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Fiducia Partners Insights - What is a family office?

What is a family office?

July 4th, 2019 Posted by Family Wealth, Investment, Planning 0 thoughts on “What is a family office?”

The term ‘family office’ is not widely known, and for good reason. While there is no strict definition, a family office is a wealth management company which invests assets on behalf of wealthy individuals or families. The term is not well known because quite understandably these families don’t need, or want, to advertise the fact that they have money to invest. If they did they would be inundated with requests. There are both single and multi family offices, single are normally run by a family member or appointed CFO who looks after one family’s wealth and multi are run by professionals who serve more than one family. 

Family offices tend to be so discreet they are only really contactable through highly selective referrals and trusted networks. As one executive said at a family office conference in Dubai last year, “we’re the most important part of the investment landscape most people have never heard of”.

And not only do family offices discreetly manage the family’s investments, they manage all the financial affairs of a family such as staff wages, accounting and tax planning, property and estate management and succession planning – while running businesses and making investments generates wealth, without proper financial planning and succession planning, preserving wealth is very challenging. Therefore family offices do everything it takes to generate and manage wealth to ensure it will be passed safely down from generation to generation.

Now, not every wealthy family has a family office, but those that do often choose to have one to avoid having to pay someone else to manage and invest their money, thereby increasing their margins. It also allows them to invest without the sector and time constraints that traditional VC firms have, usually trying to exit in 5 years or less. Because of the emphasis on passing wealth down through the generations, family offices tend to make long-term investments which is why real estate often makes up a significant part of family office portfolios. 

How do you find family offices for investment?

For those seeking investment from family offices, you will have to work hard to find them, let alone get in contact. Finding family offices is really a case of networking and receiving personal introductions. Without already knowing the right people finding a credible person, such as a capital raiser, to introduce you to family offices is a good way of starting. There are also several family office conferences each year which can provide a ‘way in’ however I am aware of several families who tend to avoid conferences, particularly those where start-ups pay a fee to present in front of investors. 

When seeking family offices for funding, to avoid wasting your and their time, it’s important to ensure that your business aligns with the family office’s investment criteria and philosophy. Many tend to invest in companies that directly or indirectly relate to the core business upon which their success is built. Also unlike VCs, who are often brutally focused on the figures, family offices value having good chemistry with the person they are funding. Therefore after having received an introduction, getting along with the family office decision makers, usually the investment manager and family patriarch, is essential to receiving their backing.

From my knowledge of family offices, however, all the hard work it takes to be introduced is worth it. Family offices make great investors for entrepreneurs because of their focus on relationships. Of course they want to see a return on their investment but because they take a long-term approach they tend to have more patience than institutional and private equity investors while also serving as experienced mentors with excellent connections. 

For more of my insights into the world of family wealth visit Fiducia Partners insights

Fiducia Partners Insights - Billionaires Giving Money To Charity Not Children - LI-W

Billionaires are giving their money to charity instead of their children

June 20th, 2019 Posted by Family Wealth, Planning 0 thoughts on “Billionaires are giving their money to charity instead of their children”

Children of ultra-wealthy families can usually grow up safe in the knowledge that a sizable inheritance will come to them. But now, it seems that many ultra-wealthy families are choosing to give their wealth away to charities rather than to their children. While charitable giving is often part of a person’s will, more and more families are deciding to give everything (or almost everything) to charity, leaving their children to make their own way and fortunes. It’s also a popular notion to leave enough for children to live “comfortably” but not so much that they will lead an idle, privileged lifestyle.

The idea of giving large chunks of wealth to charity instead of heirs was given lots of attention in 2010 when Bill Gates and Warren Buffett set up the Giving Pledge where wealthy families promise to dedicate at least half of their fortunes to charitable causes during their lifetimes or in their wills. Co-founder Warren Buffett is often hailed as the ‘most charitable billionaire’ and has planned for 85% of his wealth to go to charitable organiations with the remaining 15% to go to his children – although 15% of Warren Buffett’s wealth is still around $12.6bn. And Bill Gates, worth over $80bn, is reportedly leaving his three children $10m each explaining “I definitely think leaving kids massive amounts of money is not a favour to them”. 

Among the 200+ high-profile signatories who have joined the Giving Pledge are Richard Branson, Elon Musk, and MacKenzie Bexos, the ex-wife of Amazon founder Jeff Bezos and one of the wealthiest women in the world. 

While supporting charitable causes is one motivation for such a decision, another motivation that drives many ultra-wealthy people to make this decision is to protect their children from wealth’s pitfalls, as the examples below demonstrate. 

