Archive for: Whitepapers

Impact Investing: What Family Offices Must Consider

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

John D. Rockefeller retired in 1897, at 56 years old, having accumulated more private wealth than anyone in the history of capitalism. His retirement from for-profit enterprise made way for an equally vigorous career as a philanthropist. As a devout Baptist, he believed that it was his duty to continue working, but now instead of trying to make profit, he sought enterprises that would allow him to give his money away. What we might refer to as “The Rockefeller Model,” divides one’s career into two distinct halves: a career of wealth accumulation and a career of charitable activity. More contemporary philanthropic standards, like The Giving Pledge, and the rise of large foundations sponsored by family wealth, exist within, and expand upon the Rockefeller model.

While that model will continues to this day, with Bill Gates as the obvious modern day analog to John D Rockefeller, a new paradigm is emerging, with a set of practices that are reconfiguring how people think about business, capitalism, wealth accumulation, philanthropy, ethics, investments, returns, and value. Terms like “conscious capitalism,” “double bottom line,” “impact investing,” “environmental, social, & governance investing (ESG),” “sustainability,” “mutual aid,” “shareholder vs stakeholder outcomes” are introducing a new lexicon into the world of philanthropy and investing. The result is that the bright line between for-profit business and mission-driven philanthropy is becoming murkier and murkier every day.

In a generous reading of the situation, entrepreneurs and analysts are asking good-faith questions about the relative efficiency of capital. They ask, is it possible to structure a for-profit business in a way that would relieve the pressure for philanthropic activity altogether? Would that not be a more efficient use of traditional corporate capitalism? In a less generous reading, these activities greenwash (sometimes dubious) investments with marketing designed to pull at the heartstrings and make it appear a little more tolerable to allocate good money into questionable deals¹.

While it’s useful to keep the good faith and bad faith renditions of these arguments in mind, the primary purpose of this whitepaper is focused on understanding the landscape of impact investments, and defining what is often a vague and ill-defined nomenclature, in order to help family office investment teams navigate these murky waters. In the face of a rapidly changing environment, it’s all the more important to understand the ground you’re standing on. In the context of impact investing, that means being able to make distinctions between the major trends in impact investing in order to develop your own methodology for incorporating these ideas into your diligence process. It’s also important to maintain a bright line distinction between for-profit and not-for-profit activity. While the landscape around for-profit business is evolving, that is no excuse to simply collapse mission driven goals together with for-profit activity. At their root, these designations are important tools in your total balance-sheet, especially as you’re looking to optimize tax efficiency.

Defining Terms

The four most common terms used to describe these emerging strategies are Impact Investing, ESG (Environment, Sustainability, & Governance), Sustainability, and Conscious Capitalism. These terms overlap in many ways and differ in others. In casual conversation they’re often used confusingly and interchangeably. What these terms share is a commitment to a profitable outcome, measured financially, as well as a commitment to another set of values, measured according to a different set of metrics. Additionally, there is a shared belief across these philosophies that the consideration of non-financial factors should not come at an expense of the ultimate bottom line. To the contrary, the position that these investment philosophies uphold is that a more complete understanding of impact and investment outcomes will ultimately increase the value of the investment.

Impact Investing

The term “impact investing” is, in our opinion, the broadest, most all-encompassing, and least meaningful. Looked at from one angle, almost anything can be construed as an “impact investment.” This very article has used the term “impact” because of its capaciousness, not because it carries with it a special meaning. “Impact Investing” is a placeholder term. It shows that the organization using the word is either making a space for further definition or is trying to reframe (or greenwash) an existing investment or strategy in order to make it seem more impactful than it might otherwise be.

The problem with the term is that there are no standards or considerations as to what would make an investment an “impact” investment. As a family office investment analyst, you should engage with the term “impact” with care. If you’re evaluating an “impact investment,” be sure to drill down into the specific ways the sponsor understands and defines the term. In the best-case outcome, pressing this line of questions will reveal a more comprehensive strategy; in the worst case, the term will be revealed as a largely meaningless designator, like the word “unique.” In either case, it falls to you to evaluate of the true investment impact and the extent to which it aligns with your family office goals and values. Be aware that the term impact may not carry the weight you want it to. Expect that an engaged audience will ask you to further define what you mean by impact.

