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Strategic Assessment of Philanthropy: Lessons for the Joyful Giver

By Marc J. Sharpe, M.A., M.Phil., MBA, Patrick Moynihan and Seth Morton, Ph.D.

All major faith traditions, ethical systems, and moral codes emphasize the importance of charitable giving. Saint Paul puts it succinctly: “He which soweth sparingly shall reap also sparingly; and he which soweth bountifully shall reap also bountifully.” The stoic philosopher and Roman statesman Seneca offers a complimentary view: “We should give as we would receive, cheerfully, quickly, and without hesitation; for there is no grace in a benefit that sticks to the fingers.”¹

The highest goal then is to give cheerfully and without hesitation. However, the modern cynic, and probably you and I, for justifiably prudent reasons, would counter that one must also give responsibly. The joy of giving is easily crushed when donations produce little change or, worse, are wasted or stolen. By the same logic, increasing your philanthropic allocation will not proportionally increase your joy. Developing an informed approach is crucial.

Increasing Joy Without Decreasing Prudence

If giving should be joyful, then how can one increase joy without sacrificing the crucial role of diligence in order to make prudent and informed decisions? Looking through the lens of process can help diagnose and understand the overall ecosystem of a family office’s philanthropic work. A family office philanthropy team can enter the space with the best of intentions only to emerge jaded by bad faith actors and overly complicated structures. The result is that they become disenchanted with the potentially rejuvenating and rewarding work of giving, which then reverberates throughout the family office. In this scenario, rather than a source of joy, philanthropy becomes a burden, or just another way to build a tax efficient balance sheet. The fault doesn’t lie with any individual or organization, but rather emerges from a locus of forces and constraints that make it difficult to do philanthropy well.

The most fundamental force is simply the scale of the problem itself. An unintended consequence of being a global citizen is the inheritance and enormity of global problems. The scale of the problems are often so great that no individual or group of philanthropists alone can solve it. Against such large-scale problems, even large acts of giving appear like a drop in the bucket. But despite the enormity of the problems, and complexity of the system, one can still do philanthropy well. Doing so requires careful design and the ability to mediate a healthy cynicism with a sincere desire to improve the world in a meaningful way.

It’s for these reasons that family offices must proceed with the utmost care and caution — but proceed all the same. The rise of new qualitative metrics like Environmental, Social, and Governance (ESG) and the broader category of “Social Impact” evince the tidal shifts that are underway in public and private markets.² The rise of impact investing is in part born out of the realization that the private sector has an immense influence over a host of non-financial outcomes.³

Despite these commercial trends, there will always be a need for philanthropic citizens; if for no other reason that not every worthy cause can (or should) be profitable. The division between philanthropy and ‘for-profit’ impact investment is complex and merits further analysis, but for our purposes it’s important to simply note that there are some endeavors that produce desirable social goods but will never themselves be profitable⁴.

Measuring Giving Practice

To help your assessment of your own family office’s approach to philanthropy, we offer four assessment ‘metrics’ for consideration. These metrics are qualitative in nature and are meant to inspire critical thinking and analysis. Alongside these metrics is a heuristic that offers one way to think about portfolio construction. The most important take away comes from the ancients themselves: giving should be joyful. If you are happy and content with your giving practices, then continue in your path as a joyful giver.

1. Fluidity

The concept of fluidity assesses the overall speed of your giving. How easy is it for you to give? How long does it take you to get comfortable with a new organization? The counterforce to fluidity is drag. These are not moral terms; speed is not a universal good and drag is not a universal bad. Philanthropy is much harder to analyze than investing because the return on philanthropic giving is social, not financial. The nation’s wealthiest individuals have voiced this sentiment. Elon Musk, on January 7, 2021, tweeted that finding impactful ways to donate money is “way harder than it seems.” While Musk is at the beginning of his philanthropic journey, the Bill and Melinda Gates Foundation has 1,600 employees and an endowed trust of $49.8 billion dollars. Even with a large staff and annual contributions from Warren Buffet, the foundation supported grantees with only $5.1 billion in 2019.⁵ Based on the Gates Foundation public disclosures, the organization could easily sustain an annual giving budget of about $7.5 billion and still remain within their stated goals and objectives. The need and the resources exist, but the processes and systems increase the drag and slow down the overall impact.