The action film star Jackie Chan, worth around $350m, isn’t planning to leave any inheritance to his only son saying; “If he is capable, he can make his own money. If he is not, then he will just be wasting my money.” Simon Cowell too, who is worth an estimated $550m says; “I don’t believe in passing on from one generation to another” and plans to leave his fortune to charities. 

I can well understand the concern that multi-billionaires may have with leaving such vast fortunes to their children without them having worked for it but families of more modest fortunes (although still multi-millions) are also considering limiting the funds they will pass down to the next generation. Having spoken with some of my families about their feelings on inheritance, some are concerned about the security of a large inheritance leading their children to lack purpose and the ambition to achieve their own success.

These are legitimate concerns but one has to execute such plans carefully. Limiting children’s inheritance without discussing it as a family can create unnecessary confusion and discord but working together to decide on core family values and how the money might be used instead is a good course of action to take. Richard and Joan Branson for example will leave most of their money to charity which their children are in favour of, both of whom already build their careers on working to make a positive difference to other people’s lives. 

Equally, gifting the money to a foundation of your creation can be a good course of action. As a family you can decide on how the money is used and what causes you want to support. It also allows children to have a say and to work for the foundation, should they wish. For example Chuck Feeney, once worth $8bn, has donated 99.99% of his fortune to his charitable foundation and is down to just $2m. His children are understanding having said about his plan; “It is eccentric, but he sheltered us from people using the money to treat us differently. It made us normal people”.

The advice I give to my families on this subject is that if they make the decision to limit inheritance and give a large portion to philanthropic causes, their decision should be properly communicated to all heirs so as to promote harmony and avoid any surprise or confusion.

Fiducia Partners Insights - Sibling Rivalry in the Family Business

Sibling Rivalry In The Family Business

June 14th, 2019 Posted by Business, Family Wealth, Planning 0 thoughts on “Sibling Rivalry In The Family Business”

Over my many years of working with wealthy families and their businesses, sibling rivalry is a problem I have seen all too often and has the potential to devastate both the family and the business if not properly managed. Family business leaders are usually most concerned about sibling rivalry when they start to consider succession planning and what will happen when they are not there to mediate disputes. But where siblings are actively involved in the family business before succession if sibling rivalry can be managed and squashed early on then the matter of dealing with it after the death of the business leader becomes far easier. 

When rivalling siblings are actively involved in the family business it is often either emotional or strategic and to find solutions to the rivalry it is first important to determine the underlying causes.

Emotional Rivalry

A common example of emotional rivalry that I have seen is where siblings compete for their parents’ approval or recognition. While this is common in personal family lives and particularly when children are young, it can extend into adulthood and competition in the family business. And as the siblings are in competition with one another, they are not working together to further the interests of the business as a whole. They may actively avoid working together so they can prove the success is theirs alone. In cases such as this, the solution is to work on the parent/child relationship rather than the sibling relationship. This might mean formalising recognition and reward to remove any potential for favouritism, or the perception of it. 

It might also mean putting in place the requirement that family members must take employment outside the family business before joining. While I often recommend this as a good way of gaining exposure to alternative business techniques, in the case of sibling rivalry it also allows siblings to achieve success that is recognised outside of the family. Where siblings have achieved success separate from the family, respect for one another and for oneself supersedes the desire for parental approval. 

Strategic Rivalry

Strategic rivalry in family businesses often occurs when siblings have conflicting values and business styles and perhaps different attitudes towards risk. While such differences may not matter in their personal lives, when working together in the family business and with their livelihoods depending on one another these differences can present problems. 

I suggest that the solution to dealing with strategic rivalry is found in solid business and strategic planning. Drawing up a solid business plan and then sticking to it should help to avoid disagreements over strategic direction. It’s also crucial to avoid relying on handshake agreements. Formalised contracts, job descriptions and operating procedures can’t be misinterpreted and therefore set out expectations from the beginning. 

One high profile case of sibling rivalry over the family business that I recall is when Reliance Industriesfounder Dhirubhai Ambani died in 2002 without leaving a will, let alone a succession plan for the business. His eldest son, Mukesh, took up the role of Chairman while his youngest son, Anil, was made vice-chairman. Mukesh reportedly tried to push Anil off the board which led to a nasty legal battle resulting in a de-merger of the company in 2005, led by their mother. Even when heading their own businesses their feud continued until 2010 when their mother intervened again to issue a non-compete agreement. Today, Mukesh is personally worth around $43bn whereas Anil is worth around $1.5bn. While it is unclear why the two brothers’ feud first started it is likely that their rivalry was both emotional and strategic and without solid agreements about how they would work together once their father past away their rivalry was free to spiral out of control. While no one can know for sure, it wouldn’t be unrealistic to speculate that the two arms of the split up business would have faired much better if it hadn’t broken up and the two brothers had been able to work together.

