providers.

He explains: “A single-family office behaves like a mainframe. A multi-family office is like an outsourced IT provider. But a virtual-family office is a cloud-like platform that allows for hot swapping and updates.”

Risk is probably the single most important thing you need to manage in an operation, because there are so many moving parts

Hot swapping is important. It involves switching the components of a computer system without causing disruption. It means a VFO can access domain expertise across multiple domiciles while remaining fully operational. 

This platform approach is far removed from traditional family offices whose talking shop gives them a mind of their own.  It is also distinct from MFOs whose resources and business models are constrained by the budget of the adviser.

Martiros recalls advising a hedge fund manager who was astounded at the way his family office had mushroomed from one accountant to 25 people in their own premises. He wasn’t being told when, or why, it recruited new people. He told Martiros: “They keep telling me I need more people and I didn’t understand why.”

To satisfy the client Martiros developed a visual framework so he could see the expertise the family office needed to employ. He says: “I also explained to him it wouldn’t need to employ someone to cover all of the skills all of the time.”

Martiros used to be managing partner of CCC Alliance, which he helped build into the largest private network of single-family offices in the US. To this day, it discusses issues relating to the creation and preservation of family wealth with no input from third-party advisers. The quality of third-party providers can form part of the discussion. 

Its managing partner, and co-founder, is Laird Pitcairn Pendleton, whose family office – Cairnwood Cooperative Corporation – spans seven generations. His business partner, also a co-founder, is Barney Corning of Cove Capital family office. 

Martiros left CCC Alliance in 2010 and developed Summitas, a cloud-based portal for family offices. After 30 years of experience in the sector, Martiros sees virtue in simplicity.

 Rather than complicated flow charts, he has devised a four-category template of the sixteen skills needed to run a family office:  

 Governance: trust law, communications, human capital, knowledge;

Planning: tax, estate, risk, philanthropic pursuits;

Investing: asset allocation, due diligence, portfolio management, direct investment; 

Operations: custody and reporting, finance, property management, technology.

The approach harks back to the Checklist Manifesto by Atul Gawande which argues that doctors improve the consistency of their performance in the surgery by ticking off their preparations against a checklist.

But the Martiros manifesto is more of a long- term guide to best practice. It is out to give principals – and senior officers – the confidence that their family office can procure the right skills 24/7 in the right areas. Senior officers can go on to concentrate on these tasks without the distraction which results from managing teams of family office staff. 

Martiros says: “There’s a lot of subtleties when you hire someone. Let’s say someone agrees to sign up for $100,000. Great. But you forget he will probably want a raise next year. He will also want a bit of a career path so he can do something a little more advanced…” 

In Martiros’ experience, only the largest family offices can provide career development to retain talent: “People at family offices tend to hit the ceiling quickly.”

Things get more complicated when family offices need to fire and hire staff to deal with a sharp change in family priorities. They can also fail to provide enough structure for salaries and incentives at the small and medium end of family offices ranging up to $500 million in size which can be ideal VFO candidates.

Martiros once came across a family office who wanted to hire an analyst for $150,000 when the individual was happy with a half time contract for $60,000. No one was more surprised than the principal when the candidate took the lower offer. 

Martiros says senior staff can use a VFO structure to spend quality time liaising with service providers and improving the list: “You need to stop thinking of a VFO as a single entity.  Think of it as a structure built out of separate units.”

A structure can be amended to suit the changing needs of a principal, maybe to support a growing interest in real estate. Or design a new yacht. “You need someone who has the passion to organize this.  But it must be someone who understands how to evaluate risks.

He adds: “If you roll back thirty years, there weren’t many good outsourced solutions. But now there is so much talent you don’t need to take the risks involved in hiring people.”

Family office requirements are also changing, making it important for them not to get too involved with services which are close to becoming defunct. 

“Security used to be all about bodyguards now it is all about cybersecurity. The newest services on offer often involve technology.”

 Hiring the right adviser is part of the skill set. When this goes wrong, there can be a high price to pay. Martiros once came across a family office asking a new manager to make long-only equity investments. He ended up drifting into hedge funds and investing in a leveraged fund which tanked.

He is keen on single managed accounts, which offer clients transparency, as well as tax advantages. Providers Addepar and Geneva can help manage risks using portfolio reporting and analytics. 

Asset allocation is a big area to get right. Martiros recalls another family was so delighted with the performance of its bond manager that it put him in charge of its entire wealth.  It turned out that he knew a lot about bonds, a little about equities, and even less about everything else. 

Martiros says: “Risk is probably the single most important thing you need to manage in an operation, because there are so many moving parts.” 

There are third-party providers who can help. Albert Risk offers good risk management services to family offices. Lovins Group offers governance advice. Banyan Global can help family businesses. Geller & Company can help with tax. 

But family offices will have their own ideas about the firms they want to work with and every one of them will need to retain one, two, maybe more, professionals to deliver the internal planning, diligence, integration and implementation services to help family offices deliver on their objectives.

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