EVOLVING THE FAMILY OFFICE - Fidelity Investments

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EVOLVING THE FAMILY OFFICE

https://clearingcustody.fidelity.com/app/item/RD_9884415.html


INVESTMENTS RISK

TECHNOLOGY SECURITY FROM ALL ANGLES

TALENT

Table of Contents

MISSIONAN INTRODUCTION

KEY TAKEAWAYSTHE MULTI-STAKEHOLDER OFFICE

THE DISRUPTION-READY OFFICE


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Evolving the Family Office: An Introduction

CHAPTER 1

ANDREW T. FAY, CIMA®For over 15 years, Andy Fay has been working alongside some of the nation’s most prestigious family offices. Andy leads Fidelity’s family office business which provides a full range of services for ultra-high net worth families and the executives that support them, ranging from clearing and custody capabilities, investment and reporting services, and even practice management and consulting. Today’s family offices have a choice: evolve or get left behind as the most successful players professionalize, leveraging technologies, third parties and strategic planning to operate as sustainable businesses. Andy’s mission is to help family office professionals change their mindset to position them for success in the rapidly changing wealth management space. Andy lives in Westlake, Texas with his wife and three children.


Fidelity Family Office Services provides custody, brokerage, investment and reporting services to family offices. Working closely with 400 of America’s wealthiest families, we have distinct insight into the pressures that family office executives are facing today.

Our 2018 Evolving the Family Office e-book, released as monthly installments, will explore what we believe are the most significant challenges and opportunities that could disrupt family offices today—and how executives can prepare themselves to stay relevant in future. We hope to arm executives, along with the families they serve, with the knowledge – including real-life examples – that will enable them to approach business differently.

We’ll explore some of the broad issues that we believe family offices should consider as they battle to remain relevant.

Evolving the Family Office: An IntroductionWill your family office be intact in ten years?

A stark consideration to be sure, but the reality is that a myriad of complex situations will arise within families in addition to inevitable business disruptions. If not approached properly, it can ultimately result in havoc for a family office.

Consider the example of an office, where the executives focused all their time on the wealth creator or patriarch of the family. When the patriarch passed unexpectedly, the executives had little relationship with the next generation, resulting in replacements, causing some instability as an office.

More than ever, single-family offices and their executives must ensure they are aligned with the evolving needs of the family and staying relevant in an ever-changing world. A chameleon-like ability to adapt may help ensure survival. In our opinion, offices need to consider how to stay one step ahead, accelerate their pace of change and find creative solutions to help the current family and future generations fulfil their ambitions.



FIGURE 1: EVOLVING NON-INVESTMENT SERVICES

As our 2017 research shows, the majority of single-family offices provide a wide range of non-investment services – from succession planning to concierge services – to help families manage complex and unique issues. As they look to future generations, family offices must pay close attention to the services they offer and the way that they deliver them—to stay relevant and continue adding value for the families they serve.

Learning to adapt: Rising to meet new expectationsEverywhere you look, the way that services are being delivered to consumers is changing. Netflix has transformed the television viewing habits of millions of people across the world, while Amazon’s continuing innovation means consumers can be matched with the products they want before they even know it themselves.

Family offices need to recognize that they are not immune to disruption. Namely, that the largest inter-generational wealth transfer in history is looming on the horizon. To keep pace, they should consider how to best serve those at the helm of the family today, but also look to the next generation(s).

Across sectors, customer service expectations are changing as the speed of connectivity allows for instant answers and prompt feedback. This trend is disrupting the family office sector too. Future generations, who are growing up in an environment permeated by digital technologies, will likely expect new channels of engagement and communication.

Modern offices should begin strategizing about what their families will require in 2030, 2040 and beyond. Failure to evolve may see future generations frustrated by family office structures that are not in touch with their needs, and could ultimately contribute to the dissolution of these institutions.

Concierge Services

63% Art/Collectibles

Management

49% Family

Governance

82% Succession

Planning And Issues

85% Financial Planning

96%

Tax Compliance/Preparation

99% Tax Planning

98% Estate Planning

98% Legal Services

96% Insurance/Risk Management

Planning

96%

Source: 2017 Fidelity Insights on Single Family Office Executive Compensation



“ We know that failure to address a family’s human capital destroys wealth faster than financial capital, yet office and family members continue to devote far more time to the latter.”

ANDREW FAY, HEAD OF FIDELITY’S

FAMILY OFFICE SERVICES

Rebalancing capital: Business people vs. familyFamily offices are often consumed by their focus on the ‘financial capital’ (that is, an office’s investable assets) at the expense of attending to ‘human capital’—the family members and their broader needs.

In our opinion, a cohesive family vision and an ability to impart values and knowledge to future generations are essential to the survival of any family office. Often, executives not only find themselves trying to organize the seating arrangement at the family table, but also helping construct the chairs to sit in. There is a fine balance in making sure the family mission is the table’s center piece, but also that each place setting is aligned with the larger purpose.

History has taught us that failing to look after a family’s human capital will destroy its wealth far more quickly than the decisions that are taken

with its financial capital. While a portfolio may be able to sustain a 10% drop in the market, a feuding family can erode wealth by pulling the family in opposing directions.

Even if you take conflict out of the equation, a failure to develop human capital through appropriate stewardship can leave the next generation ill-prepared to take on the responsibilities associated with overseeing their wealth.

Offices should think about how they can work with their families to tackle these challenges—even if this means taking a more interventionist approach.



Over-controllingWealth creators are often naturally confident and controlling individuals yet transferring that approach to parenting may prevent children from learning through their own bad decisions—a key developmental tool for building resilience and a stronger sense of self.

Wealth as a “shield”Even non-wealth creators may deny their children some of these learning experiences, giving in to temptation and using their wealth as a way to protect children from the consequences of bad decisions. Family offices can help to make parents more aware of these risks.

Investing in human capital: Nurturing future decision-makersNurturing the family office’s human capital begins with parenthood. Raising strong individuals with shrewd decision-making skills is key to the longevity of family offices through generations.

Yet this can be more challenging for very wealthy parents to achieve, with some common pitfalls arising:

The family office has an important role to play in financial understanding too. From a young age, children can be assigned ‘money mentors’ who can help them to become financially literate and to understand the objectives for the family’s investments. Building an understanding of the office’s mission and how it works is crucial, as future generations cannot be expected to value and run something they don’t fully understand.



Accelerating innovation: Embracing digitalCompared to other institutional organizations and investment industry participants, family offices tend to be behind the curve with their technology infrastructure. The upshot is that family offices run the risk of being left behind in the unremittingly dynamic, data-driven world we live in today.

Investment in digital transformation is crucial for these offices:

Given the highly customized service that a family office provides, they may not appear the most obvious candidates for automation. In fact, there are a myriad of administrative tasks where automation can be put to work, taking human efforts out of low value-add tasks, such as preparing tax and compliance forms. Families will increasingly apply pressure for such change, especially when technology allows the office to function more efficiently.

For example, migration to the cloud can facilitate technology advances and innovation. It is not necessary just for increased computing power, data storage and IT requirements, but also the ability to have more secure, open communication with family members.

Meanwhile, though still in its infancy today, the business world is finding multiple uses for artificial intelligence (AI), from predicting unseen investment risks to delivering product and service advice to customers. Family offices can improve their services through embracing AI and forging third-party partnerships with FinTech firms to accelerate their understanding.

For many family offices, this transition represents a significant leap. While digitization should help provide your office with a secure operating framework, the shift will most likely require time and effort to educate the family. Ultimately, the costs will be justified, as the successful family office of the future will likely have a digital platform at its core.

To help ensure that operations run

efficiently

To help address cyber security

attacks

To help meet the requirements of tech-savvy

families



Family offices on the whole may be somewhat behind the curve when it comes to the sophistication of their IT estates, but most now recognize what it means for their future survival—and some are firmly embedding IT innovation into their ethos.

As an example, one New York-based office states that one of its key operational goals is “to do as little work as possible”. A flippant remark perhaps, but the point is a serious one: the office is committed to automating

processes and re-engineering inefficient systems to ensure they are as lean as possible. Staff are actively encouraged to create and invest in new solutions to increase operational efficiency. And this is not an isolated case: another Chicago-based office is making significant investments in workflow automation to achieve the same outcome.

Transferring human workloads to machines will be key to securing the future sustainability of the family office because it provides more time to tend to the needs of the family.

The survival imperative: Doing “as little work as possible” in the future


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Putting the Mission First:Every Family Office Needs a “North Star”

CHAPTER 2

JIM COUTRÉJim Coutré is Vice President, Insights & Connections. He is responsible for the oversight of Fidelity Family Office Services’ Insights & Connections program, which provides family offices and wealthy families with thought leadership, referrals to industry experts and consultants and access to a peer networking program. Prior to joining Fidelity, Jim was a vice president at The Philanthropic Initiative where he helped ultra-high net worth families and multi-generational foundations increase the social impact of their giving and he trained professional advisors and family office staff to help their own clients set and achieve their philanthropic goals.


Putting the Mission First Every family office needs a “North Star”

Families and executives often come to us seeking help when they embark on creating or restructuring their family office. They inquire about the appropriate way to structure different functions, they ask us what services they should offer, how they should be delivered and who should be their next hire.

While we are eager to help, we can’t provide truly helpful answers until we know why they want a family office or why they are restructuring their current office—and, surprisingly, this is a question many have a hard time answering.

We've seen that the family office foundations that have stood the test of time tend to start from a clearly defined mission—created from the family's vision of success. In short, every family office needs a “North Star”.