Sustainability

Although “sustainability” is a popular concept, in the realm of impact investing it is not much more meaningful than “impact.” A sustainable investment could be focused on a set of environmental outcomes, as in a company that is not degrading or damaging the local community or environment; or it could refer to a capital strategy that is “sustainable” in that the business has a low turnover, efficient with capital, and requires little from outside managers.

Whereas “Impact” is ambivalent and omnidirectional in its provenance, sustainability adds a sense of efficiency. A business might qualify as sustainable if it has a high employee retention rate, efficient capital management, or a low energy or environmental impact. In contrast to “impact,” “sustainability” also imparts a notion of maintaining the status quo. To sustain is not necessarily to change, and this might be the most important difference between it and impact.

One way that “sustainability” becomes more meaningful is through an organization like US SIF, The Forum for Sustainable and Responsible Investment. US SIF takes “sustainability” as their watchword, and underneath that term they build an understanding of environmental, social, and governmental metrics (ESG). The mission statement of US SIF is to “rapidly shift investment practices towards sustainability, focusing on long-term investments and the generation of positive social and environmental impacts.” US SIF expands this mission through its declaration of values; “environmental, social and governance impacts are meaningfully assessed in all investment decisions resulting in a more sustainable and equitable society.”² US SIF connects with international advocacy groups; offers education for asset managers, retail investment professionals, financial advisors, and community-based investment platforms; develops policy proposals for investments via the SEC; and acts as a central hub to build a network of investment professionals that are committed to a shared set of standards for sustainable investments.

While the US SIF is a major player in the space, it is not all things to all people. They work with some large family office foundations, however the major focus of their education and advocacy is directed toward retail investors and investment managers. Family offices often have more institutional needs and capabilities, as such these retail-focused offerings should be read through the lens of your particular family office needs, wants, and capabilities. If “sustainability” is the key word that is driving your family offices’ efforts in impact, be sure to carefully define the term according to your target outcomes.

Environment, Social, and Governance (ESG)

ESG Investing was one of the first technical approaches to frame this kind of thinking within the context of more traditional securities analysis. The CFA Institute uses ESG in order to mark a set of risk-mitigating protocols and considerations that any securities analyst or marketing firm should utilize in an effort to market or analyze a security.³ The terms themselves are meant to be somewhat open to interpretation, because the ultimate outcome that the CFA wants to cultivate is one focused on a more comprehensive risk matrix. As such environmental may refer to specific environmental risks associated with an energy plant or with the health and safety concerns within an oil refinery; social risk might refer to strained relationships between management and the labor force; and governance might refer to potential regulatory changes or shareholder activism.

In the rather dry landscape of risk-mitigation, it’s no wonder why an organization like US SIF is compelled to overlay ESG with their concept of sustainability. ESG on its own does not necessarily lead to an “impact” or “sustainable” outcome. While ESG is the most robust framework for analyzing and measuring various forms of risk analysis, it’s also the easiest to “greenwash” investments, because the metrics themselves do not require any special lens in order to qualify as a sound “ESG” measured investment. On their own, ESG considerations are helpful in producing sound analysis, but they are insufficient in underwriting an impact outcome on their own. When evaluating ESG opportunities, pay special attention to the values that are motivating these metrics. Is it coming from a well-grounded theory of sustainability or mission-driven objective, or is it merely a more comprehensive way to risk-mitigate the security or investment? Or something worse, an attempt to greenwash an investment by ticking the boxes on an ESG checklist?