From a macro perspective, the problem of an illiquid philanthropic ecosystem is evinced through the capital held up in donor advised funds (DAF).⁶ In 2018 total contributions to DAFs grew by 20% to $37.12 billion. Total charitable assets in DAFs were $121.42 billion in 2018. Despite the increase in funds, the aggregate grant payout rate remains around 20%. While the DAF payout rate is higher than what private foundations are required to give, there is a tremendous amount of capital stuck in DAFs. Unlike an institution like a foundation, the purpose of a DAF is meant to streamline the giving process between making the gift and deploying the gift. Part of the disjointedness emerges because the benefit to giving to a DAF is secured once the gift is made, not when the gift is deployed. In other words, the incentives to make the gift are higher than the incentives to deploy the gift. If DAFs only deployed 20% of their assets in 2018, does that mean that there were only $24.28 billion dollars of worthy organizations? Given the scale of the national and global problems and the amount of human and ecological suffering, it would appear that the problem is not the lack of need, but rather the lack of fluidity.

Your success as a giver is secured through trust and knowledge, both of which require time and patience. As a general principle, the more you trust the individual or organization, and the more you know the details of their organization, as well as their mission, the more quickly and fluidly your giving will be. The conclusion of this paper outlines a few practical strategies that can help increase the overall fluidity of your philanthropic practices without losing the important and necessary work of diligence and building an informed understanding. As a family office philanthropist, reflecting on the fluidity of your own giving practices may help you discover new ways to optimize your overall practice.

2. Transparency

There are two lenses through which one can analyze transparency: authenticity and integrity. Authenticity captures the extent to which claims line up with actions and intentions. Integrity speaks to how the practices of the organization fit within a larger social and economic milieu.

Authenticity is the surest way to establish trust in an organization. Do they do what they say and are their operations open for careful diligence? In extreme cases, inauthentic organizations may be acting fraudulently, however a more common occurrence is simply the marketing claims of the organization not living up to the experience and practices on the ground. Because there is such a strong connection between the story of an organization and their ability to attract donors, sometimes the claims of the organization outgrow the operations. Stakeholder analysis as well as program and financial analysis and track record are critical factors for any analyst here.

The concept of integrity, in this instance, refers to the human, social, and economic stability of the mission of the organization. A clear example of an unstainable practice is found in the practice of donating basic supplies – like clothes – to poor nations. In the case of Haiti, donated T-shirts end up being sold for pennies on public markets. The result disrupts the local economy, puts skilled craftsman like tailors out of work, erodes community-based knowledge, and creates a dependency between the developed and undeveloped world that cannot be easily undone.⁷

There’s no easy way to analyze the sustainability of an organization but empowering your team to investigate the secondary and tertiary consequences of an organization, with the same level of rigor that they bring to private investment opportunities, and working with experts in the space will help build a more sound and thoughtful overall strategy and mission to your philanthropic activity. Becoming a subject-matter expert in a specific region or theme allows you and your team to build a specific knowledge base in order to understand the major players and the best and most effective strategies.

3. Efficiency and Effectiveness

While the concept of fluidity and drag represent one way to understand efficiency, the concept broadly speaks to all the forces that either impede the flow of capital or dilute the use of capital. Drag is both quantitative and qualitative. There are ways to measure the efficiency of the gift, but one must also reflect on the other forces that are causing one to “drag their feet.” Is the gift outside of your comfort zone, do you have reservations about the organization, do you question the larger impact and purpose of the gift, are there competing interests that make an equally strong case for another kind of organization?

As was the case with DAFs, analyzing the relationship between the dollars committed vs the dollars deployed is one way to measure overall portfolio efficiency. Another equally important metric is the measurement of operational overhead vs deployed capital. It’s not always the case that low overhead costs mean well managed money. More important is the organizations justification and analysis of their own overhead costs and how those line up with your own ideas. Robust organizations that are looking to build a charitable legacy need to create worthy incentive structures in order to attract and retain top talent. Similar to building a family office team, finding the perfect balance between operational efficiency and rewarding incentives is an ever-evolving dynamic. When it comes to philanthropic activity, the best place to begin is simply with validating the claims of the organization itself. For example, “Food for the Poor”, got into trouble because its marketing claims used cash and noncash donations to appear much more efficient than it actually was. Eventually the state of California issued a cease-and-desist order to “Food for the Poor” and this is a cautionary tale in the importance of careful diligence⁸. Although your gifts will not be measured through an ROI, it is vital to work with experienced professionals that can help identify robust, authentic, and well-designed organizations that will help you achieve the social objectives of your philanthropic gifts. Those that you empower to help steward your capital toward these ends must be as diligent and rigorous as the investment team that structures and negotiates private investment or public securities.