NORTH STAR vision for the family and

mission for the office

STRUCTURE DIFFERENT FUNCTIONS

WHAT SERVICES SHOULD WE OFFER

HOW SERVICES SHOULD BE DELIVERED

WHO SHOULD BE THEIR NEXT HIRE



Getting lost at seaFamily offices are often elusive, private and complex, so it is understandable that family members don’t always have clarity on what might be involved in building an office—or even what questions to ask first. When an executive is charged with execution, it’s expected that they will forge ahead with whatever guidance—great or small—they have received from the family. In these situations, a family office will be created and it may be successful, but the likelihood of headaches, stumbles or suboptimal outcomes increases.

So what have we seen go wrong when the office is launched before its mission is properly defined and understood?

DISJOINTED DECISION-MAKING

In the absence of a statement of purpose, decision-making criteria are unclear, leading to confusion, inefficient processes or decisions that ultimately are not aligned with the family’s philosophies or needs.

SERVICES MISMATCH

If created without a deep understanding of the family’s needs and wants, the office structure and services may fall short of its potential today—and this will be exacerbated as the rising generation comes of age. Similarly, the office is more likely to be over-built and require right sizing further down the line. Lastly, decisions made in the beginning might have to be undone, which may cost dollars to correct. Without clearly articulated goals, offices can bias their service offerings toward the professional expertise of the founding executive.

SKEWED HIRING

It is hard to hire the appropriate talent if you haven’t yet defined the strengths, skills and culture that will align with the family and seeks to deliver a vibrant office.

NARROW PERSPECTIVE

In most cases, families want their offices to support multiple generations or promote cohesion across different branches. Failing to involve a broad set of stakeholders is a potential lost opportunity lost. Without an inclusive approach, the final product is less likely to truly reflect the broader family and family members may lack a strong sense of ownership as a consequence.

DISAPPOINTMENT

If no metric is created to measure success, any claim that value was created can be made—or dismissed—arbitrarily, putting the efforts of the executive at risk of being under appreciated.



Setting a “North Star” It can be challenging or even uncomfortable for executives to have a conversation with the principal or family about defining the mission of the office. The family may have no idea of what the answers are, or may simply not realize how important it is to articulate a mission and the criteria for decision-making.

To help secure the long-term success of the office, we believe it is critical that executives have this conversation. Armed with the lessons learned above, and factoring in the following considerations, success may be more likely.

Vision for the familyMission for the office



“ Understanding the purpose of wealth means being intentional in defining what will fulfil family members today and even for generations to come. These conversations should be personal, emotional and reflective of the family’s true hopes and dreams.”

JIM COUTRÉ, VICE PRESIDENT, INSIGHTS AND CONNECTIONS,

FIDELITY FAMILY OFFICE SERVICES

Setting a “North Star”Defining the purpose of the family's wealth: a family vision

With so many financial, legal and tax advisors surrounding wealthy families, it’s not surprising that many offices default to targeting the protection and growth of financial assets. But the starting point should actually be to define:

WHAT DOES SUCCESS LOOK LIKE FOR THE FAMILY (NOT THE OFFICE)?

And what is the role of wealth in that vision of success?

WHAT IS THE PURPOSE OF THE FAMILY’S WEALTH?

Is it solely to beget more wealth?

Is it to create cohesion across generations?

Is it to use philanthropy to help shape a world the family wants?

Is it to help individual family members find personal fulfilment?

Is it to drive entrepreneurship or innovation?

Is it some combination of these purposes?

There are no right or wrong answers; every family is different, but if you don’t know where you want to go, you are unlikely to reach your destination.



Setting a “North Star”Drawing up a mission statement

Once a vision for the family has been established, creating a clear mission statement for the office should help to align family members around shared goals, enabling the family and its advisors to create an office around what has been identified to matter most.

There is no single approach to crafting a mission statement, nor are there requirements for what should be included. But a well-crafted mission statement should capture what is most important to the family—a bit like a scorecard that ensures long-term goals are not sidetracked by urgent or tangential concerns.

With that in mind, here are some examples of simplified, illustrative mission statements that families might put in place:

Family A

SUSTAINABLE ASSET MANAGEMENT

To protect and enhance the family’s wealth.

SUPPORT PHILANTHROPIC ENDEAVOURS

Support philanthropy and other charitable giving by providing operational services, fostering governance, and cultivating family leaders.

EDUCATE FUTURE GENERATIONS

Ensure future generations understand the responsibility of their inheritance and how they can benefit from it.

Family B

SELF-ACTUALIZATION

To ensure that individuals can fulfil their potential and ambitions, whatever those may be. Providing tailored financial and advisory support to individual family members to support them in achieving their aspirations.

Family C

STEWARDSHIP OF THE COMMUNITY

As longstanding land-owners, the family vows to undertake responsible use and stewardship of its property as a resource to the local community. The family members pledge to each other mutual support in achieving property stewardship, contribution to society, and personal growth.



Organizing the OfficeIf the mission represents the navigational beacon of the office, organizing the appropriate team and provisions are the keys to staying on course.

The office mission can be used as a basis to understand what the organization of the office needs to look like:

What services will it offer?

What roles need to be staffed?

What culture needs to be created?

How will it be governed?

What legal structures should be used?

It is important to understand that answers to any of these questions may change over time as the family's needs and vision evolve. Even an office that has been running successfully for many decades may need to revise its mission, and therefore the way it is organized, as the priorities of new generations change.

One large and growing family started to feel less cohesive because of their global dispersion, so they decided to refocus on their vision for unity and identity. As a result, the office was retooled to put more emphasis on creating and maintaining communication channels, defining and executing educational programs, and convening an annual retreat intended to build stronger emotional bonds between branches and individuals.



Organizing the OfficeIn our opinion, families and executives that manage to articulate a clear purpose and mission, which can feed into decision-making frameworks for the office, have a far greater chance of creating an office that will stand the test of time.

Through our experience in helping families and offices achieve these goals, we found it can take upwards of five years to get the vision and mission correct. Based on our experience, it is our opinion you will need to test initial assumptions and theories before you can agree that you have it right. After the vision and mission are understood, it can take another five years to get the office staffed and working effectively. Building this foundation is a marathon and not a sprint, so taking the time to set things up correctly will pay dividends down the road.

The onus is now on family members and hired executives alike to help steer that process—enabling every family to find its “North Star”.

One family office, founded due to a liquidity event, had to evolve as new generations arose. As the family grew, it became clear that the long-held vision for success was unattainable if new wealth was not created. To align with a newly established vision for the next era, the office’s primary role shifted from wealth preservation to wealth creation. This included changed investment policies, new programs to promote entrepreneurship, life coaches for family members, and assets liquidated to create a new fund to invest in family-led start-ups.



Questions to Consider

For families:

Can you articulate the purpose of your wealth?

Is your vision for the family your own or is it a shared vision, inclusive of multiple members and generations?

Have you communicated this purpose and vision with those you have charged to run your family office?

For family office executives:

How do you know that the office and the family are aligned on what success looks like?

How might the family’s needs and wants change over time?

As the family does evolve, how will you react to address these changes?


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Culture Might Hold the Key to a Vibrant Office:Today and Tomorrow

CHAPTER 3



Culture Might Hold the Key to a Vibrant OfficeToday and Tomorrow

“We screened 40 candidates, half of whom could do the technical aspects of the job,” says Brendan Rogers, COO of MSD Capital Partners. “Out of those 20, we found only three who also fit the culture of our office.”

This highlights a key principle of family offices’ talent strategy: culture fit. It defines the team, keeps it in place, and helps ensure that the office remains aligned with the family.

Rogers also references another difficulty for family offices: the hunt for talent is becoming increasingly competitive as the number of industry participants continues to grow and offices expand their talent search across sectors.

Combine this competitive landscape with the challenge of getting the right cultural fit, and the task of building a vibrant office looks more complex than ever. We believe the family office that makes a success of it, however, should reap the rewards.

“ Our office is too small to absorb a bad hire, so I must screen dozens of candidates for each position and spend lots of time getting to know our top candidates. Skills can be learned; culture is much trickier.”

SINGLE-FAMILY OFFICE COO



“ There is no ‘right’ culture for a family office, but any culture that doesn’t reflect the priorities and philosophies of the family is the ‘wrong’ culture.”

JIM COUTRÉ, VICE PRESIDENT,

INSIGHTS AND CONNECTIONS,

FIDELITY FAMILY OFFICE SERVICES

“ As trusted advisors, we need to encourage families to have these culture conversations—regardless of how foreign or uncomfortable they may feel.”

KATHRYN MCCARTHY,

FAMILY OFFICE BOARD MEMBER

Defining the Right Team:It’s About Culture, Not Only Skills

Getting the right cultural fit when hiring new team members is critical to maintaining a thriving family office, which is why it’s so important to first define that culture and ensure it’s aligned with the family.

Defining the culture is no simple task, and every office will need to find its own path. There are, however, two important steps they can all take:

1. Focus on the Family

Focus on understanding what motivates the family and what it is they want from an office. What are the philosophies and attitudes most important to them? For instance, they might prioritize collaboration and creativity, or they may have higher concerns about privacy and risk.

2. Articulate the Culture

The simple act of capturing the desired culture in writing can be a powerful way to establish it, publicize it and rally everyone behind it.



“ As wealth has grown, so too has the number and size of family offices requiring talent to be recruited from outside the family office space. Family offices need to adjust their pay plans – including short and long-term incentives – to reflect this new competition and to address the additional risk many candidates perceive when moving from their industry to the opaque and idiosyncratic family office world.”

BRUCE BENESH, NATIONAL MANAGING PARTNER, HUMAN CAPITAL

SERVICES, GRANT THORNTON

Finding the Perfect Team:It Takes Hard Work

Hiring for culture over skills isn’t easy: it requires patience, time, and resources to ensure that each new hire is the right fit. Only a select few candidates may possess what you want, so a healthy flow of applicants may increase the odds of a successful hire. During the search, consider casting your net wide for candidates, making the most of recruiters and peers. In our experience, offices that are quick to hire candidates simply because they have family office experience tend to face more talent struggles, as they are more likely hiring for skills over cultural fit.