If you enjoyed this article please let me know by leaving a comment. I really appreciate it.

Fiducia Partners Insights - How To Begin Succession Planning In A Family Business

How To Begin Succession Planning In A Family Business

January 31st, 2019 Posted by Family Wealth, Planning 0 thoughts on “How To Begin Succession Planning In A Family Business”

Every year 70% of family businesses fail to successfully transition from the first generation to the second. It’s not surprising considering that PwC recently found that just 18% of family businesses have a robust, formalised and communicated succession plan in place.

In my experience this is often due to a perceived lack of urgency where business leaders would rather push on with running and growing the business than face up to the fact that they can’t run it forever. There are other reasons too why business leaders would rather not begin succession planning. While each family is unique, these are some of the more common ones I see:

  • Time pressure – business leaders are invariably busy and other matters are often prioritised.

  • Interpersonal conflict – family unity can be stretched when it comes to handing down the family business. Complex family dynamics can make the subject of succession a difficult topic and can create factions among family groups or staff loyal to one member or another. Instead of taking steps to try and stop this happening many avoid the subject altogether.

  • Communication difficulties – if communication within the business and family is already difficult this presents a problem for communicating succession plans.

As with many things, getting started can be the hardest part so while I always recommend drawing up a formal succession plan and making sure to communicate with everyone affected, there are a few ways you can begin that are better than doing nothing at all. 

First, create a plan detailing the key operational elements of the business in the event that you aren’t able to run the business, either temporarily or permanently. In the event of succession being triggered ahead of plan, this acts like an emergency backstop that should prevent early succession from being a crisis event for the business.  

Second, communicate with your ideal successor and other family stakeholders. Writing a succession plan without involving other family members (as well as key non-family members of the business) is likely to invite upset and discord therefore communication is paramount and should ideally happen long before a planned departure. Communicating such plans gives likely successors and other stakeholders a chance to voice their opinions and become excited about the business before they bear its weight. It’s also possible that likely or willing successors don’t yet have the skills or knowledge to take over and so early communication gives them time to seek the right experience, nurture the necessary skills and build their knowledge.  

Third, nuture potential successors to ensure they are ready to take over. Spending a year or two working closely with your successor before you step down should help make for a smooth and successful transition.

These three steps are just the beginning but I think they are the absolute minimum any family business leader should undertake to ensure the continued success of their business and family. If you would like to discuss succession plans in more detail with me please do get in touch.

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Fiducia Partners Insights - Four Reasons To Rebalance Your Investment Portfolio

Four Reasons To Rebalance Your Investment Portfolio Now

January 10th, 2019 Posted by Investment, Planning 0 thoughts on “Four Reasons To Rebalance Your Investment Portfolio Now”

Portfolio rebalancing is something people rarely do despite being essential for any investment strategy. As all investors know, considering goals, risk tolerance and timelines to determine the right portfolio allocations takes time. But by not monitoring your portfolio and rebalancing it every now and again it can easily stray from your intended allocations. This is because different parts of your portfolio almost always generate different returns and the risk profile of different assets continually changes. Therefore I think it is good practice to rebalance annually and often take stock when the new year rolls around. 

To begin you need to find out whether you need to rebalance your investment allocations and by how much so you need to know what they currently are. This means totalling up all your stocks, bonds, cash and other investments to calculate the percentages of each asset class and type. Once you know what your percentages are and by how much they differ from your strategy you have to decide how you will rebalance. There are two ways to main ways to rebalance a portfolio:

  1. By using new money. When adding new money to a portfolio, the money should be allocated to those assets in asset classes that have fallen. For example, if bonds have fallen from 40% of the portfolio to 30%, to rebalance you would buy enough bonds to return them to their original 40% allocation. 
  2. By selling “winning” assets to buy more underperforming ones. This forces you to buy low and sell high, which is difficult for some investors as they don’t want to part with winning assets although taking profits from your winners is often a wise strategy. As Sir John Templeton said: “The four most expensive words in the English language are, ‘This time it’s different’.”

There are several benefits to rebalancing your portfolio. Here I go through the key benefits in an effort to encourage you to do it regularly, something which is often far down on peoples’ priorities.

