Family offices need to use Bayesian analysis, says sector specialist

Family offices need to try harder to come to terms with a fast-changing world, according to a 190-page analysis published by its leading trade body. 

The Family Office Association founder, Angelo Robles, calls the handbook:  Generational Success: Creating an Adaptive, Resilient, Anti-Fragile Family Office that Thrives Generationally. It is peppered with ideas, quotes, advice and actions, far removed from the stilted prose of reports compiled by management consultants.

To deal with the digital revolution, and other issues, his guide says family offices need to use Bayesian analysis, named after Thomas Bayes, an 18thCentury Presbyterian minister, who was fascinated by maths.

Billions more people are expected to come online in the coming years. Commerce and entrepreneurship will grow exponentially. This will be further accelerated by the internet of value as the next evolution of the internet. Web3, decentralisation, blockchains and programmable money

Bayes argued people needed to continually update their strategies to cater for new evidence, just as we need to update computer programmes in the present day. Failure to do so means you end up making decisions based on irrelevant, or insufficient, evidence.

Robles was named as an influencer to the family office community by Family Capital last year. In the FAO report, he says: “The rules of community and global engagement – as well as risk/reward – are changing rapidly. The single-family office may need to radically change to stay relevant to the needs of family members and adapt to the rising generation.

“Massive opportunity exists for those that start the shift. Many single-family offices will find their playbook doesn’t work optimally anymore.” 

He says families often base their decisions on past and incomplete experiences. Prior years have been kind to them, so they overlook threats and opportunities which make them feel anxious. Where they are content, they tend to become less concerned about unexpected outcomes. 

He believes families need to conduct stress testing, simulation planning and “what if” scenarios, as the universe of understanding expands. Albert Einstein once said: “As our circle of knowledge expands, so does the circumference of darkness surrounding it,” which makes the Bayesian process more complex, but highly necessary. 

Robles cites Nassim Nicholas Talib: “You are fragile if you disorder and disruption for fear of the mess they might make of your life. You are antifragile if shocks and disruptions make you strong and more creative.”

A five or twenty-year plan may make sense, according to Lonnie Gienger, CEO of the Wilkinson Family of Companies of real estate fame. But it can lead to inflexibility: “You still need a thirty-day review.” There should be no shame in carrying out a pivot, or quitting a strategy, if the facts which underpin a theory start to change.

Family offices need to pay top dollar for top-ranking advisers to see the way forward, says Robles. A survey carried out by Botoff Consulting in 1999 found that 54% of US family offices already facilitate co-investment for their staff. Around 56% pay deferred compensation. Both percentages are on an upward trend.

Robles supports the appointment of Chief Learning Officers, to keep existing, and rising, families up to speed with events. New thinking is urgent, according to mentor Stephen Rudin: “Never have second industrial revolution concepts and constructs been so obviously irrelevant. Our interaction with exponential technologies creates a shift in the consciousness and capabilities of humanity. These shifts can be made to our benefit – or leave us enslaved.” 

Covid-19 adds to the challenge, making it crucial for families to deal with adversity and take advantage of the opportunities it can create.

Investing in the right vaccine against Covid-19 has been one obvious opportunity. To deal with stresses in the banking system, Robles says families could consider buying banks and insurers in safe domiciles, rather than taking a view on third-party custodians.

Rather than relying on flawed CPI data, Robles says family offices need to make sure their assets, and the income they generate, rise in value quickly enough to deal with their experience of inflation. 

Rather than relying on stocks and bonds they should put more money in cutting-edge venture capital, using their financial clout to co-invest.

Robles is emphatic that self-reliant family offices should put more faith in digital assets: “Billions more people are expected to come online in the coming years. Commerce and entrepreneurship will grow exponentially. This will be further accelerated by the internet of value as the next evolution of the internet. Web3, decentralisation, blockchains and programmable money.” 

Robles adds trillions of dollars will flow into the digital Metaverse worlds through NFTs. He thinks new advances, such as Theta Blockchain, could destroy Netflix. Dfinity is working on ways for internet users to build their own computers and dispense with streaming and the cloud. A new class of society, known as influencers, are making more waves than you might think. They have turned dogecoin into a rival to bitcoin. They have brought new life, and a change of management, to GameStop. Charli d’Amelio has more followers on Tik Tok than votes for Joe Biden in the 2020 US presidential election.

Commercial property has backed family office portfolios for centuries. But what happens as work patterns dissolve?  And why has Microsoft founder Bill Gates bought 300,000 acres of US farmland?  

Robles also supports the idea of a virtual family office that outsources as many functions as possible to third parties, giving top officers time to review risk exposures, evaluate strategy and develop new ideas.

According to essayist William Deresiewicz: “Multi-tasking is not only not thinking, if it impairs your ability to think. Thinking means concentrating on one thing long enough to develop an idea about it…by making associations and conclusions.”

This philosophy replaces control from the centre with diversity and transparency: “Sourcing the best of the best is an advantage. Frequently, these professionals are hard to bring into a single-family office.” And there is no shortage of reporting platforms and procedures to facilitate co-operation.  

Robles believes remote working, as well as outsourcing, will remain popular after the pandemic.: “The new normal opens up opportunities for families to hire globally and become far more digital.”