In addition to a healthy flow of applicants, you will likely need practical tools to help you test candidates on their cultural fit.

One option is to create a cultural scorecard. Outline the attributes you are looking for and use this to help guide conversations with, and compare, candidates.

Another option, particularly when hiring for senior positions, which require significant investment, is an industrial-organizational (I-O) psychologist—a specialist who applies psychological methods to determine the suitability of new hires and assess the organizational environment more broadly. One single-family office client, for example, has had so much success using an I-O psychologist for C-suite hires that they no longer hire at any level without first doing a personality profile.



“ I challenge the team to reinvent the office every five years—they have come to learn that if they don’t do it, I will.”

MARK DENZLER, COO, SUTTON PLACE

Keeping the Team:The Importance of Living the Culture

Single-family offices cannot avoid the reality that they are now competing in a talent market that reaches far beyond family offices.

To retain your team, you will need to put in place the right mix of financial and non-financial incentives, but perhaps most importantly, live the culture that you want to create.

Three key pillars:

MAINTAINING THE CULTURE

ALIGNING COMPENSATION WITH PHILOSOPHY

EVOLVING THE TEAM

Maintaining the CultureIt takes planning, resources, and relentless focus to develop and maintain an office culture. That focus means embedding culture into processes. For instance, if collaboration is core to the office culture, then the way employees engage with each other should be central to the regular discussions they have with their managers.



Cultural Attribute

EFFICIENT WAYS OF WORKING

TEAMWORK

SENSE OF FAMILY

CONTINUAL IMPROVEMENT

PRIVACY

Living the Culture

Office staff are not only given time to invent more efficient processes, but the successful processes are named after their inventor—sometimes leading to years of recognition.

The office has a rule that the entire team leaves the office together at the end of the day. This ensures that the team is focused on getting work done, and also encourages team members to lend a helping hand when others are overwhelmed.

One office that prioritizes a sense of family brings in soup and salads every Thursday, and the staff all dine together around one table. Another has a “take your shoes off at the door” policy and a dedicated massage and yoga room.

One principal, who believes that fear of punishment stifles improvement, ensures that no office employee will be punished for any mistake as long as they are 100% forthcoming and transparent.

One office requires employees to sign a non-disclosure agreement restricting them from ever revealing which family they work for.

Family Offices That “Live” Their Culture: Examples of how offices have embedded their culture in office life.



Aligning Compensation With Philosophy

Of course, compensation will always play a major role in retaining top talent. Compensation structures and levels must therefore reflect the realities of the market—accounting for the fact that the best employees will have a host of career options within and outside of family offices.

At the same time, compensation needs to match the philosophy of the family – and it needs to be stress tested. The 2007-08 financial crisis threw up some extreme examples of why this is so important.

“In one instance in 2008, a chief investment officer was rewarded handsomely for outperforming the benchmark set by the principal – yet the principal had not anticipated this scenario and his frustration with what he saw as an oversized bonus eventually drove his CIO out,” says Linda Mack founder of Mack International. “Meanwhile, another manager out-performed the market substantially but received no bonus because the principal argued: “If I don’t make money, then you don’t make money.” The manager subsequently left for another family who would value his performance. In both situations, the office suffered, all because the principal hadn’t fully figured out – and stress tested – their philosophy.”



Evolving the Team

The needs of a family and the demands placed on the family office will evolve over time, and the team should evolve with it. Effective performance management is important here, and involves several ingredients, including but not limited to:

Create a fast-moving environment

Provide "Engagement boosts"

Set realistic expectations

Keep processes current

Embedding the right culture within the family office, and ensuring that it can evolve with the family over time, is one of the hardest challenges facing family-office executives. However, they will need to get it right if they are going to maintain a successful and vibrant office.

SET REALISTIC EXPECTATIONS

Creating a culture that addresses discontentment openly may make team members more comfortable in raising their hands as it nears the ideal time to move on. For instance, one office hires accountants with the mutual understanding that after three years, the senior team will help them find their next opportunity, whether it be within the organization or at another family office.

KEEP PROCESSES CURRENT

Staying on top of best practices in HR can be tough for family offices that may not have a dedicated HR team. But it is important to review your performance-management processes. Many family offices, like corporations, are moving from annual backward-looking performance reviews to more regular, forward-looking conversations.

CREATE MOVEMENT

Keeping team members engaged means ensuring that they are challenged in their roles every day. Making slight shifts in responsibilities will help, as well as creating problem-solving opportunities for team members, outside of their normal responsibilities.

PROVIDE "ENGAGEMENT BOOSTS"

Team members can be re-energized when given the opportunity to move into different roles across the organization (on a temporary or secondment basis), or assigned new titles. One office allows staff to do rotations as part of their yacht’s crew in the Caribbean. This same office also encouraged an accountant to move to a better-fitting role as an organic farmer on the family’s farm.




For families:

Knowing each family member may have a distinct style or different expectation for how the office should feel, how do your executives choose what will be reflected in the office culture?

What might be a challenging situation that could stress-test your compensation philosophy?

What resources are being used by your executive team to understand and implement current best practices in hiring and performance management?


Can your team articulate, with consistency, the culture you are looking to create or maintain?

When you evaluate new hires, what might a simple, three-question “culture scorecard” include?

When is the last time you asked your team to brainstorm new culture-building activities?


Managing a Family Office Investment Program for the Future

CHAPTER 4

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MICHAEL BLACK, CFAMichael Black is Vice President, Relationship Management and Investment Director for Fidelity Family Office Services (“FFOS”). He is responsible for managing a select few large and complex single-family office relationships, and for developing and maintaining investment-focused relationships with FFOS’ largest and most sophisticated single and multi-family office clients and prospects.

Prior to joining FFOS, Michael was a Consultant at NEPC, LLC where he was responsible for providing asset allocation, portfolio construction, manager selection and idea sourcing advice to Family Office, University Endowment and Foundation clients.

Michael earned his Master of Business Administration and Master of Science in Finance from Boston College, and his Bachelor of Arts in Philosophy & Economics, with Distinction, from Boston University, Michael is a CFA® charterholder.


What Do We Consider Success?Given the idiosyncratic nature of the single-family office (“SFO”) market, it is extremely difficult to answer the question: “What does a successful investment program look like?” However, while there may not be a “right” answer, in this chapter we outline a few common approaches and challenges that we have identified through our work with many of the largest and most successful SFOs in the United States. Given our exclusive focus on the ultra high net worth (UHNW) market, we are uniquely positioned to partner with SFOs to help define success, drive down costs and enable them to strive toward their goals in a resource-constrained world.



Success is in the Eyes of the BeholderSFO investment programs tend to be a direct reflection of the wealth creator’s unique goals, objectives, explicit/implicit biases, liquidity needs, investment edge, risk tolerance, tax considerations and time horizons. Multi-generational SFOs will likely incorporate the next generation’s views into the investment program as well. As of Summer 2018, we are in the midst of one of the longest economic recoveries of the past generation, and as such it may be a good time to reflect on your investment program to ensure that it is positioned for your intended success.

Success can be a nebulous term. Some investment programs define success purely through quantitative metrics (e.g., 10% absolute return over a market cycle or return relative to an index), while others are more qualitatively driven (e.g., solve world hunger). In a 2017 survey1 of our SFO clients, we found that these offices were divided between absolute return and relative return as their primary quantitative metric. Additionally, a decent portion (19%) of offices fell into the qualitatively driven group as they did not have a quantifiable metric of investment success.

We have found that many successful investment programs focus on a dual mandate: (1) ensuring the family is happy, and (2) meeting quantitative/qualitative metrics agreed upon with the family and investment staff.

Source: 2017 Fidelity Family Office Investment Survey1

Measuring SuccessHow do SFOs define investment program success?

38% 23% 19%

Absolute return target

Track in relative terms (i.e. beating an index)

No specific target

34% 25% 23% 18%

Principal Wealth Creator (PWC)

Investment Committee

Family Office Executive

Descendant/family

member of the PWC

Who is the primary investment decision-maker in your single family office?



Facing Unique ChallengesAccording to our 2017 survey1, SFO investment professionals face a number of challenges.

Benchmarking Can Be DifficultThere is no “SFO Model Portfolio”, which makes benchmarking difficult. Average asset allocation numbers may be deceptive, as SFO investment programs tend to be built from the “bottom-up” based on the unique personality of the family. As the chart on the right illustrates, there is a wide variance for different asset classes, rendering the average less informative.


Asset allocation differs greatly across the SFO spectrum(bars = 1 standard deviation)

EM Public

US Public

Int'l Public

Muni FI

Priv EQ

VC Int'l FI

Taxable FI

High Yield

CashReal Assets

Hedge Funds

25.3%

8.3%4.4%

9.1%

3.3%

7.5%

3.4% 2.7% 0.2%

12.0%

8.3%

13.3%



Customization Increases Complexity

Each SFO has its own unique identity, which must be factored into the investment program. The investment team should fully understand this complexity and ensure they are adequately staffed to manage it. However, through our investment study, we found that resources tend to be stretched. For example, 41% of respondents to our survey believe their investment team is understaffed, and 44% of SFOs have just one dedicated investment manager in-house (see page 9).

We have recognized that successful SFOs tend to strategically partner with a select few firms in order to leverage their scale and increase efficiency to compensate for having fewer internal resources.

Common Traits of Successful SFOs

It is impossible to be overly prescriptive about how to run a successful long-term investment program. But in our experience, we have noticed three common traits exhibited by successful SFOs:

HAVE A CLEARLY IDENTIFIED EDGE

UNDERSTAND THEIR STRENGTHS AND WEAKNESSES

HIRE AN APPROPRIATE INVESTMENT TEAM



1. Have a Clearly Identified Edge

Families have done something unique with an extraordinary amount of skill and passion in order to create enough wealth to necessitate forming an SFO. We define this skill and passion as their investment edge, and note that the SFOs considered successful clearly identify where the family’s expertise and passions lie.