Maintain Risk Levels

One of the key benefits of rebalancing is to maintain roughly the same level of risk in your overall portfolio. Asset allocation is all about balancing risk and reward and depending on the direction of market fluctuations you could end up taking on risk that is either greater or smaller than you originally intended.

Review Performance

Rebalancing your investment portfolio also gives you an opportunity to review fund performance and make changes. For example, for funds that are underperforming you can sell them off and look for others.

Make Strategy Adjustments

Our tolerance for risk changes are we grow older and as we go through other big life changes. In general investors start off willing to take more risks but they become more conservative as they grow older. When reviewing your portfolio with a view to rebalancing it, you can also take the time to alter your investment strategy according to changing tolerance, financial goals and time frames. 

Prevent ‘Analysis Paralysis’

One of the other key benefits I see to rebalancing is that it helps to prevent ‘analysis paralysis’ where you can spend so much time trying to work out the best way of doing something that you end up doing nothing at all. Rebalancing as a periodic activity takes some of the emotion out of investing and ensures you draw up a plan and review it periodically in a way that you can stick to knowing you have done a formal review based on rational considerations. In theory this will help you avoid panic selling at the bottom of a market and buying at the top. In essence, it maintains a disciplined approach to your investment portfolio strategy.

Please let me know if you enjoyed reading this article by clicking on the thumbs up icon above or leaving a comment. I really appreciate it. 

Fiducia Partners Insights - The Future For Family Offices

The Future for Family Offices

October 18th, 2018 Posted by Family Wealth, Planning 0 thoughts on “The Future for Family Offices”

The number ultra-high-net-worth (UHNW) families is rising and with them, more single and multi-family offices created to serve them. Knight Frank’s The Wealth Report 2016 tallied 187,500 UHNW families (controlling at least $30 million in assets), forecast to rise to 263,500 by 2025. Family offices need to adapt to reflect the tech savvy, socially conscious millennials about to inherit the family wealth as well as the changing investment market. Here I detail four trends I think family offices will increasingly embrace in the coming years.

 

  1. A preference for socially responsible / impact investing

Socially responsible and impact investing may soon dominate family office investments. A study released this year by Spectrum Group found that “more than half of millennial investors (52%) see the social responsibility of their investments as an important selection criteria, compared with less than 30% of WWII-era investors and 42% of Generation X investors”. Over the next decade the largest transfer of wealth since pre-WWII is about to benefit millennials so any family office not engaging with socially responsible or impact investing may struggle to keep up with the family’s expectations.

 

  1. A move towards direct investments…

…aligns with the long-term outlook of family offices

Something I have noticed more and more of over the last few years is family offices’ growing appetite for direct investing. Many have been moving money from underperforming hedge funds into direct investments, often in real estate and startups, in the hope of more sustainable returns but also to retain control. This is only set to rise with Family Office Exchange reporting that nearly 60% of family offices expect to increase their direct investments in the next two years.

Direct investing makes sense for family offices where the goal is to grow and preserve the wealth of their family for generations. Whereas family offices take a long-term view and can stay in investments for as long as they want, private equity funds tend to stay in investments for five-to-seven years and are judged by quarterly performance. Family offices don’t need to move with short-term markets or put time limits on their investments so cutting out the middle man means they can make long-term investments and ride out market fluctuations. Direct investing also means they avoid hedge funds fees, which can often make the difference between a return, or not.

 

…allows family member to hand-pick investments

Direct investing also makes sense when thinking about the move towards socially responsible investing as it allows family offices to hand-pick each investment according to their family’s own criteria for what it deems as a socially responsible or impact investment.

Also, because we are all living longer millennials are inheriting the family wealth later in life and therefore many have forged their own careers before becoming involved in managing the family fortune. Direct investing allows them to choose investments where their own expertise can deliver value.

 

  1. An increase in collaboration

I also think we will see more and more collaboration on deals between family offices. I think this because families often develop their expertise in a particular market and so when looking to diversify their portfolio, may approach a family with expertise in the market they know little about and vice versa. This can significantly lower the risk element and encourages knowledge sharing.

 

  1. More casual forms of communications

Finally, the Spectrum Group report I referred to earlier has found that 68% of millennial investors favour texting or instant messaging as a way of communicating with their financial advisors vs. email or phone calls. It looks like family offices will have to get comfortable with this fast-paced, all-hours mode of communication.

 

I hope you enjoyed this article, if so please leave a comment to let us know.

Fiducia Partners Insights - Family Business Feuds

Family Business Feuds and How Stop Them Being Fatal

September 20th, 2018 Posted by Family Wealth, Planning 0 thoughts on “Family Business Feuds and How Stop Them Being Fatal”

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