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Preparing for the family office of the future: An interview with Mark Blumenthal

May 13, 2022 Article 8 min read
Authors:
Mark Blumenthal Brian Carter Jack Kristan
In connection with the soon-to-be-released Plante Moran Family Office Answer Book, Brian Carter and Jack Kristan (co-editors along with Mark Blumenthal) sat down with Mark for a discussion of current trends and the evolution of the family office.
Three silhouettes of business professionals in an office.BC and JK: We hear often with respect to prognostication that “this time is different.” And there’s typically at least some convincing evidence that, indeed, “this time” it may be. But what does that mean today, and beyond, and most importantly for readers here, what does that mean for family offices?

MB: Among those individuals who like to pontificate about the future — present company included — the past two years or so have taught us a valuable lesson: Our ability to predict the future doesn’t exist. This is really not news to any of us, but for me, it has been a humbling experience — with a takeaway: We need to try harder to prepare for, rather than predict, the future.

The real question is, how do all the changes we’re experiencing — inflation, talent shortages, new pandemics, geopolitical risks, delivery of healthcare, remote work, baby boomer retirements, proposed changes in regulations and taxes, lifestyle changes, new technology, and the list goes on — impact the family office? 

The answer, I believe, is that family offices want to know how to build flexibility into their operating models, leverage technology, and accelerate the adoption of best practices to prepare for a future that may be difficult to predict.

BC and JK: How can family offices build flexibility into their DNA? How have some successful organizations you’ve worked with future-proofed, so to speak, their family office?

MB: One of the most fundamental ways to ensure flexibility is to start with the “why.” Why does the family office exist? The original purpose may no longer be relevant. Some family offices were set up to serve the needs of generations one and two with a family business and now may be serving generations three and four with no family business.

The mission, goals, and individual needs of the family members drive the services the family office will provide, which in turn drives the operating model. Successful family offices will build options for change into their operating model — anticipating the evolving needs of the family and changes in the world. This can suggest a formal review of the mission, goals, and operations of the family office on a regular basis — annual for some offices; every two or three years for others.

It’s also important to understand that the “why” for some family members is a family office that supports the freedom to live their lives while protecting them from a variety of personal and financial risks. For others, the driver of the office is the desire to build a direct investment or philanthropy function. There are countless reasons, and there usually isn’t just a single “why.”

Asking the “why” and revisiting that question every few years within the context of the family office model and operating structure is the “secret sauce” — it’s what creates this flexibility to accommodate the changing needs of the family.

BC and JK: When does a typical family decide to form a family office?

Many families are surprised to learn that they’re already operating a partial family office within their operating business. This is a common situation — what we refer to as Phase II in the evolution of a family office. This is usually not a permanent family office solution since this structure can lead to problems relating to privacy, allocation of business resources, income tax issues, and the skill sets of the part-time family office employees. The model will usually evolve to Phase III (a free-standing family office alongside the business) when family wealth, excluding the business, reaches a certain tipping point.

Other family offices are formed following the sale of public stock, a private business, or other private asset; inheritance; or when family members decide to leave an existing family office that’s not adequately serving their needs.

BC and JK: Can you comment on the difference between running a family office and operating a family business?

MB: In most situations, they are very different. The primary mission of a business, as we all know, is the business and not the personal and financial affairs of the family members.

Operating a successful business usually doesn’t prepare the family to operate a family office because the issues and expertise are so very different. This is true even for families that sold or are still operating a financial investment or services firm. Recognizing this difference is important as an entrepreneurial family, or anyone for that matter, is thinking about forming a family office.

BC and JK: How does technology factor into our discussion?

That is a subject we could talk about for hours. For now, I’ll say that new technologies provide new ways to communicate and new opportunities to provide services to family members that weren’t possible in the past. Technology permits family offices the ability to reinvent themselves to serve ever-changing needs of the family members. This can mean more powerful and affordable internal systems, the ability for remote working, and the ability to outsource more services in a seamless manner.