Some offices choose to make the family’s edge the focus of the investment program, while others do not. For instance, if the family created wealth through owning and operating hotels, the core of the investment program may be heavily skewed towards real estate.

This is reflected in the experience of one investment respondent in the Fidelity Family Office Investment 2017 Survey1:

“We spent the last six months reconstituting ourselves to have a less diversified asset allocation model and much more concentrated in what we know — our primary business is in real estate. Everything else is alternatives.”

2. Understand Their Strengths and Weaknesses

We have identified a few general constructs that have been implemented successfully in various forms. While no SFO fits neatly into any of these frameworks (see the following page), we believe they provide a good starting point for comparison.

Importantly, we note that SFO investment professionals deemed successful avoid straying from their agreed-upon framework unless there is a clearly identifiable structural change in the office and/or the market. Likewise, these investment professionals are willing to respectfully push back against the family if they want to change the framework without just cause. This two-way partnership appears to be critical to success.



Framework

“Endowment Model” Replication of typical institutional investment program; strong focus on alternatives (e.g., hedge funds, private equity funds)

“SCT Model” Simple, cheap, tax-efficient implementation of traditional investments (e.g., stocks, bonds, cash); select focus on alternatives/directs

Direct Investment Focused Heavy emphasis on directs

Key Considerations

Generally lower adoption by SFOs Extremely time-intensive Likely the most expensive framework Lower degree of control/flexibility of underlying investments Potentially least tax-aware

Generally high adoption by newer SFOs Much less time-intensive Likely least expensive framework Greater degree of control/flexibility of underlying investments Potentially most tax-aware Tend to concentrate liquid investments with few partners drive scale and efficiency

Generally high adoption by SFOs with active, entrepreneurial families Time-intensive, focused on finding the right direct investment which directly aligns with SFO’s edge Highest degree of control/flexibility of underlying investments Many SFOs aspire to this model, few implement successfully over the long term

Investment Frameworks:



3. Hire an Appropriate Investment Team

There is a constant battle for talent due to competition with public and private investment firms. To illustrate this, the chart below shows that SFOs employ fewer than three investment professionals, despite the substantial pools of capital they oversee.

Without the appropriate investment team in place, even the most well-designed investment programs may fail over time.


12-56-1011-1516+

Average1: 9.9 Median1: 5

12-56-1011-1516+

Average1: 2.9 Median1: 2

Approximately, how many full time equivalent (“FTE”) staff does your office employ?

Of those FTEs, how many are dedicated to investing?

A Resourcing Battle

17%

38%19%

18%

8% 44%

40%

14%

1%1%




While these questions are difficult to answer, they are absolutely critical to an SFO’s success.

1 2017 Fidelity Family Office Services Investment Study. This study surveyed a group of 343 families and family offices. The study was a mix of qualitative and quantitative research conducted between 9/28/17 – 10/16/17 and consisted of single-family offices (SFOs), multi-family offices (MFOs) and wealthy families, with the majority being SFOs.

How does the family define success?

What is our edge?

How do I keep investment costs as low as possible without sacrificing potential returns?

How do I accomplish more with fewer dedicated resources?

Am I aligned with the right strategic partners to help in my day-to-day management of the portfolio?

Which strategies should we insource vs. outsource?

How do I network with the right families?

Am I engaging the next generation appropriately?

How should we take advantage of potentially disruptive technologies within the investment program (e.g., robo-advice, artificial intelligence, blockchain)?

How should I plan for the next market downturn?

Generally, some of the most successful SFO investment professionals continuously evaluate the following questions:


Extinguishing Slow-burning Risks with an Agile Mindset

CHAPTER 5



Slow-Burning Risks When family office executives worry about risks facing the success of the office, it is understandable that the threats to the family’s financial assets tend to dominate their thoughts. But our experience tells us that it is often the less tangible, more easily overlooked risks that prove to be the undoing of family offices in the long run.

Keeping the family engaged, remaining aligned with the family, and continually evolving the office are the challenges that are hard to see in any given moment, yet with the benefit of hindsight, we see that these often turn out to be among the most likely risks to a family office.

These three risks are slow-burning and are rarely treated with a sense of urgency. But if left unaddressed, they could choke out the vibrancy of an office. Instead of being kicked down the road, they should be identified and prioritized when executives set their risk management agenda.



Aligning the Office and FamilyFamily office executives can often find themselves in a tricky position when it comes to building and implementing strategic plans.

Family members are usually keen for executives to move swiftly when building or managing their office. But at the same time, it is not uncommon that their attention is focused on other matters, such as on managing the family business.

Executives, eager to keep moving forward, can be forgiven for pushing ahead with expanding their team, building out services or implementing new processes. However, when they take too many steps without the family’s involvement and oversight, the office can run into problems.

In one instance, a west coast family office continued to expand their range of services as the principal requested them. The principal, heavily pre-occupied with the explosive growth of his operating business, made it so the executives were unable to garner enough of his attention to allow him to understand the implications of each individual request.

When the principal eventually dedicated time to sit down with his executives, he was shocked to find out he had a 110-person office and quickly cut back.



MAKE COMMUNICATIONS COUNT

Family members have different learning and communication styles. Understanding and connecting with those distinct styles can pay dividends over the long run.

MAINTAIN MOMENTUM

Since family members are often short on time (or interest), executives need to use whatever means they can to keep important discussions going. One office requires executives to raise one of several pre-identified “pressing questions” each time they meet with a family member, to maintain progress on important but non-urgent issues that the family is happy to kick down the road.

KEEP FAMILY MEMBERS TALKING TO ONE ANOTHER

It is difficult for an office to be aligned with a family that isn’t aligned with itself. Formal governance structures including family councils or informal dialogue catalyzed by meetings, reunions and social media can create the muscle memory needed to sustain intra-family communications across the generations.

Aligning the Office and FamilyPitfalls are not always easy to avoid. Beyond the general rule of thumb “communicate early and often”, there are several useful tactics that can help to mitigate such risks:



Keeping Communication Channels Open Many single-family offices tend to have a primary point of contact with the family – such as the founder or a family-elected board – in the hope of providing an efficient decision-making structure.

This is a sensible approach as too many family voices create confusion, and it is impossible to please all the people all the time.

That said, we notice that problems arise when offices do not have a grasp on the diversity of thinking across the family – or when those diverse voices believe they are not heard.

NEGLECTING THE NEXT GENERATION

One office executive devoted all of his time to strengthening his relationship with the third-generation leader to the detriment of his relationships with fourth generation. When the patriarch passed away unexpectedly, he hurriedly tried to establish relationships with other key family members, but it was too late – the family replaced him with someone they believed valued their contributions.

BLINDSIDED BY DISCONTENT

A lack of early-warning signals led to unexpected litigation for another family office. Despite working closely with their board, the office executives had no formal or informal connections with one of the branches of the family, and were thus unaware of simmering discontent that was about to boil over. A few years into this high-profile conflict, the office now sits down with every family member individually at least once a year.

While we encourage efficient governance structures, we get nervous when executives put all their eggs in one basket – whether by relying solely on the founder’s input or by blocking wider channels of communication to family members. There is good reason to be concerned about the risks of this approach, as some recent examples illustrate:



Keeping Communication Channels Open Important lessons can be drawn from the examples on the previous page. A clear governance structure that brings the wider family into discussions at the appropriate moment is essential, but the right culture needs to be embedded too, to ensure that this engagement works.

Executives and family members will also need to create communication channels that work for them. These could be in the form of family satisfaction surveys, family meetings or individual meetings between executives and households, to name a few. These solutions will inevitably create additional demands on family office executives’ time, but could go a long way to ensuring that they are not blindsided by misunderstandings with the family further down the line.

“ If communication lines with the wider family are closed off there’s a real risk of being blindsided by discontent among the wider family. And communication channels can’t just exist on paper – there needs to exist a culture that allows them to be used. How many times does a family member need to be ignored before they stop offering input?”

JIM COUTRÉ, VICE PRESIDENT, INSIGHTS AND CONNECTIONS, FIDELITY

FAMILY OFFICE SERVICES



Leveraging Agile to EvolveFamilies are continuously changing – yet offices can find themselves cemented in historic structures and allegiances that prioritize execution of the status quo over continuous evolution. Over time, the rigidity of these offices solidifies in a culture that leaves them unable to make small changes and threatens their fundamental ability to execute on larger strategic planning efforts.

Offices that remain vibrant don’t allow their adaptation muscles to atrophy. Some stay strong by creating new strategic plans every three to five years. In these cases, the plan produced is perhaps less important than the practice of reimagining the office.

For offices with little appetite for monolithic planning processes, intentionally working to be more nimble and responsive on a day-to-day scale can also be effective. In our own business here at Fidelity, we’ve started to implement the Agile approach, created by software developers in the 1990's, and evolved by today’s technology firms like Spotify.

“ If you don’t like change, you’re going to like irrelevance even less.” ERIK LANDSNESS, CHIEF EXECUTIVE

OFFICER, TAMCAP, LLC.



Leveraging Agile to EvolveThe agile approach allows us to quickly and continually make iterative progress (or fail fast) rather than be beholden to glacial processes that detach us from rapidly evolving client needs.

We embrace core principles of an Agile organization:

FOCUS ON THE CUSTOMER

SMALL, DEDICATED, CROSS-FUNCTIONAL TEAMS

ITERATE EFFICIENTLY AND QUICKLY

We assemble small cross-function Squads working alongside other Squads, called a Tribe, which are supported by individuals with deep expertise.