4. Joy

It’s difficult to write about joy in a rigorous way, but it may be the most foundational and important ‘metric’ on this list. Giving should be joyful. When organizations you’ve given to in the past call you, or your philanthropy team reaches out to have a meeting, do you feel joy or dread or nothing at all? If the feelings are negative, then it may be time to undergo a deeper review of your overall strategy and goals. If you already experience joy, then how can you continue to foster and grow that experience for yourself, your team, and your peers? One important relationship is the connection between joy and knowledge. By joy, we’re not referring to the superficial rush one experiences when one makes a large gift. The kind of joy outlined by St Paul and Seneca is sustainable and grounded in knowledge. Making informed choices and knowing that your actions are making a real and significant impact in the world create a foundation for becoming a joyful giver.

Putting These Metrics into Practice

Hopefully these four metrics help put your own giving practices into perspective. If that’s the case, then there are some easy-to-implement strategies to improve your giving practice. First: Curate your portfolio. Pick a few organizations to get seriously involved with. Organizing around a specific theme is a great place to start. Second: Become a subject matter expert. Build a knowledge base around the theme, expert writers and thinkers, and major organizations and efforts. Third: Identify opportunities for outsized impact. Large gifts can seem small when given to massive foundations; alternatively, local organizations or more niche strategies may allow you to make a massive difference within a particular area. Extra diligence is required when working with newer organizations, but the opportunity to grow alongside an organization while it builds out its capabilities Finally: Become engaged with the community. Get to know the groups that you’re most active with and look for opportunities to become a board member or advisor.

While these strategies offer a framework for deploying enlightened capital, you can supplement this strategy with a separate pool of funds for more spontaneous gifts, akin to a pipeline for future opportunities and research. From a risk management perspective, 80% of your allocation may be dedicate to your core area, while 20% you keep on reserve for new opportunities.

We hope by putting the above strategies in place it will help you to add more joy to your giving!

About the Authors

Marc J. Sharpe is the founder and Chairman of TFOA, an organization formed in 2007 to provide a forum for education and networking and to serve as a resource for single family office principals and professionals to share ideas and best practices, pool buying power, leverage talent and conduct due diligence. Mr. Sharpe also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and SMU Cox School of Business. Contact: marc@tfoa.me

Patrick Moynihan is a leader in the nonprofit space with experience as an educator, a community builder, who spent the past 25 years successfully reviving and then expanding an educational institution, in Haiti, one of the Western Hemisphere’s poorest nations. Patrick has seen the best and the worst in the global philanthropy and he launched Moynihan Philanthropic Advisors (MPA) in 2020 to share his knowledge and help funders gain the confidence to invest their philanthropic dollars more quickly and accurately, increasing its impact. Patrick graduated magna cum laude from Brown University and earned a Master of Arts Degree with distinction in Religious Studies from Providence College. Ordained a permanent deacon for the Roman Catholic Diocese of Rockford (IL) in 2001, he is currently assigned to St. Sebastian, Sebastian, FL and lives with his wife, Christina, in Vero Beach, FL.

Seth Morton, Ph.D. has served family offices in areas of investment diligence, execution, and management; governance; research; communications; and multi-generational, sustainable legacy planning. He seeks to improve team performance by cultivating learning-focused and communications-driven processes that deliver exceptional results. He and his family are currently based in Texas.

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

How Should Family Offices Approach Digital Assets?

By Marc J. Sharpe, M.A., M.Phil., MBA and Seth Morton, Ph.D.