Conscious Capitalism

In comparison to the three terms above, conscious capitalism simply introduces a new lexicon to what is an old conception of how capitalism, when done right, should be practiced. The term as its commonly used, refers to a set of practices that aim at achieving a broader and deeper understanding of capitalism as an economic endeavor. The intended result of these practices is twofold: First, the shift of focus moves from strictly maximizing (short-term) shareholder value to include optimizing outcomes for a broader set of stakeholders. These stakeholders may include anyone who is affected by the business’s activity. When decisions are made in light of stakeholder outcomes, then stronger (long-term) alignment emerges between the business, its owners, operators, customers, and the community. Second, the time-horizon expands to consider longer-term outcomes. Consciousness in this sense not only refers to an awareness of how decisions you make today have an impact today, but also how the decisions you make today will impact your stakeholders further out into the future. These two insights are intertwined, but distinctly refer to two different sets of analytical and operational practices.

Organizations such as Conscious Capitalism Inc., a non-profit organization, supports business leaders that want to incorporate these kinds of practices into their business culture. Other such organizations – like Good Business or Certified B Corporation – are similarly aligned non-profit organizations that hope to cultivate a new understanding of business. Their credo is as follows: “We believe that business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had. But we can aspire to even more.”⁴

From this credo four core themes emerge: Higher purpose, stakeholder orientation, conscious leadership, and conscious culture. Unlike ESG risk analysis, or even the educational tools offered by an organization like US SIF, implementing conscious capitalism in your investing strategy requires a more holistic and philosophical approach. To put it bluntly, it requires that you take seriously the “conscious” part of the equation. The ultimate purpose of conscious capitalism is the development of a prosperous ecosystem, one that encompasses all of the terms discussed above. In some ways this is the highest bar to achieve as a portfolio manager, but it is also the most rewarding.

Conscious capital practitioners believe that private enterprise has an important role as a force for good in the world. If your family office is looking to develop a more sophisticated approach to ‘impact’ investing, we recommend this approach as one worth exploring further. Of course, as with all investment-related endeavors, the more you know about your desired outcomes, the more you can navigate these waters.

Final Thoughts

Impact advocates insist that there is moral and financial premium that is earned through impact investing. According to this view, impacting investing is not only good, but it is also more profitable in the long run. In some cases, this may be the case, and over time that may be easier to achieve, but more often than not there will be trade-offs and sacrifices that a Chief Investment Officer will have to make in order to achieve a desired impact target. Given the potential trade-offs, it is especially important to define what objectives and concepts are most important to your family office investment plan and to organize your portfolio according to how your current holdings line up with that plan. With that initial knowledge you can start to implement an allocation strategy that slowly incorporates more opportunities that achieve your desired impact outcomes while maintaining overall fund performance.

The world of capital is a lot more complicated than it was for John D. Rockefeller. While there is a temptation to think that the abundance of new terms related to investing with ‘impact’ is merely the clever proliferation of greenwashing tactics, the truth is that these terms point to a vigorous and ongoing secular shift, raising fundamental questions about best practice for a family office’s investment capital. This whitepaper only scratches the surface of a topic that is on the mind of every investment professional and institution today. The sheer breadth of the terms we discussed speaks to the many challenges that will likely cause this subject to remain ongoing and undecided for the foreseeable future. Looking ahead, we hope to see the emergence of more concrete standards and metrics. In the meantime, there is an opportunity for family offices to lead by example by simply initiating these conversations and beginning to implement specific strategies.

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 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.

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 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.

Theory vs. Practice

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

What is a Multi Family Office?

The concept of the Multi Family Office (“MFO”) appears to offer the best of all possible worlds for a wealthy family who isn’t ready (or perhaps large enough) to start a Single Family Office (“SFO”) of their own. Under one roof it promises a convenient repository for all documentation, reduced overhead, consolidated buying power, diversified risk management, plus economies of scale and talent. But despite their theoretical promise, in practice an MFO must manage a complex set of conflicting interests while simultaneously navigating a financial industry that is largely focused on short-term gains rather than creating long-term value.