While the entire Tribe is working towards the same mission, each Squad gains autonomy over their path to get there. Squads will assess a long list of client priorities but choose just one or two to address at a time – learning, developing and then testing their iteration or innovation over the course of just a few weeks. Pace is prioritized over perfection. A client’s voice bubbles up rather than a leader’s voice waterfalling down.

Agile Ways of Working

Source: Boston Consulting Group

Fast-paced

Constantly adapting to changing market conditions

Entrepreneurial

Teams working autonomously; freedom within a frame

Speedy delivery

Short timelines, minimum viable products

Continual feedback

Problems identified and dealt with early



Leveraging Agile to Evolve Agile requires a continuous improvement mindset, and continuous learning from the client, to set priorities and test advancements. For a family office, those small-scale interactions with the family client help:

ALL FUNCTIONS STAY CONNECTED TO THE CHANGING

NEEDS OF THE FAMILY

KEEP LINES OF COMMUNICATION WITH THE FAMILY OPEN

We believe that perhaps the biggest opportunity for family office teams who embrace Agile is the renewed customer-center ethos that requires them to ask one another “what does the family really want?” and puts the onus to make whatever changes needed into each of their hands.

“ By now most business leaders are familiar with Agile innovation teams. These small, entrepreneurial groups are designed to stay close to customers and adapt quickly to changing conditions. When implemented correctly, they almost always result in higher team productivity and morale, faster time to market, better quality, and lower risk than traditional approaches can achieve.”

HARVARD BUSINESS REVIEW, MAY-JUNE 2018



Leveraging Agile to Evolve In our opinion, Agile may institutionalize the constant evolution that quells the slow-burning risk of remaining static.

The pressures of running a modern family office will inevitably lead to executives fighting fires on multiple fronts. But while financial concerns and investment performance may often attract the spotlight, we believe these slower-burning fires ought to be given equal attention, to ensure that your office remains dynamic and successful in the long term.

LIVING THE AGILE TENANTS

The executive of a multi-generational family office instilled a client-centric mindset in his team by continually asking “How are we going to win the family’s business today?” Because of their efforts to “sell” the office to the family, the team was very aware of which offerings were valuable and which needed to be quickly retooled. For the past few years, family members have been bringing more outside assets into the office than they have been taking out.




Does your risk analysis look at slow-burning disruptors?

Even if you have an open-door policy with all family members, where are the most likely blind spots that could be keeping family members from communicating openly and proactively with you?

Because an office can't be aligned with a family that is not aligned, what more can be done to foster intra-family communications?

Are you allocating time to explore non-urgent areas of risk with your executives?

Have you asked your executives where they need more of your time or attention?

Who are the branches, generations or individuals in your family who may believe they have the least voice in your office?

For executives: For families:


Transforming Family Office Tech: Getting the Decision Process Right

CHAPTER 6

| 48

PHIL IERARDIPhil Ierardi is senior vice president, National Sales for Fidelity's family office business. In his current role, Mr. Ierardi oversees the business development efforts across the country for single family, multi-family and wealthy family client types. He is also responsible for managing a team of consultants focused on providing reporting solutions to the family office segment of clients, as well as training and support efforts around the Wealthscape technology platform. Prior to joining Fidelity Family Office Services, Mr. Ierardi worked for Fidelity Charitable as a project manager. He managed the project life cycle from business analysis and testing through release management and operational readiness. Mr. Ierardi received a bachelor of science from Providence College.


Evolving Technology EnvironmentWith the market moving more quickly than ever, and families and regulators demanding more granular reporting, family offices need technology that enables them to keep up.

In our experience, however, Excel remains the norm. Just about all family offices use Excel in some capacity and about half still depend exclusively on Excel and Quickbooks to power their reporting — tacking on complex workarounds with every new demand on the system. Continued reliance on Excel and Quickbooks is understandable because they are inexpensive and flexible, and it’s easy to find people to run them. However, in today’s changing technology environment, this outdated arrangement may have left many family offices behind the curve.

Based on our experience, family offices greatly want to improve operational efficiency, reporting standards, client relationship management and accounting rigor. In order to do this, family offices must upgrade their technology.



A blueprint for decision-making There is no “one-size-fits-all” solution as family offices invest in technology. But, in our opinion, offices that run their technology investment programs with strategic intent and precisely mapping out their needs, will be best-placed to choose the appropriate vendors, invest money in the appropriate places, and respond quickly to clients’ evolving demands.

The key is to have strategic alignment with the family and agreement that the problem the office is solving is also a priority for the family. The starting point is to think hard about the factors that will influence their decision-making. These include:

Staffing

Investment in new software is pointless if the family office does not have either people who can use it effectively, or the budget to bring in new people with the necessary skills. It will take time to train existing staff to use the new systems, and family offices might need additional resources for support and/or to outsource some tasks.

Timeframe and urgency

Is there a specific reason to upgrade the system: a liquidity event, the formation of investment partnerships, or a new type of service demand? Some systems are quicker to implement than others. Time needs to be built in for data conversion and implementation of the system. The need for staff training and/or recruitment will also have an impact on timing.

Budget

Family offices will save time and avoid unnecessary frustration by agreeing to a budget for technology investment with their ultimate decision-maker at the beginning of the process. It is crucial to maintain clear communication with the family about what is required.



A blueprint for decision-making

Executional risk

Assessing tolerance for risk should help family offices define the extent of their technology ambitions. What is the strategic risk the project faces? What are its chances of success given the need for operational change, system integration and change management? The financial viability and service levels of chosen technology vendors are another important consideration.

The decision-making process

Many family offices make decisions informally, rather than in a structured way. We believe the process of choosing a technology vendor requires a more disciplined, fact-based approach. This will help the family office to exclude potential bias, such as thoughts about particular vendors from peers that might have very different needs, the opinions of staff, and even the views of the family, which may not be well-informed.



Choosing a tech vendor: What not to do If the vendor selection process stalls, it tends to be for familiar reasons: most family offices are making the same mistakes.

A common scenario we encounter is that office executives start by defining a list of wants and intermingle them with some features and functions.

They then set up six or seven demos with a wide range of different providers that may or may not be appropriate for the problem they are trying to solve. Confusion and frustration sets in, as partial negotiations continue with perhaps three of these vendors.

The process then stalls because of a lack of clarity. This is where they go back and retool the functional list and repeat the process — until paralysis sets in.



Choosing a tech vendor: Getting it right Fortunately, there is a better way. We find that the best results come from working sequentially through a series of steps:

DECIDE WHO DECIDES

RANK THE DECISION-MAKING CRITERIA

GET THE PROBLEM DOWN IN WRITING

TAKE UP REFERENCES

BUILD A SHORTLIST

CREATE A RECOMMENDATION DOCUMENT

NEGOTIATE ON RISK AS WELL AS PRICE

1. Decide who decidesIt is crucial to involve the ultimate decision-maker in the process from the outset, so their objectives and criteria are aligned with those managing the vendor search. That means getting agreement upfront on key principles and objectives, timeframes, and the budget.



IMPLEMENTATION IMPACT

How much work will it take to get the new system up and running, and who will be expected to do that work? For example, will the software be off the shelf or customized? Will the system need to integrate with other systems? Will in-house IT staff be expected to manage the implementation?

TIME TO IMPLEMENT

How long will it take to implement any new system, and does this fit the family office’s timescales?

OPERATIONAL RISK

Here, the question is about how comfortable the family office feels with external vendors. Can the vendor provide service-level agreements that offer guarantees of quality? Which side bears the brunt of financial risk during implementation and delivery? Will the vendor be around long enough to provide support and development? Does a larger provider feel more stable, or is the family attracted to the potential flexibility and collaborative capabilities of a smaller firm?

FUNCTIONALITY AND FEATURES

What, specifically, should the new system be capable of? As well as capabilities, questions will arise around ease of use and the ability to customize.

INSOURCING VERSUS OUTSOURCING

Some family offices want more control over their systems than others, so although outsourcing has its benefits, it raises concerns about data privacy, confidentiality and the opportunity to customize. Vendors increasingly offer cloud-based solutions, which enable them to quickly provide fixes and updates and to add scale where necessary, but some offices may prefer on-premises solutions.

COSTING

While the potential size of the necessary investment is an obvious question, it may limit vital discussion about what the office needs to deliver the service it wants. Nevertheless, this issue must be confronted early on.

2. Rank the decision-making criteria Most family offices will consider similar criteria for choosing a vendor but attach different levels of importance to each. In our opinion, they ought to consider the following:



3. Get the problem down in writing With the decision-making criteria established and ranked, it should be possible to document the problem to be addressed and to detail what a solution needs to offer. This document can serve two purposes: form the basis for the vendor search and align the views of those managing the process with the views of the ultimate decision-makers in the family.

4. Take up references Family offices that are admired for their technology are an important resource. The references should be a good profile match for the problem the office is trying to solve. It should be possible to build a list of potential vendors by comparing the family office’s problem (see above) with what is being achieved by other offices. Which desired benefits have other family offices achieved, and who are their vendors?

5. Build a shortlist To reduce that longlist to a more manageable two or three potential vendors, family offices need to pinpoint their specific requirements and then benchmark these against each potential supplier.



6. Create a recommendation document Once each shortlisted vendor has submitted its proposal and the family office has chosen a preferred bidder, a recommendation document will set out the rationale for that decision. This can include:

“ We were trying to solve for all our needs in the office and we could not distinguish between all the various vendors we had seen. Once we prioritized our requirements and better understood our decision-making criteria the decision was clear.”

BOSTON-BASED FAMILY OFFICE

THE ORIGINAL PROBLEM STATEMENT

The issue to be resolved.

THE SOLUTIONS CONSIDERED

A brief summary of the proposals made by shortlisted vendors.

THE TRADE-OFFS

The pros and cons of each of the proposals.

THE SOLUTION PROPOSED

How the final selection was made against the agreed decision-making criteria.

THE BENEFITS

What the family and the family office will gain from adopting the chosen vendor’s system.