Introduction

“Fear of Missing Out” (aka FOMO) is that anxious feeling of not being included in something with others, such as an interesting or enjoyable activity. The concept was originally used to describe social behavior, a form of self-inflicted peer pressure to participate in social activities. More recently the term has been taken up by the behavioral finance community to describe how investors follow the trades of others in order to “not miss out” on the next big thing. FOMO is a common experience, but in the world of investing it is usually associated with poor decision-making. After all fear rarely provides a solid basis for clear, rational decision making.

The massive breakouts in Bitcoin and other digital assets in the past few years have created many FOMO inducing moments. At The Family Office Association (“TFOA”) members experienced such a moment in late 2017. TFOA often hosts dinners for our family office members to meet with industry experts and learn from leading practitioners about a variety of topics. Over the years we have found that one of the best ways to diligence a manager is during a private dinner where questions and ideas can be openly asked and answered. Our dinner conversations tend to be both candid and fun; and our diverse membership of experienced family office CIOs, CEO’s, Principals and Presidents provide unique and different perspectives.

For this particular dinner we invited the head of a relatively new crypto fund to host a dinner for members in the private room of Pappas Bros. Steak House in Houston, TX. An impressive oak paneled room with wine racks from floor to ceiling offered members the intimacy of a closed door private meeting and the perfect setting for friends and colleagues to visit. The theme of the dinner was “The Facts, not Hype, of Crypto and Blockchain.” At the time the fund’s assets under management were small, around $40M, but the founder was exceptionally knowledgeable about the space and members were keen to learn more about what was really going on and how they should best position themselves. The conversation was fascinating. Many questions were asked, steak eaten, and wine drunk. However, it was perhaps a little early in the evolution of crypto for some of the more skeptical participants to see how this interesting new technology might translate into a viable asset class. Other members saw the potential for asymmetric upside and followed up with the manager after dinner to learn more. The skepticism of those members who chose not to invest wasn’t entirely misplaced as, five years later, digital assets are still perceived by many to be pure risk capital. After all, not many assets maintain a valuation range from zero to infinity, which is what digital assets currently appear to offer. For those that didn’t choose to invest, it is understandable that at that time the opportunity appeared too aspirational and too technical. Five years ago, there was still much to understand about this new asset class. Today, the fund manager who hosted that dinner now overseas an investment business with more than $6.5 billion in assets under management (with much of that growth from investment performance). Like we said, the experience created a FOMO inducing moment!

In hindsight it was an obvious bet, but the fact of the matter is that in 2017 the most common question surrounding crypto was simply “what is crypto?” Today the question is more along the lines of “what is your crypto strategy?” The conversation has moved considerably in five years. Having said that, and despite how much more knowledgeable we all are today, many family offices are still in the process of developing their own approach to digital assets.

According to UBS’ 2021 Global Family Office Report, 13% of family office respondents have already invested in cryptocurrencies, and an additional 15% have it under consideration.¹ Family offices are ahead of institutional investors, who are just now beginning to dip their toes into the space, but the asset class still remains outside a traditional asset allocation. As family offices continue to develop their post covid allocation strategies in parallel with the increasing awareness and adoption of digital assets from a broad spectrum of investors (from retail to institutional), it is more important than ever for families to consider how digital assets may or may not fit into their allocation strategies. To that end we would like to offer some perspectives to help frame how family offices might approach the topic.

1. Risk Capital

First and foremost, digital assets should be considered pure risk capital. And from a family office perspective, it makes sense to frame a crypto strategy within the overall risk capital budget. Digital assets are new, largely unregulated, and based on technology that is quickly evolving. The lack of regulation has made it exceedingly difficult to invest with conviction for any professional investor or those with a fiduciary responsibility to others. This framework is changing, and institutional investors are beginning to allocate a portion of their risk budget toward digital assets. The continued development of institutional fund strategies is accelerating that process. From a risk calculation perspective, a relatively small allocation can yield tremendous upside.

New coins and tokens can be quickly developed with open source coding, but the resilience of these new coins is largely based on how many people invest, adopt, and remain committed to a particular coin. This means that many emergent coins are very much tied to the success of their marketing campaigns. Therefore, picking coins carries the same kinds of risks as betting on horses at the racetrack – while they look promising, with great form, there’s no guarantee they won’t fall at the first furlong – so finding experts in the space and investing in the underlying technology seems more prudent than simply following Reddit discussion boards or other online communities.