As an example, the “skinny” family office will continue to gain popularity for its incredible flexibility but wouldn’t be possible without the advances in technology that we’ve seen over the past few years.

BC and JK: In the past, you’ve mentioned the importance of philanthropy in the family office. What trends are you seeing among family offices related to charitable giving?

MB: For many families, philanthropy is one of their top priorities. I continue to see a growing allocation of resources within the family office to philanthropy and families beginning to measure the success of the office around the philanthropy function.

We’re seeing changes in how families choose to give back to their communities. Many families take a more passive approach and make contributions to public charities through their private foundations. Others combine profit and charitable intent. For example, we’re seeing a lot of families invest in real estate in depressed communities, even though they don’t expect to see a profit for 20 or more years.

We’re also seeing a shift away from just donating money; many families want to volunteer their time as well. Some won’t even consider a donation unless they can personally make an impact through a board position or other active role. Family offices are also using philanthropy as a tool to teach younger family members about investments, leadership, and family values. It’s working — we’re seeing the younger generation getting more active in philanthropy through the family office.

BC and JK: Have you seen any changes to the chief investment officer (CIO) role in the new family office models and structures?

MB: Whether a family has just realized a significant liquidity event or is transitioning wealth from generation three to four, the CIO is still going to be a key factor in the success of the family office. Whether you outsource or hire an experienced in-house resource, the CIO ensures the safety and security of assets, manages liquidity, and creates — and implements — the long-term investment strategy for the family.

The CIO can also lead or oversee the organization’s direct investment strategy, which some family offices use to provide more control over their investments, to diversify away from the public markets, and in some situations as a hedge against inflation.

Of course, the CIO needs to coordinate with all the other internal and external advisors on issues, including income and estate tax, philanthropy, and lifestyle. This coordination as well as the execution of the CIO role is a prime example of how technology has provided new tools and flexibility for the CIO within the family office.

BC and JK: What do you see as the greatest risks to the family office?

MB: This is a critical question, and one we often discuss with family office leaders. The answers can be surprising and often very different even within the same family office. Some common responses to the “greatest risks” question include cybersecurity, investments, outdated technology, staffing, internal controls, income and estate taxes, lack of operational best practices, younger generations, personal security, family leadership, and succession.

What I find interesting is that many times the initial top risks turn out not to be the top risks after a careful evaluation and ranking. I guess this is because you don’t know what you don’t know.

The challenge for many family offices is to sit down and identify all the risks; this is a time- and skills-based challenge. Most lean family offices are busy just keeping up with the day-to-day work and the new priority of the week.

It’s important for all family offices to take a step back every few years and evaluate not only their purpose, mission, and goals but also their risks. Not doing this would be the greatest risk to the family office.

BC and JK: As we get ready to wrap up, what trends are you seeing that you think will be impactful long term?

MB: We never really know what trends ultimately will prove to have real staying power. I hesitate to say “this time will be different” for reasons already mentioned. In 2021, we witnessed an increase from the prior year in the formation of new family offices. Compared to a few years ago, these new family offices are much more likely to outsource certain key functions, such as taxes and bookkeeping. On the other hand, we have also seen an increase interest in building in-house functions in direct investments.

So far in 2022, the trend in new family office formation continues alongside the reorganization of older family offices into the newer family office models.

Another trend we’re all watching is the shift to remote work, including professional services delivered virtually or in a hybrid in-person way. This creates tremendous opportunity and provides more options for family offices to create flexibility in their operating models.

I’m often asked how digital communications will change family offices, and my view hasn’t wavered: Relationships are critical to both the long-term viability of organizations (within the family office) and the clients (family members) they serve. Technology has transformed the family office in a very positive way, but technology doesn’t, and won’t, change the fundamental importance of relationships.

As I look back over the years of working with family offices, I can honestly say that most family offices are less about growing wealth and more about serving as a vehicle to execute the family mission, provide a legacy for all generations, and offer a coordinated way to give something back to their communities. I think this mindset is for the long term.

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