7. Negotiate on risk as well as price

Family offices are rightly cost-conscious, but what they want most is a solution that can be successfully implemented and will deliver the promised benefits. At the end of the day, most offices that have experienced failed implementations would have paid more to increase the probability of success. Vendor negotiations should therefore focus on reducing operational and executional risk. They should benefit from looking into:

PILOT PROJECTS

Are vendors prepared to run pilot exercises with the family office’s own data, rather than simply showcasing sample data in a glossy presentation?

FIXED-PRICE IMPLEMENTATION

Clear terms under which vendors or the family office will be responsible for costs caused by implementation delays.

GUARANTEES

What liabilities will the vendor face in the event that its solution does not deliver the desired outcomes? How will these be enforced?

EXIT CLAUSES

If the family office’s circumstances or needs change, what scope is there to vary or exit the contract? What support will the vendor offer?

FUTURE PRICING

What guarantees can the vendor offer on pricing once the initial term of the contract expires?



A process that works for every family officeWorking through this process should help family offices to overcome the challenges of transforming their technology and choosing their vendor. This is the journey toward building the family office of the future — a family office that keeps pace both with the rapidly evolving market and with families’ increasingly sophisticated demands.




For the office:

Do we have the expertise to manage the vendor selection process or do we need the help of a consultant?

How will this new system fit in to our current technology architecture?

Will this improve our operational efficiency, data quality, or family member experience?

For family members:

Will this new solution provide me with more relevant and timely information?

Will I benefit from the efficiency gains in the office by having them perform more value-added activities?


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Preservation in the Digital Era: Ensuring the Office Keeps the Family Secure

CHAPTER 7

| 60

GARY F. ROSSI Gary Rossi has over 30 years of experience as a private sector and law enforcement security professional with deep expertise in investigations, cyber fraud matters, risk mitigation and strategic planning. Gary joined Fidelity Investments in 2003 and served as Fidelity’s Head of Corporate Investigations. Gary now leads the Fidelity Security Services group, working directly with many clients to assist them in better understanding current security threats and with building appropriate mitigation strategies. Prior to Fidelity, Gary served for 14 years as a special agent for the Federal Bureau of Investigation (FBI).

JON DOUGHERTYA 23-year veteran of Fidelity Investments, Jon most recently served as the Vice President of Risk Technology, where he was responsible for the delivery of technology services in support of Global Security Operations across the enterprise. His responsibilities included planning/forecasting and oversight of solution delivery and support teams as well as the Global Security Operations Center — Fidelity’s 24x7x365 emergency management, alarm monitoring, and event and crisis management function. Jon received his bachelor’s degree from Westfield University and is a member of ASIS International.


Preservation in the Digital EraFamily office executives have a responsibility to guard the family against bad actors targeting the family’s wealth online or in the physical world. They must also help the family help themselves: that means communicating more effectively about the dangers the family faces and cutting through the anxiety around security. It also means explaining how the family may be able to mitigate risks.

“ Getting hacked was a really scary process. It was a life changing event. We now talk about our "pre-hacked life" and our "post-hacked life." While we always feared financial losses, we were blindsided by the emotional impact.”

FAMILY MEMBER



Online Risk: Where do the threats come from?

Many families will already understand that online security breaches could leave them vulnerable to significant loss. But it can be difficult to know where to start.

We believe knowledge is key. Families need to understand the different online threats and the nature of the bad actors operating online. The threat that should most worry them comes from profit-minded organized cyber criminals. These underground groups are highly skilled, organized and collaborative, often specializing in niches such as identity theft and credit card fraud. And, in our opinion, they are particularly likely to target high-net-worth individuals, often accessing public and private information accessible on the web or through their “fraud forums” to identify potential victims.

The following page goes deeper into two typical cyber attacks facing wealthy individuals and family offices:

MALWARE

“TRUE NAME” OR “NEW ACCOUNT” FRAUD



Spotlight on Cyber Crime:MalwareMalware is malicious code implanted on the victim’s computers, tablets and other devices that can, for example, capture their key strokes, revealing their login credentials, usernames, passwords, and other sensitive information. It commonly lurks on risky websites, such as gambling or pornography sites, or on the sites of organizations with limited IT resources, such as charities. Sometimes, malware is placed in legitimate looking advertisements referred to as “Mal-vertising.” Or, cyber attackers send emails to the victim containing web links that, once clicked, downloads the malware to their device.

Some of these emails are sent to thousands of people, which is known as phishing; of even greater concern for family offices is the specific targeting of particular individuals, known as “whaling.” After a victim’s family is profiled in a detailed manner, a customized email or “spear phish” is sent. The fraudsters target groups of potential wealthy victims by exploiting their digital footprint — much of which is publicly available personal information. Using this, the hacker sends a personalized email to their victim that appears to come from, for example, their child’s school, their favorite charity or country club. Unsuspecting victims are then more likely to click on a link or open a document containing malware.

“True-name” or “New account” fraud True-name fraud is a common method to move funds once an account is compromised to an account in the victim’s name fully controlled by the fraudster.

Armed with the detailed information obtained in the profiling exercise described above, the attackers set up accounts in the victim’s name at other financial institutions. The attackers then log back into the victim’s compromised devices and accounts and transfer money into the new accounts — and from there to overseas accounts they can access for themselves.

Vigilance is crucial here. All too often, when victims receive correspondence relating to the new, fraudulent accounts (e.g. a welcoming letter for a new account), they ignore it because they don’t think they have any business with those institutions.



Minimize your Risk: Important defenses

Family offices need to alert their families to the risk of these fraud methods and provide advice on how to avoid being compromised. Important defenses include:

TWO-FACTOR AUTHENTICATION

With two-factor authentication, the user can only gain access to an account when they verify their details on an additional device. Ideally, this should be a device such as a mobile phone, which uses a connection that is separate from the user’s internet connection.

CREDIT FREEZING

The three major credit bureaus (Equifax, Experian and TransUnion) enable individuals to place a permanent freeze on their existing credit, which prevents new accounts being opened in their name.

DEDICATED DEVICES

A dedicated device can be used for accessing the financial accounts where your family’s wealth resides. No web surfing or email is conducted with the dedicated device, significantly reducing the risk of any malware getting on that device. Other devices can be used for all other online activity.

ONLINE “HYGIENE”

Basic security measures include: using unique passwords for each account and changing them regularly, keeping anti-virus software up to date, and setting up alerts with account providers that notify holders of any account activity. Emerging technologies are adding to the defenses available.



Minimize your Risk: Understand and minimize your digital footprint

More generally, a family office can help their family be more careful about managing their digital footprint, which is a potentially powerful resource for cyber attackers.

All family members should use the privacy settings on their social media and avoid publicizing information about their whereabouts — when they are on vacation, for example, which could be an invitation to burglars. The family could also have their existing digital footprint analyzed and mapped, identifying what information is already in the public domain so they can help mitigate this risk.



“Real-world” Risk:

Security at home and away

Online threats are making the headlines, but threats to safety and security in the physical world have not gone away.

Securing the homeFamily offices can help families identify weaknesses in their home security systems. One emerging threat is that many devices in the home, from digital assistants to smart thermostats, are now connected to the internet and can be attacked by cyber criminals. Families must change the default passwords on these devices.

Also, many families will invite regular and temporary staff into their homes: house cleaners, nannies, landscapers, chefs, dog walkers and others. Conducting background checks on these employees – particularly those with more access or greater responsibility – can provide important reassurance.

For example, we believe family offices should encourage the family to make provisions for a crisis that forces them to leave their home — a natural disaster, extreme weather conditions or a fire. Cloud-based tools that can protect personal information can be a useful way to safeguard critical personal documents, but families should also have a plan for emergencies

Securing the personFamilies must also be well-protected when they are away from home, with specialized travel medical insurance that is meant to help protect them while travelling abroad. High-quality travel insurance will cover the cost of medical attention or healthcare they may need while away, including expert guidance on proper treatment options and emergency international evacuation services.

Family offices can also play a crucial role in protecting older members of the family in cognitive decline, or any member of the family with greater vulnerability. This might mean helping the family to set up powers of attorney to monitor or manage one family member’s finances on their behalf.

These more vulnerable persons can also be easy pickings for fraudsters, who might even be their caregivers or extended family members. Work with the rest of the family to help mitigate this risk with greater transparency, perhaps by establishing ways to monitor their accounts such as setting up alerts triggered by unusual transactions.



Family Offices Step Up Conversations with the family about some of these issues may be difficult and feel intrusive. It may be necessary, for example, to insist that the family accept security precautions they find inconvenient or time-consuming. However, family offices that fail to ensure that the family is properly protected may expect more difficult questions if the worst does happen.

At the same time, the family office must also play its part: they too are at risk of fraud and cyber attack. For example, sophisticated attackers may target the family office with email instructions that appear to come from the family, asking for disbursements to be made into fraudulent accounts. It is crucial that offices have processes to prevent such failures: family offices should never accept instructions sent by email alone and must put in place verification procedures that are understood by all staff.

It is also vital to safeguard key information in the first place, and this will include both the family office’s data and the family’s data. Consider the actions to the right.

The family office that makes security a priority will help the family help itself. By keeping its own house in order, the office should be able to help keep the family safe — both online and in the physical world.

Actions to Safeguard Key Information

APPOINT A HEAD OF SECURITY

It will be this person’s responsibility to maintain the family office’s information security; they may also be able to work directly with the family.

CREATE BETTER DOCUMENTATION

Family offices should clearly document their security policies, with information classified and given appropriate security protections.

ESTABLISH USAGE RULES

Make sure every member of staff understands what they are allowed to do with all devices, such as what information they can store on computers, tablets and cellphones, and what degree of personal use is allowed.

KEEP TALKING TO STAFF

Communication should be an ongoing priority, so that all staff understand evolving risks and how to protect themselves and the family.