Crypto bears have pointed to China’s recent regulations and the banning of miners while bulls point to El Salvador’s President Bukele who named Bitcoin legal tender for the country in 2021. The more established crypto currencies, like Bitcoin and Ethereum, have established a much larger and stickier share of the market. In the case of Bitcoin, the algorithm is designed to produce a fixed number of total coins, which will be completely mined by around 2140. Although the technology is new, the concept of limited supply serving as a store of value is not. However, if your primary motivation toward Bitcoin is as a store of value, then you must be mindful of how you plan to access that store of value. This is as much a question of privacy and security logistics as it is technology. Physical wallets allow you hold your coins but add an additional layer of risk. If the drive is lost or destroyed, your coins are gone as well. On the other hand, in a situation where you need access to your coins quickly, nothing can beat the speed and efficiency of a digital wallet that you fully control.

2. Patient Capital

Family offices are uniquely positioned to take advantage of investments over a long time frame. Many have the luxury of being able to deploy capital over generations. While Bitcoin prices may swing wildly on any given day, if your conviction about Bitcoin is based on a belief that it is Gold 2.0 and a better store of value, it’s not unreasonable to conclude that given the limited supply and algorithmic nature of the blockchain, the ultimate value of Bitcoin move higher over the long term.

Currently the IRS treats virtual currencies as property, and they are taxed in accordance with capital gains. However, other government agencies are arguing for different classifications. Not surprisingly, the SEC sees digital assets as securities while the CFTC believes they are commodities. While it is reasonable to assume a “J-Curve” pattern with the asset class in relation to future regulation – the assumption being that regulation will eventually drive down valuations as some investors don’t agree with the regulatory framework, but that over time regulation will make it easier for institutional investors to move in with greater force, thus raising long term valuations far above the initial dip – nobody knows exactly what the time frame for such a development might be. In the meantime, digital assets remain risky by nature but over the long term winners will emerge and there can be no denying that blockchain technologies offer a tantalizing prospect for decentralized finance and smart contracts.

3. Flexible Capital

In addition to patient capital, families also have access to flexible capital, namely, they can deploy capital with a flexible mandate that does not only require profit maximization, but also take into consideration legacy and impact. From this perspective, an allocation to digital assets must fit within an impact investing or ESG framework. An investment in digital assets should be flexible in the sense that it may generate positive or negative social or environmental returns, but it should also be tactically flexible given the rapidity of development within the space. Today, each Bitcoin requires energy consumption totaling 1173 kWh/ per transaction, which in U.S. energy terms would equal about six weeks’ worth of average household electricity.² Other coins and new technologies are significantly driving down the energy load for transactions. Questions around energy usage will continue to be a feature in the discussion around digital assets. It is a complex topic. While digital assets appear to use more energy than other forms of currency, is anyone tracking how much energy is expended to mine for gold or run a global fiat banking system? The relative impact of digital asset energy usage needs to be weighed against the environmental costs of producing other stores of value, like gold mining, which rely on heavy machinery and industry. And digital assets have the ability to utilize forms of energy and electricity that would otherwise be wasted or are currently underutilized. Of course, heavy industry also benefits the economy by creating jobs. Given the complexity of the subject, the many competing narratives probably tell you more about personal biases towards crypto currencies than anything else.

For family offices, what is most important is understanding what the question of digital energy means for you, and this question highlights the importance of flexible capital. If a family office can’t reconcile the energy requirements of certain digital assets against their ESG mandate, there may be other strategies that better align with their goals. For example, Bitcoin mining operations that seek to stabilize and more efficiently utilize the electricity grid may be one such example. Indeed, the speed at which new technologies are coming online to solve these issues is startling, even within the context of a disruptive sector. On the other hand, placing too much faith in technology to solve problems is a common fallacy, so it is prudent to approach new solutions with a certain amount of skepticism³.

Beyond FOMO

Trains or tulips? As we think about digital assets in the context of the long history of capitalism, examples of transformative industries like the railway industry come to mind; followed quickly by the famous Dutch tulip craze with its ultimate and inevitable flop. Will digital assets prove to be more like the former or the latter?