The literature typically frames MFOs as a stepping stone between traditional wealth management for the mass-affluent and a robust single-family office solution for the ultra-wealthy. We believe the perspective most needed – and often conspicuously absent – is from the perspective of the family itself. What organizational, operational and investment advantages might an MFO offer the family and how can a family identify those traits within an industry that is often opaque by design? This whitepaper offers an analysis of the challenges both families and MFO’s face; as well as a set of practical principles and concepts to help families who are vetting Multi Family Offices for their financial, investment and other needs.

While the landscape of the family office industry is changing, one certainty is that the Multi Family Office space will continue to grow. This is true for a number of reasons, including the changing demographics of wealth, new attitudes toward risk management, and market-based pressures to find new ways to scale the Single Family Office market to a broader segment of the population. While these new vistas are exciting, not every adaptation will be successful. These emerging trends in the family office space make a deeper study into what makes a Multi Family office successful both timely and important. ¹

An RIA with a Worse Business Model?

With the rise of more holistic approaches to asset management and legacy planning, the “Multi Family office” concept is often cited as the future for the Wealth Management industry. The term is frequently used to describe a broad range of businesses involved in asset management and investment advisory work as well as a range of non-financial related services that cater to the specific lifestyle needs of wealthy families. The ‘trendiness’ of the MFO moniker from a marketing perspective makes it difficult to identify the core functions of a what an MFO should actually offer its clients. At the risk of being pedantic, a Multi Family office should be “Multi” in that it represents multiple families of significant wealth; and also should serve “families” with a broad range of services focused on non-investment related disciplines, including education and strategy, philanthropy, tax and wealth planning, risk management, finance, operations, and governance.

From the vantage point of a strictly returns-focused investment manager, a Multi Family Office solution typically looks like an RIA with a “worse” business model. “Worse” in this instance refers to the host of activities the MFO offers which may not themselves be revenue or profit producing. This gets at the central tension within the MFO business model and begs the question: “To what extent is their mandate to manage a family’s assets in conflict with their desire to provide a set of non-investment services to help a family define and execute on their legacy?”

The answer to this question falls in part on the MFO to clearly define their service model. But it is also incumbent on the family being served to understand what they’re looking for from an MFO. It should go without saying that if a family is only concerned with identifying the best asset manager(s) for their investments, an MFO is probably not going to be a best fit. There are specialist managers who solely focus on specific investment strategies and asset classes that are more likely to be able to generate consistent ‘alpha’ than a generalist MFO that is managing the complexity of multiple family’s overall asset allocations. One the other hand, if you and your family are beginning to think more broadly about wealth management, especially as it relates to the management of complex trust structures and multigenerational legacy plans, then a Multi Family Office may offer a good balance between the investment management and family office advisory services you need. The important thing is to recognize that, almost by definition, since no firm can be “the best” at everything, by choosing an MFO you are de facto making a compromise. Either you will get great investment performance or great family office services, but it’s unlikely you can get both under one roof at a price that makes sense.

Best Practices and Diligence Considerations

Although the Multi Family Office landscape is changing, the more resilient and time-tested MFOs typically exhibit common characteristics. Ultimately the most important factor to evaluate is their advocacy as a fiduciary for their clients (versus their veracity as asset gatherers). This evaluation includes both the way they demonstrate their ability to act and advise in your best interest, but also their awareness and transparency regarding conflicts of interest (especially when it comes to the services they are financially rewarded or incentivized toward). Taking extra qualitative steps as a fiduciary to flag or avoid conflicts is often what separates the best from the rest. In order to assess the strengths and weaknesses of any particular MFO, we recommend using the following three lenses: 1. Fees; 2. Business Structure and Ownership; and 3. Typical Client Profile.