For executives:

Is everyone clear on processes, especially as it relates to the disbursement of funds (never trust email…)?

As it relates to crisis management, is form, structure & accountability clearly defined and understood by all associates (e.g. incident response and escalations)?

Are we doing enough with education and awareness to develop and maintain a culture of security consciousness and data protection?

For families:

Have we taken the time to assess how vulnerable we might be to a cyber fraud scheme or are we just “hoping it doesn’t happen to us”?

Have I dedicated time to develop risk mitigation strategies?

Am I leveraging options and tactics (e.g. leveraging two-factor authentication, freezing credit, diversifying passwords, maintaining clean digital hygiene) to help make me a less appealing target?


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When Evolving from a Founder-led Office, Consider Running It Like a Business

CHAPTER 8


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The Multi-Stakeholder OfficeSuccessful family offices are typically those that deliver exactly what the family needs. In founder-led offices, that will be set out by the founders themselves. The office will reflect their needs, wants, financial goals, investment style, philosophy and even idiosyncrasies. Everyone on the team understands that the founder’s satisfaction alone defines success. But when that office transitions to multiple stakeholders, such as a set of siblings or multiple generations, it needs a fundamental shift in mindset if it hopes to be as successful serving the many as it was with the one.

The multi-stakeholder office must serve many masters, understanding and meeting the diverse needs and expectations of multiple family members. It is a fundamentally different “beast” than an office designed to serve a single founder. The successful and thriving multi-stakeholder offices come in many different shapes and sizes – but they all share one key characteristic: they are run like a business.

Vibrant sibling and multi-generation offices start with a clear view of what their customers require, and they employ talented staff who

can work together to deliver against those requirements today and as the family evolves. They are intentional in their efforts to create a healthy, dynamic workplace. Businesses whose employees are disengaged, frustrated or poorly motivated will fall on the job of delivering to their customers; the same principle applies in a family office—employees must be inspired and fulfilled by their working life and their objectives. Such organizations will attract the best people and retain them.



Mapping out the future: Pursue the visionVision is the starting point here. For a founder-led family office, the principal’s vision of what they want to achieve with their wealth sets the agenda. But in multi-stakeholder offices, developing and articulating a vision that every member of the family can agree on is challenging—but getting this right can be fundamental to success.

To agree on the vision, the office will need to understand what the family hopes to achieve with its wealth, incorporate differences of opinions and priorities and communicate those values internally. All too often, family offices start from the other end of the process. They focus on what services they can supply instead of starting with a holistic view of what the office needs to achieve and developing a service proposition in response. [See Chapter 2 Putting the Mission First]

The truly business-like family office sets out a strategic plan for achieving the vision, builds an operational model around it, secures the resources that vision demands, and deploys those resources to maximum effect.


| 72| 72Explore other chapters at GO.FIDELITY.COM/EVOLVEFAMILYOFFICE

Being Business-likeOffices we consider to be run like businesses have achieved a level of sophistication around several key pillars:

1. Strong leadershipRunning a multi-stakeholder family office calls on a blend of leadership strengths. In addition to the sort of skills needed in a more conventional chief executive role, which range from financial acumen to strategic planning, the family office leader needs to be able to build a relationship of mutual trust with the family members.

It’s an unusual level of trust, and uncommonly complex: they need to be able to work with the whole of the family, rather than any one faction or any one demographic, to develop and pursue the shared vision. This requires a blend of diplomacy and authority, as the leader helps create a space for the family to resolve its differences and agree on a direction of travel, and steps in which provide a lead where necessary.

2. Appropriate budget Successful businesses are tightly managed, with a keen eye on costs, but they also understand exactly what’s necessary to operate effectively. Vibrant family offices apply the same principles. With their vision and strategic plan in place, they clearly set out what budget they need to succeed.

It is not uncommon for wealth creators to view their family office solely as a cost center and try to spend as little as possible. While it is natural to want to keep expenses to a minimum when carried into a multi-stakeholder office, it can stunt a successful transition. Families who bring a “run-it-like-a-business” mindset to this transition are more likely to make the investments needed to build a different kind of organization.

However, regardless of a family’s perspective on “an expense” versus “an investment”, they are entitled to expect efficiency—so family offices must make the business case for that budget. Equally, family members need to accept that executives will want to agree upfront on what services they’ll supply based on the resources available. The office may also push back when staff begin flagging additional requests for work and tasks that are unfunded. Some family members may be more demanding than others so extra attention is required to ensure that the services delivered are in line with what the entire family has agreed to fund.



3. High-caliber staff Just as the best businesses hire the best people for the job, successful family offices recruit the appropriate talent. As the office grows and its mission evolves, the talent strategy may require a rethink. Does the current workforce have the experience and skills they need to execute on the organization’s vision? Can the current leadership build the right relationships across the generations?

With the appropriate talent in place, successful family offices think carefully about how to retain their people. It may not always be easy to offer organic career progression opportunities—particularly in small offices and those with flat structures. But office leaders need to focus on this question; in a successful business, executives think of their staff as assets to be nurtured and developed, rather than there simply to do a job today.

Investment in staff, perhaps through training, professional development opportunities, or networking opportunities that combat the common feelings of isolation when working for a privacy-focused family, for example, will help keep staff engaged, motivated, and loyal. [See Chapter 3 Is Culture the Key to a Successful Family Office?]

Family members also need to focus on the happiness of their top executives. We recently saw a family office CEO offered twice his compensation to lead an office for a different family. They stayed put. Would yours?

Based on our experience and numerous conversations with clients, we determined what many employees at sophisticated multi-stakeholder offices value most in the workplace. Not surprisingly, compensation is considered the most valued – but focusing only on pay is risky. Flexibility and work/life balance are also very much valued, along with a fitting office culture. In our opinion, it’s important to strike a balance between both monetary and emotional benefits.



4. Policies and proceduresThe business-like family office operates professionally. It has policies that govern how the organization will run, covering everything from decision making to financial management to communication with the family. It also has agreements in place on working practices such as human resource policies, processes such as how money movement requests of certain dollar amounts are approved and even family preferences such as which vendors to use or what to stock in vacation home refrigerators.

How it strikes the right balance between authority and informality will depend on the family and office leadership, but all organizations need to agree how to optimize efficiency and clarity while encouraging their employees to act with autonomy and initiative.

5. Continuous improvementSuccessful businesses are generally committed to improvement, but that requires them to measure where they currently stand on performance. Family offices can follow this example by identifying appropriate measures of success and then monitoring these key performance indicators (KPIs) closely.

While investment performance is a common KPI for multi-stakeholder offices, it may not necessarily create room for what matters most to the family (or generate a lot of excitement for the office in a down market). Other common KPIs include family satisfaction with the office, family cohesion, efficient management, timeliness, task completion and even problem solving.

To evaluate KPIs, many offices use client satisfaction surveys or employee-engagement surveys which can provide crucial intelligence for staff recruitment and retention. It may also be possible to benchmark scores against the performance of other family offices.



Should your multi-stakeholder office employ family members?There’s no right or wrong approach—and families themselves may have strong views either way—but the guiding principle should be to employ the most capable people.

This certainly applies at the leadership level. There are plenty of examples of thriving family offices led by a member of the blood line or a spouse. However, families need to remain vigilant about perceived nepotism; they must ensure that family-member employees are seen to represent the views of more than one faction or interest and have the ability to unite the family behind a shared vision.

The bottom line is that appointments throughout a multi-stakeholder office should be made on qualifications and merit. Family members working

in the office must be competent to do the job, rather than being appointed because of their name. Any organization employing incompetent staff will underperform – and struggle to attract and retain talented employees who can do the job.

Some keep family members out of the office because they fear not doing so will hinder their efforts to attract high-caliber professionals; others preclude family members to “push them out of the nest”, forcing them to realize the value in self-earned achievement.

Many families have created policies or rules that clarify the professional experience required before a family member will be considered for a role in the office. Others believe that there is no better way to align interests between the office and the family than by having qualified family members in professional roles. Regardless, setting and communicating expectations is key to success in whatever is right for your family.


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It’s all about the clientIn practice, high-performing businesses sum up the “secret of their success” in relatively simple terms: they are client obsessed. They invest what’s necessary to understand who their customers are and what they want from the organization, in the most granular detail possible.

For the most successful multi-stakeholder family offices, it would make sense that this should become a natural and continuous process. They constantly seek more information and insight to understand where the opportunities for improvement lie, and each and every employee is committed to working with the family to raise the efficiency and effectiveness of the office.

The result is a virtuous circle of positive feedback. Employees understand what they must do to deliver further success and everyone in the family is delighted by the results.

Explore other chapters at GO.FIDELITY.COM/EVOLVEFAMILYOFFICE




For executives:

Beyond compensation, what really motivates your team and keeps them engaged? How do you know?

Would you consider your team "customer obsessed"?

Where could you be soliciting more data or insight to evaluate your key performance indicators and client satisfaction?

For families:

Do your executives have a clear understanding of the family's vision and goals for the office? Does the family?

What processes are you using to determine if the offices have the appropriate resources to response to what the family is, in actuality, asking for?

How confident are you that family members share a consistent understanding of the family's perspective on family members working in the office?


Creating the Disruption-ready Family Office:Planning for the Inevitable

CHAPTER 9

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JIM COUTRÉ Jim Coutré is Vice President, Insights & Connections. He is responsible for the oversight of Fidelity Family Office Services’ Insights & Connections program, which provides family offices and wealthy families with thought leadership, referrals to industry experts and consultants and access to a peer networking program. Prior to joining Fidelity, Jim was a vice president at The Philanthropic Initiative where he helped ultra-high net worth families and multi-generational foundations increase the social impact of their giving and he trained professional advisors and family office staff to help their own clients set and achieve their philanthropic goals.


