Welcome to the “Show Me The Way” podcast with David Seitter
In this episode of “Show Me The Way,” Dave sits down with Thomas Dexter, or TD, about his experiences helping individuals create and operate family offices. We discuss the different types of practices, who should consider a family office, and get advice on best management practices.
Ep. 31 — Navigating the Intricacies of Family Offices with Thomas Dexter
The episode begins with an in-depth exploration of the family office industry with seasoned expert, Thomas Dexter, or TD. He explains his diverse background that includes growing up across the United States and leveraging his athletic abilities to gain an MBA from the College of William and Mary.
TD then provides a detailed overview of the family office industry. He shares his experiences of assisting individuals in creating and operating family offices, which involves arranging, handling, and counseling families, as well as dealing with Mergers and Acquisitions.
Thomas explains that a family office is an organization that manages the financial affairs of a family. However, not all family offices are the same. They differ based on investment discipline, structure, and other factors. He points out that a family with $250 million in assets and above would generally be a candidate for establishing a family office.
The reason for this, TD explains, is that the costs associated with running a family office (including staffing and investment fees) can be justified at this level. He notes that smaller family offices might be better off leveraging the resources and infrastructure of outside firms.
The discussion also delves into the criteria that may prompt the establishment of a family office. For instance, a family might establish a family office if they have a large number of children or grandchildren, requiring more intensive administration. Confidentiality concerns might also prompt the establishment of a family office, as bringing all operations in-house can provide an additional layer of identity protection.
Managing a Family Office
TD then delves into the essential aspects of managing a family office. His primary emphasis is on the absolute necessity of having a mission statement and bylaws to ensure the smooth functioning of a family office. He believes that these are crucial in outlining the organization’s purpose, goals, and rules of operation, thus providing a clear direction and a set of guidelines to follow.
A key aspect that TD underscores is the pivotal role of the family office manager. This individual needs to be in constant dialogue with family members or trustees to understand their goals, objectives, and risk tolerance. This understanding allows for more accurate planning and decision-making, tailored to the unique needs and expectations of each family member. He points out that a successful manager must foster open dialogues, comprehend the family’s objectives, and grasp their risk tolerance.
Furthermore, TD highlights the value of having an investment policy statement. This document outlines the family’s investment strategy, providing a roadmap for the family’s investment decisions and ensuring consistency in their approach. It provides clarity on risk tolerance, asset allocation, and investment objectives, helping to avoid any misunderstandings or disputes over investment decisions.
Lastly, he underscores the importance of educating the next generation about risk and spending. This not only prepares them for future financial responsibilities but also ensures the long-term sustainability of the family wealth. He also discusses the pros and cons of involving qualified family members in the family office, noting that while this can bring valuable insider perspective and commitment, it can also potentially introduce conflicts of interest or interpersonal tensions.
Objective Arbiters in Conflict Resolution
Given that family offices typically involve multiple generations of a family, there is often an evolution in the dynamics of the family office. TD explains it is thus critical to have these bylaws in place from the outset, providing clear guidelines on how to navigate various issues such as hiring family members, determining criteria for roles and outlining authority chains.
He notes that conflicts are almost inevitable in any family-run business, and it is the same for family offices. TD explains this is why it is crucial to have an objective arbiter who can handle such situations professionally and objectively. The role of an objective arbiter could be filled by a trusted family member, a legal expert, or a third-party mediator.
TD also discusses how to exit a professional who is not living up to expectations in the family office. This process can be quite challenging, especially if the professional in question is a loved one. It is recommended to have a clearly outlined process in the bylaws for such a situation.
Lastly, the podcast touches on the concept of bringing in external professionals to the family office. It is advised to ensure these professionals are well-qualified and have a deep understanding of family office dynamics. Dexter suggests that the family office manager, who has been in the industry for several years, would have a network of professionals to tap into. Alternatively, headhunters could be employed to find suitable professionals.
Types and Risks of Family Offices
TD then explains the different forms a family office can take, each coming with its own set of unique challenges and considerations.
Firstly, he explains that there are single-family offices, which cater exclusively to the needs of one affluent family. These are typically formed by families with $250 million or more in assets. These types of family offices can be highly customized to the needs and desires of the specific family, however, they can also be quite costly to operate.
Secondly, there are multi-family offices. These serve the needs of multiple families and are a more cost-effective solution for families with substantial, but perhaps not immense, wealth. While they lack the extreme customization of a single-family office, they provide professional management and confidentiality.
Virtual family offices are a relatively new type of family office and operate mostly online. They can offer a high level of service and customization while also keeping costs down due to reduced overheads. However, they might not offer the same depth of personal relationships and understanding that can be developed in more traditional office settings.
Lastly, Dexter mentions hybrid family offices. These combine elements of the other types to provide a flexible solution that can adapt to a family’s changing needs over time.
Family Office Investment Strategies and Advice
TD follows this up by providing valuable insights on the investment strategies for family offices. He stresses on the importance of identifying and calibrating the different risk appetites among family members. This is crucial as the family office represents multiple generations, each having different investment goals and risk tolerance levels. A thorough understanding of these factors can help the family office manager design a customized investment strategy that aligns with the family’s objectives while minimizing risks.
One key point discussed is the need for a rigorous process when selecting a primary member of the investment team. The person in this role has a critical responsibility to manage and grow the family’s wealth. Therefore, the selection process should be comprehensive, considering factors such as the candidate’s experience, expertise, integrity, and alignment with the family’s investment philosophy.
Furthermore, TD advises family offices to be cautious when venturing into new asset classes. He specifically mentions cryptocurrency, an asset class that has gained significant attention due to its high returns. However, it also carries considerable risk due to its volatility. Dexter suggests limiting exposure to such asset classes until the family office has gained a thorough understanding and can manage the associated risks effectively.
TD also highlights the advantages of leveraging buying power in a family office. With significant assets under management, family offices can negotiate better terms and conditions with service providers and investment opportunities. This can lead to cost savings and potentially higher returns on investments.
Finally, TD provides his perspective on the future of family offices. He predicts a potential decline in the headcount of family offices, implying a shift towards more streamlined operations and perhaps increased outsourcing. This trend could be driven by various factors, such as advancements in technology, changes in the regulatory environment, or shifts in the family’s needs and preferences.
TD Provides Advice and Insight
TD continues his advice in offering invaluable advice on the legal aspects associated with the functioning of family offices. This involves the crucial elements that must be present in an agreement between a family office and its members. These elements likely include the rights and responsibilities of each member, their financial obligations, as well as guidelines on conflict resolution.
Additionally, he highlights the best practices for managing the ongoing relationship between the family office and its members. This might involve regular meetings, transparent communication, and consistent reviews of the office’s performance and objectives. He underscores the benefits of having a clear process for resolving disputes, which can prevent disagreements from escalating and damaging the family’s relationships or the office’s functionality.
This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship. The recommendations contained in this podcast are not necessarily appropriate for every individual or business. In determining the best course of action, business owners should consult with an attorney on their distinct circumstances.