1. Fees

The most important aspect of an MFOs fee structure is its transparency and alignment. The structure should be completely transparent and easy to understand. There are two common structures: a). AUM Based Fee (typically ~1% p.a.)² or b). Base Retainer, with an à la carte menu of services that have associated costs.

a). The biggest challenge for the AUM based fee model is twofold: first, the MFO’s ability to balance its desire to increase AUM, by finding new clients, with the necessity to best serve the existing client base. And second, the fact that the MFO is providing non-investment service work under the aegis of an investment service fee structure. This leads to the situation where the MFO looks more like an RIA “with a worse business model,” since AUM fees are directed toward business lines that themselves are not revenue generating (and are essentially loss-leaders for the core investment management service). The biggest strength of the AUM fee model is its simplicity: one fee charged once per year and in turn you have complete access to every service the business offers (and then some). This level of transparency, at its best, can help facilitate a unique kind of bond between the family and the Multi Family Office team, where the family feels comfortable bringing any kind of project or vision to the MFO for discussion and execution.

b). A base retainer plus services menu model solves some of the problems of the AUM model but is not without its own challenges. Chief among these is complexity and the uncapped nature of the potential cost to the family. Service items can be complex and adding a layer of scoping and pricing of projects on a case-by-case basis adds negotiation and deliberation that can slow down operations. From the perspective of behavioral economics, individuals may become deterred from important work simply because they believe the costs are too high, or they can’t get comfortable with the scope of work process. Although this model has the potential to allow a family to specifically tailor services to their needs, it risks a financial barrier between the MFO team and the family, which can extend to matters of trust (especially if the family feels like every problem they raise ultimately leads to a discussion of scope of work and additional cost).

A common way to split the difference between these two models is simply to charge AUM on actively managed assets and then also charge a retainer fee for the broad spectrum of services that the MFO provides. While this blend creates an added layer of complexity, it can help separate out conflicts of interest associated with paying for non-investment services through investment performance. A detailed service level agreement can also help!

2. Business Structure and Ownership

As a general principle, MFOs that are privately owned and operated tend to be more aligned with the needs of their family office clients. Private ownership is important, if only for the fact that public ownership puts shareholder outcomes above all else. The quarterly demand to show growth and profitability to shareholders does not usually align with the long-term design and strategy for families thinking about multi-generational legacy (or even simply a structured philanthropic wind-down process for the founders to give much of their wealth away in their lifetime).

An equally important aspect from a business design perspective is how the office handles sales and client service. The most effective way to manage an AUM model is to separate the Sales division from Client Service division. This division of labor allows the sales team to focus wholly on finding new families that the business can serve, while the client services division can wholly focus on serving the current clients to the best of their abilities. Conflicts of interest emerge when individuals are required to recruit new families while also serving current families. This is not a strict “red flag,” but when evaluating a Multi Family Office that mixes sales with services, take extra time to understand how the business manages this inherent tension. Finally, how does the MFO identify, attract, and retain top talent? Is there a lot of turnover within the client services division and are the current employees happy, efficient and friendly?

MFO’s often emerge out of a particularly successful Single Family Office that is opening up its platform to other families to monetize the investment it has made in technology, talent, and systems. The provenance of an MFO is an important consideration. If the MFO still serves the founding family, how much attention will you get before their needs are serviced? If the MFO was founded initially as a family trust, how will that impact the types of investments you will have access to? Does the structure of the MFO have any implications for tax planning or intergenerational transfers of wealth? These are just some of the many questions you should be asking when considering an MFO to serve your family.

3. Client Profile

Simply put, does your family look like the current roster of families served by the Multi Family Office from the perspective of structural complexity and net worth? While MFO’s may say they deliver the highest level of service equally to all their clients, the pragmatic reality of running a business means that some families will command more time and attention than others. Understanding the workload and coverage demands for those that will work with your family will help you understand this from the perspective of business operations, but it is also helpful to consider this issue on a more absolute basis in terms of what percentage of the business your family would represent in comparison with other client families. And, if the squeaky wheel is going to get more grease, then you may want to consider how that will impact the level of service you can expect from your chosen MFO provider.

Conclusion: Disruption in Private Wealth Management?