The Disruption DilemmaAnticipating disruption is an exercise in planning for the unknown. In many ways, disruption is like a meteor — a strike is inevitable, but knowing when, where and from what direction it will come is near impossible. As such, while there are some tangible preparations that can be made and contingency plans that can be crafted, it is impossible to prepare for every scenario. What offices can do is create an organization that is capable of rolling with the punches.

Disruption-ready family offices need to be flexible and agile, rather than rigid organizations that will simply break during times of stress.


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Understanding Disruption

Disruption is an existential threat. It is neither inherently bad nor good. It can be good if it forces intentional and thoughtful change — even if that means shuttering an office because there is a better way to serve the family. It can be bad if it creates chaos or a vacuum that leaves the family uncovered, in disarray or unintentionally splintered.

That is why family members and office executives should be moving toward “disruption-readiness” – to ensure that the short- and long-term interestsof the family are being attended to in the mosteffective way.

In our interactions with family offices, we’ve noticed that many have a very narrow and near-term view of disruption, typically tied to the loss of a principal or a top executive. In reality, disruption can come from any angle and through issues that are incomprehensible or unimaginable.

In broad strokes, we think of disruption as coming from one of several directions:

Family Changes

Some of these disruptors will originate with the family. The death of a family member may be the most obvious example, but disruption can come from the family’s dispersion, changes in their relationship with their wealth, or from a fundamental change in how they identify as a family.

Office-based Disruption

The departure of a key executive, for example, has the potential to cause significant difficulty, but beyond that, there could be regulatory changes or financial services innovation that can disrupt. Artificial intelligence, for instance, is already changing the way offices work and are staffed.

Universal threats

The third group of disruptors is external and very broad. For example - What impact could climate change have on the family’s income sources or geographic footprint? How can automation and job loss lead to universal income or wealth confiscation? What would be the impact on the family if a civil war broke out in the country? Many of these disruptors seem far-fetched today, but history tells us that we’re likely to experience these things over the course of many generations.


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Consider Planning Like a Corporation:

Planning for the Likely

Smart corporations spend time “future scanning” to try to identify as many of these threats as possible – whether with the client, internally or externally – and the likelihood of them becoming reality. Smart family offices should do the same and begin to develop contingency plans for the most likely scenarios.

There should be a specific plan in place for the death of a key family member, for example, just as the family office should ensure no single executive is utterly indispensable by making sure skills, experience and knowledge are spread throughout the office. Recognizing that we all love to enshrine a completed plan and pat ourselves on the back for a job well done, we should find ways to practice with the plan or at least dust if off from time to time. Some families have found “fire drills” effective in holding themselves accountable for trying out and updating their contingency plans. “I’ve been hit by a bus. What are you going to do first?” said one principal to the family and trusted advisors he had convened.

…And Planning for the Unknown

The reality is that offices will probably be hit by something other than the scenario they plan for. With so many potential sources of disruption, it is impractical if not impossible to develop a plan for every situation.

So, what can offices do to prepare for the unknown? They can work to develop the “disruption-ready” characteristics that make them more likely to be able to absorb – or even be energized by – disruptive forces.



Planning for the Likely and the Unknown1. The office has a clear sense of purpose

An organization that is not fully committed to its purpose for existence may not have the necessary fortitude or function to face disruption when it comes. By contrast, organizations that have a commitment to purpose should be able to use that as a guiding star amidst chaos.

Equally important, organizations that have a commitment to purpose will have done so by bringing the family and executives together to figure it out. They will be practiced in working together. They will know one another. They will know how to communicate effectively. They will know how to make decisions together and get things done. Those offices that are practiced in working together on important issues will be better positioned to embrace and lean in to disruption without wasting precious time.

Family members need to keep in mind that this work requires attention and commitment when the waters are calm; it can be hard to get people motivated in such circumstances and this can discourage your executives from pushing you on it. Consider having continual, robust conversations around the values and vision of the family and the office. It is important to clarify values, continually ask what they mean to each board or family member and reinvent them as needed.

2. The office is practiced in change

Offices that are constantly evolving to stay relevant to the family and the world around us know how to change. They have muscle memory that makes it easy to jump into action and do things they haven’t done before. Because these offices are already in motion, they are less likely to be knocked back on their heels by disruption.

Think of how a tree is disrupted by a storm: inflexible branches break from the tree while the more elastic sway to and fro, absorbing and deflecting the force of the wind.

By building a more agile mindset and applying that flexibility to their daily work, family offices should also be able to manage disruption that develops over the longer term and requires a more continuous approach.



Looking Ahead:Confronting the Existential Threat

Family offices exist to serve their client base: their focus in resilience planning has to be the family, not self-preservation. The agile mindset must be agile enough to contemplate a world in which the family office itself looks very different — potentially with different structures in place and even different people, depending on what is necessary to continue serving the family.

Disruption-ready family offices, in other words, are ready to protect the value they are providing to the family; this isn’t about holding onto a particular family office model. In a future world, the family office as we know it today may shrink or even disappear altogether. This may be an uncomfortable thought but preparing for disruptions will allow evolution to transpire. Achieving greater disruption-readiness will require some difficult conversations. Those who decide to avoid these conversations may leave the family even more vulnerable.

Managers Versus Leaders

Well-run family offices typically understand the importance of good management in delivering high standards of service day after day to their clients.

But in the medium to longer term, the challenge of maintaining operational excellence becomes ever tougher for family offices that haven’t prepared themselves for the future. For this reason, family offices need their executives to be good leaders as well as good managers.

Leadership means setting a vision for the future of the family office, based on both external drivers and a view of the family’s evolving needs. Leaders need to be constantly scanning the horizon for emerging threats and opportunities in anticipation of the family’s future needs.

Purpose, here, is delivering the greatest possible value for the family — and they should be involved in this process. Some family members may not be used to engaging in this way – they may even regard this solely as a job for the family office – but the best leaders will bring them into the conversation.




For families:

Are you giving enough attention to defining, evolving and re-affirming the office’s purpose, vision and mission?

Are you giving your executives the resources they need to plan for the future?

Are you creating a dynamic that encourages your executives to be leaders or just managers?


Have you engaged the family in exploring possible directions of disruption? What objections would need to be addressed for you to do so?

Have you documented policies, procedures, roles, vendor relationships and even the “secrets” to working with each family member?

Where is the office most inflexible? How can you make your office more agile?


What Next for Family Offices? Key Takeaways

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Building on the Learnings of this eBook This Evolving the Family Office eBook began with a tough question: “Will your family office be intact in 10 years’ time?”. It may be an uncomfortable thought, but our aim is to encourage family offices to think about the most significant opportunities and challenges they face. While many successful family offices are doing a fantastic job right now, they will need to evolve if they are to remain relevant to the families they serve.

What does that mean in practice? The message from this e-book is that forward-thinking family offices think about their organizations differently. They constantly question themselves, asking how they can perform better. They prepare for the future, even if they do not always know what it will bring. And above all, they have a different mindset — they’re ready to adapt even while they’re focused on delivering great service in the present. You might summarize those ideas with the following six key takeaways from the preceding chapters.


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1. Family Offices Needa “North Star”

The most fundamental question of all is why each family office exists: what is it that family members want and need from the organization? To ensure the family office has the most solid foundations, there needs to be a clearly defined vision for the family and mission for the office. This mission may change over time – and it would make sense for family offices to revisit it periodically, working with families to ensure it remains appropriate as every other decision should flow from it.

2. The Right TeamProvides the PerfectCultural Fit

The talent available to any family office will determine its success — or otherwise. But recruiting the right team for a family office is as much about cultural fit as securing the right skills and experience. Unless the culture of the office reflects the priorities and philosophies of the family, the organization may fall short; recruiting new talent is therefore an exercise in finding people who will comfortably plug into that culture — and keep the office vibrant.

3. Build an InvestmentModel that is Fit forPurpose

There is no one-size-fits-all investment model for family offices dealing with clients whose needs and interests are so different. But while the family office’s investment model will rightly be tailored to the family, basic principles underpin the most successful endeavors. Smart family offices build their models according to the interests and expertise of their principals, focus their asset allocation strategy accordingly, and then build an investment team with the skills to execute it.


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4. Risk Management isa Broad Pursuit

Family offices rightly focus on the most obvious risks facing the families they serve — those threatening their financial assets. These span concerns such as investment performance, as well as security, both personal and online. At the same time, however, family offices must consider three less tangible risks that are often overlooked: the need to ensure continued alignment with the family, the pitfalls of failing to communicate effectively with the wider family, and the danger of being too rigid to evolve.

5. Technology Will be aCrucial Enabler

Too few family offices currently have the tools and technologies they need to respond to the increasing demands of the family they serve. To keep pace with the need for more granular and timely reporting, and with so many vendors flooding the marketplace with IT solutions, family offices should consider thinking strategically about how to upgrade their systems and software to get the right outcomes - including security and auditing ofprocedures and controls.

6. Prepare for Disruption

Disruption is the meteor that will change everything: there is no way to know when it will arrive or where it will hit, yet a collision is inevitable. Smart family offices are flexible and agile enough to cope with stresses that would break their more rigid counterparts — they even work together with their families to harness disruption as a force for good.



Seize the InitiativeTypically, over the long term, successful and vibrant family offices run themselves like businesses. They have a clear view of the future, with a tightly defined mission, and they are characterized by strong leadership, appropriate resourcing, high-caliber staff, robust policies and procedures, and a commitment to continuous improvement.

Does that sound like your family office? If not, maybe this is the moment to seize the initiative.

How can you better prepare for the challenges to come?

Do you have the right talent and technology?

Do you have the agility and mindset required to cope in an era of accelerated change?

We look forward to discussing these questions – and many more – with you in person.





For additional insights and resources, please contact your Fidelity Relationship Manager, call 866.273.2130, or visit familyoffice.fidelity.com.

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