Perhaps it’s still too early to say, but even if one’s convictions are on side of trains rather than tulips, it’s important to remember the rail industry took many years and saw many failures before stabilizing into a successful system of logistics and travel. History teaches us that family office allocators can’t afford to make decisions based on hype or excitement. Fortunately, in addition to all the FOMO around this asset class, there is also a growing body of knowledge and resources to help develop strategies for prudently allocating to digital assets.

Since the Great Recession, the market size of crypto currencies has swelled from zero to trillions of dollars. That’s a lot considering only a few years ago Bitcoin investors were perceived as fringe actors in a speculative technology with mysterious origins and a uniquely libertarian philosophy. Many of these pioneers are now immensely rich and the future for crypto, decentralized finance, blockchain, and the metaverse, seems boundless and unlimited. While family offices should proceed with caution, today there is no excuse for not ‘going down the rabbit hole’ to better understand digital assets and develop an approach that fits their strategic asset allocation goals and objectives.

About the Authors

Marc J. Sharpe is the founder and Chairman of TFOA, an organization formed in 2007 to provide a forum for education and networking and to serve as a resource for single family office principals and professionals to share ideas and best practices, pool buying power, leverage talent and conduct due diligence. Mr. Sharpe also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and SMU Cox School of Business. Contact: marc@tfoa.me

Seth Morton, Ph.D. has served family offices in areas of investment diligence, execution, and management; governance; research; communications; and multi-generational, sustainable legacy planning. He seeks to improve team performance by cultivating learning-focused and communications-driven processes that deliver exceptional results. He and his family are currently based in Texas.

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

Clubs & Associations: What would Groucho Marx Do?

By Marc J. Sharpe, M.A., M.Phil., MBA and Seth Morton, Ph.D.

Introduction

New and established single family offices are beset on all sides with family office networking opportunities. Most of the self-proclaimed family office networks are run for-profit, with a few notable ‘non-commercial’ exceptions. Some of the networks look like multi-family offices, or loosely affiliated groups of family offices; others are simply trying to cobble together industry-specific conferences or deal platforms. When it comes to the issue of how best to navigate these networking opportunities, we recommend a Marxist approach. Not Karl, but Groucho: “Refuse to join any club that would have [you] as a member.”

Groucho’s self-deprecating criticism of club culture reminds us to always proceed with skepticism and caution. His humorous refrain raises a question about the core intention of any club that is targeting you as their ideal member. This question should always be at the front of one’s mind when considering joining any family office network or community or attending any family office conference.

The world of family offices is growing, but it is still relatively small. While multiple reports have put the number of family offices around the world in 2019 at around 7,300 — which represents about a 38% increase over the last two years — we believe the number of true single family offices to be considerably smaller.¹ This small, asset rich, but growing market has seen a precipitous rise over the past five years in the number of networks, clubs, and associations that claim to connect and serve family offices.

Despite the rarity of true single-family offices — especially multi-generational, sustainable family offices, with stewardship across the entire spectrum of a family’s assets and wealth — the family office space has become increasingly filled with ‘everybody and their dog’ claiming to have a family office. Part of the problem is that the term ‘family office’ is used broadly and loosely; and what constitutes a family office for some, may not rise to the same level for others. As a corollary to this increase in the recent preponderance of family offices, there is an associated rise in the number of family office networks, associations, peer groups, and third party service organizations claiming a foothold in the space. The result of all this growth is a feedback loop where more and more high net worth investors claim the status of family office (than probably should) and more and more groups claim to have access to networks of family offices (than probably exist).

When faced with the noisy complexity of this situation, Groucho’s famous quote rings like a bell. Although most wealthy families are used to managing the social and business responsibilities that come with their status, there is a qualitative and quantitative difference with the kinds of groups and organizations that are increasingly clamoring for attention within the single-family office community. Simply put, it is often difficult to differentiate one group from another; and it is becoming increasingly harder to understand the true value proposition for the family offices they claim to serve. At the same time, family offices are increasingly seeking a network of their peers to help them with a host of issues — whether it be a ‘safe’ place to ask questions, to share due diligence, or to pool capital for (no or low fee) co-investment opportunities.

