It's a pivotal time for Single Family Offices, and several factors are driving them to take a closer look at their businesses. Single Family Office Services Group Leader Mark Blumenthal recently sat down with Troy Snyder, risk accounting and advisory services (RAAS) partner, Jack Kristan, also of RAAS, and Lauren Boehm, senior consulting manager, to share how they're seeing family offices advance their missions and strategize to identify and mitigate risks.
Mark Blumenthal: While Congress was hashing out a final tax bill last December, the tax court was handing down its decision in the Lender Management case (Lender Management, LLC v. Commissioner). Very briefly, the court ruled that this family office was engaged in business activities; and therefore, its expenses were deductible under the Internal Revenue Code. It was a good decision for many family offices, and when coupled with some significant changes in the new tax legislation, we're seeing many family offices revisit their strategies, structure, and operations around taxes and their business operations overall.
But those aren't the only issues motivating Single Family Offices to reflect on their structures and operations.
Lauren Boehm: Very true. Demographic changes are having a huge impact right now. As the older generation ages — I'm referring both to family members and family office executives and managers — the younger generations are taking on greater control over assets and decision-making. In regard to the family members specifically, they have different personalities, ideas, and needs from their parents and grandparents — for instance, they want real-time access to financial information likely from a mobile device. These generational transitions create a lot of risk and considerations for the family office executives.
Troy Snyder: I'm seeing that too, Lauren. I have a client: a family office executive who's about to retire. She's been with the family for over a decade since before the office was established, and she has so much institutional knowledge. It's going to take about three people — I'm not exaggerating — to replace her. But the bigger issue is, how do you transfer all that knowledge to a new manager and to younger family members?
Jack Kristan: Those questions can lead families and family office managers to weigh the pros and cons of outsourcing. Some of the families we're working with — they might be in generation three, four, or five — and some of the up-and-coming family members are saying, “Hey, I've got a buddy who does investment advisory. Why am I going through the family office for this? Maybe I want to have my friend manage it for me; maybe I want to take my business to the open market.” It comes back to what Mark mentioned earlier about being strategic. What's the strategic objective of the family office? What are its core competencies? More mature family offices are thinking a lot about this right now.
LB: Yes, and philanthropy risk can be closely related to that. It sometimes surprises clients to hear that giving can pose significant risk. If the charity doesn't align with the family’s values, it can damage the family's reputation and brand. This is arguably a bigger issue today given how fast information spreads.
JK: I talk a lot with clients about risk "velocity" or how fast information travels. Take something like interest rate risk; that's typically pretty slow-moving. But say someone in the family office clicks on a malicious email link and unleashes a virus. The impact travels frighteningly fast throughout the family office IT network and can quickly compromise investment account details, emails, and other private information.
MB: Especially if there's some type of scandal and family members are involved in charity work or politics, or simply want to keep their lives private. It can be devastating having the family name and sordid details splashed around the internet; it can send the family and family office operations into crisis mode.
TS: And the recovery time is slow. But the good news — I think we're ready for some good news here — is we're seeing a real maturation. Family offices are moving from mainly focusing on internal controls and day-to-day blocking and tackling to strategy and business process improvement. I'm often hearing, “How can we run the family office better and more strategically?” That wasn't the case a few years ago.
JK: Me too. When I talk about tax with clients, for example, they used to ask, “Did we take the right steps to ensure our returns are accurate?” Now, it's, “Is tax a core competency of my family office? Are we missing savings opportunities? Does it make sense to keep it in house, from both a strategic and risk perspective?” I mentioned outsourcing a few moments ago. Some of those questions family offices are asking reflect this maturation — this evolution.
TS: I agree. Many family offices haven't talked about these issues before. Part of the reason is that they haven't had a common language. I like to do a telling exercise with them: I say a word, and ask them to respond with the opposite. I say "Up." They say "Down." I say "North." They say "South." And so on. There's a chorus of consistency; no one wavers. But when I say, "Risk," there's hesitation. Someone says "Safety," while someone else tentatively offers "Security" or "Reward." The common vocabulary is gone.
But when we're talking about a family office’s mission and strategy including the different kinds of risk, it's critical to share common definitions so they're all pulling in the same direction. That's part of what this evolution is about.
MB: Exactly. It's being clear about the family’s mission, values, and the core competencies of the Single Family Office. It's about developing a strategy that connects the dots between the operations and functions of the family office and the family members. And it's about using risk management to help perform against that strategy to protect the assets, operate more efficiently, and add real value to the family.