In today’s competitive marketplace, many family offices are looking to deploy their private capital in non-banked, proprietary opportunities; so, the promise of a network of other family offices with whom to co-invest with is highly desirable and very tempting. As family office professionals, it falls to us to understand and evaluate the networks and service providers that are pitching their products, services, and relationship capital. That journey begins with understanding the various business models and alignments (or conflicts) of interest that they entail.

In an effort to provide some clarity, this whitepaper offers an analytical framework to categorize the many groups one might encounter within the family office ecosystem. We suggest that the various business and revenue models they embrace should frame how you think about these groups; more than the service claims they make. With that in mind, we believe three broad business models of family office networks currently exist:²

• Member-based Models
• Commission-based Models
• Advertising-based Models; and

Similar to any private investment opportunity, our overall methodology is to subject these organizations to a certain amount of diligence. In fact, every family office network or partner group should be evaluated like a private equity opportunity. Good diligence begins with a clear vision of the desired outcomes. Like the development of an investment mandate, the family office should create a strategy or mandate for their objectives with these network opportunities. Having a clear idea of what you’re looking for from the family office community you would like to join will make working with these groups much easier and more productive.

Member-based Model (MBM)

Member-based models provide, for a fee, an exclusive network for family office principals (and sometimes also professionals) seeking to learn from one another and stay current on the best-practices in the family office space. When evaluating an organization with a member-based model, one must weigh the exclusivity of the group against the size of the organization. Exclusivity considerations include the quality of the membership, the number of members and how they are organized, and the culture and principles that members abide by. Exclusive membership is fairly easy to evaluate: do they limit membership to single family offices (and perhaps ‘closed’ multi-family offices) only? How do they verify their members? An extremely exclusive group may function more like a small social organization, while a large group with a national presence may function more like a pseudo-industry association. Can they offer the best of both worlds, with local trust and national (or international) reach? Organizations that manage scale and growth through autonomous regional chapters may be able to strike a happy balance between these two ends of the spectrum, so be sure to ask the question!

The issue of group norms, organizational culture, and operating principles speaks to the kind of member participation the group nurtures and encourages. It is important to align your own desired outcomes with the kind of participation the group fosters. The key issue here will turn on matters of privacy, confidentiality, and whether active solicitation is allowed or frowned upon. Organizations can quickly devolve into trading platforms if the main activity becomes simply pitching deals. While this is not necessarily a bad thing — especially if you’re in the market for deals — one consequence of a “deals-focused” association is that the spirit of collaboration and peer-learning usually takes a backseat (and at the extreme the group breaks apart as family office members compete for ‘the best’ deals). In addition, if privacy and confidentiality is not strictly enforced as a core principle of the group, then don’t be surprised if your name and contact details are sold on a list and your family office becomes inundated with calls from a long line of service providers.

Member-based models typically finance their operations through membership fees. Besides keeping the lights on, a reasonable level for dues shows commitment and some skin in the game to the network from members. However, some member-based family office groups charge fees in the tens of thousands of dollars. They aim to be exclusive, but often experience significant turnover as their value quickly diminishes, and family offices are unable to justify the expense. If possible, examine how other peer groups interface with the network. Is there a sizable contingent of family offices that regularly participate in events, or do family offices come and go with limited engagement?

Peer-networks are a special class of member-based groups and deserve particular attention. A true peer network allows family office principals and professionals to interface directly with each other in order to learn from one another and build bonds of friendship and trust. The true test of a peer-network is the peer-group itself. The best peer-groups provide opportunities for principals (and professionals) of family offices to meet in a commercial-free environment. In the best cases, the digital platform, annual or semi-annual meetings, and overall engagement with the network all point to a community with diverse interests and a shared purpose. While there are many peer networks forming, there are only a special few who have survived the test of time and continually add value to their members in a safe and trusted environment.

Commission-based model

Commission-based networks are ‘for-profit’ enterprises that generate income through commissions associated with executing commercial transactions. Like any for-profit business, profit motive determines action, and these groups are incented to sell investments or deals, preferably in volume. In the strictest sense, these groups aren’t really family-office networks, but rather they are sell-side focused businesses or deal platforms. However, it’s important to consider these groups because they often claim to associate with family offices and represent large networks of family office investors. Occasionally, these groups emerge from a profitable family office investment practice. If a family office investment team is growing and building a profitable base, they may seek to register themselves as a broker-dealer and become their own business. While these businesses may offer ancillary services, because of their close connection with family offices, the fundamental relationship they offer is deal-focused and commercial. As their primary interest is in generating transaction or commission-based revenue, it’s best to let your dedicated family office investment team evaluate the viability of the commercial offering before fully committing to any network opportunities.³

One variety of a fee-based model to consider is the multi-family office (MFO), operating as a Registered Investment Advisor (RIA), which typically charges a fee based on assets under management (AUM) and occasionally assets under supervision (AUS). One important distinction to understand and evaluate is whether these groups operate as an ‘open’ or a ‘closed’ MFO. Open MFOs have a core group of family office clients but offer a set of services to any potential client who is willing to pay them a fee. Closed MFOs have a finite set of families that agree to share overhead and pool buying power; and are generally not soliciting for or open to new clients.

Within the spectrum of open/closed MFOs, there is a variety of different kinds of service and/or collaboration models. At one end of the spectrum, an open MFO looks very much like an RIA, perhaps with a few large family office clients that anchor the business. On the other end of the spectrum, a closed MFO may look like a single-family office with a complex structure of sub-organizations, estates, and trusts. From the perspective of evaluating potential partnerships with groups like these, the naming conventions are not as important as the working relationships. One important question to ask yourself when evaluating these groups for your own objectives is whether or not you will be treated as a client or a peer. If the answer is the former, then you’re likely speaking with an open MFO that faces the same incentives and challenges as a typical RIA. If it’s the latter, then you may be dealing with a closed MFO, which has a different set of challenges (which will require a future whitepaper from us at a later time to explore in depth!).

Advertising-based model

Viewed in the context of fee-based models, the advertising-based model appears at first to solve for the issue of mis-aligned profit-motives by generating profits for the family office network, club, or organization through the sale of advertising relevant to the family office ecosystem. As a result, these networks often organize events and engagements that require little financial commitment from a family office. Typically, these family office networking organizations rely on a diverse array of advertisers and sponsors to cover the costs. In the case of large institutions looking to promote a specific area of their business, the organization itself will be its own sponsor — like a private bank or insurance company, for example, hosting an industry-specific conference.

However, to borrow a concept from digital marketing and the tech industry, it’s important to keep in mind that “when the product is free, you are the product”. In other words, these organizations invert the commercial-based model by creating a context where your family office will be “sold” to any commercial interest willing to pay for the lead. We don’t present these relationships in stark terms in order to offer critique, but simply to lay out the fundamental business dynamics that are at work here. Indeed, this model is one of the most common and can produce “win-win” scenarios: single family office professionals gain valuable insights into best practices and new industries, new relationships are forged, and advertisers / service providers may gain important new clients. As in the discussion above, it is always important to understand the motives of the involved parties: what is the objective of the organizers, advertisers, and your fellow participants? And, how do these objectives line up with the objectives of your family office? Special attention should be paid to any data that your family office provides. As we have seen in digital marketing trends, the data generated by users is often more valuable than the product itself.

Final Thoughts

While the number of family offices and family office networks appears complex, our advice for building a peer-network of like-minded single family offices is simple: begin with local and regional groups, consider the underlying business models that drive either profitability (in the case of your commercial enterprise) or mission (in the case of a peer network), and align your organization with groups that share your objectives. When evaluating the merits of any individual organization, seek a diverse array of researched and practiced experts. Ultimately the network that you build is a reflection of your own organization and the mission that is driving your family office. The relationships and goodwill that are forged through these groups can last a lifetime. The task may be daunting, but the rewards can be plentiful. Caveat emptor!

About the Authors

Marc J. Sharpe is the founder and Chairman of TFOA, an organization formed in 2007 to provide a forum for education and networking and to serve as a resource for single family office principals and professionals to share ideas and best practices, pool buying power, leverage talent and conduct due diligence. Mr. Sharpe also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and SMU Cox School of Business. Contact: marc@tfoa.me

Seth Morton, Ph.D. has served family offices in areas of investment diligence, execution, and management; governance; research; communications; and multi-generational, sustainable legacy planning. He seeks to improve team performance by cultivating learning-focused and communications-driven processes that deliver exceptional results. He and his family are currently based in Texas.

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.