The Multi Family Office model continues to evolve and there is an increasing proliferation of business models that appear to be disrupting the traditional Private Wealth Management industry. Virtual Family Offices, Fractional Family Offices, and even exclusive Co-Working Spaces all represent ways the industry is evolving to bring the knowledge and insight of the family office model to more families. However, we recommend you proceed with caution. While the promise of innovation is alluring, it is always important to analyze and understand the fundamentals of a business, especially when that business is your family. Be sure to ask hard questions around MFO structure, conflicts of interest, transparency, fees, service levels, alignment, incentives, and performance. And always keep in mind that no firm can be “the best” at everything, by choosing an MFO you are de facto making a compromise.

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 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.

Fact or Fiction?

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

While family offices come in many shapes and sizes, one universal experience is that everyone working in a family office has at one time heard or said the following platitude: “Once you know one family office, you know one family office.” We term this popular saying “the first law of family offices.” Besides acting as a universal introduction for any family office plenary session, this phrase succinctly distills one of the core truths of family offices: all families, and therefore family offices, are inherently different¹. The phrase is more than an empty platitude. In fact, it encapsulates an entire philosophy for family office professionals and therefore merits a more careful reading.

The First & Second Law of Family Offices

The first law of family offices speaks directly to what many people experience when they begin working for a family office: Once you know one family office, you know one family office. Applying any professional expertise to a family office environment is not a simple 1 to 1 equation; it requires a careful consideration of the needs and mission of the family, and these needs are often driven by forces that are not easily captured in a traditional business or MBA curriculum.

If the first law describes the uniqueness and individuality of all families, what we refer to ask the “second law of family offices” speaks to one of the most universal problems experienced by many wealthy families: “Shirtsleeves to shirtsleeves in three generations.” James E. Hughes Jr. has written extensively about the transcultural phenomenon that the vast majority of family wealth disappears within three generations.² Hughes and others have dedicated their life’s work to understanding the nature of legacy and the methods and approaches to best manage it. This second law captures the generational forces that often impede the legacy and institutionalization of family wealth beyond three generations. Only a very few families and family offices are able to develop legacy structures and systems that enable multiple generations of wealth to build and serve the legacy, mission, and needs of the family and its subsequent generations.

To negotiate the inherit tension between these two laws, something like a “family office industry” has taken shape. In this context, the “industry” refers to a knowledge base of professionals dedicated to helping families navigate complex systems and manage diverse, multi-asset portfolios. In order to better understand how and why these professionals coalesced around this concept of “industry”, we’ll need to dig a little deeper into the first law of family offices: “once you know one family office…”

The ubiquity of this phrase speaks to the way it captures the sheer diversity and broad range of special projects that one encounters while working with or for a family office. It also explains the very reason so many people enjoy family office work: they’re fun, idiosyncratic settings where professionals can build real, long-lasting value in the form of stewardship. Family office work is unique to each family, their background, their mission, their design and their governance. Family offices are typically not structured like a traditional business and the drivers that motivate success are not the same drivers that motivate traditional businesses. Because they are not constrained by traditional corporate drivers, they take on a look and feel that is uniquely tailored to the family itself.

The idiosyncrasies endemic to family offices reveal a deep irony about the first law as it relates to the business of family offices: if it is true that all family offices are different, then it would be impossible to create an industry around a set of principles or standards that define best practice for family offices. Viewed in this way, the phrase undermines the very possibility of a “family office industry”, because industry formation requires repeatable processes and uniformed, predictable outcomes. As a countervailing force, professionals have created a plethora of books, whitepapers, conferences, legal structures, and business processes in an attempt to isolate a standard set of practices that apply across a broad spectrum of family offices³. A tension therefore exists between the first law of family offices and the emergence of a professional class of experts that serve families. But which force is greater, the individual idiosyncrasies of families or the universal professionalization of family office work? It’s only at this nexus that we can begin to understand the term “family office industry”. While it may seem a self-defeating and contrarian position to take, the very concept of the “family office industry” merits careful consideration. What is the term meant to describe, and by whom is the description being made?

Two Family Office Industries: Internal and External

In reflecting on the nature of the word “industry” as it relates to family offices, two emergent categories appear: family offices designed either inside or outside of the family itself. In the modern history of family offices, families like the Morgans, Rockefellers, and DuPonts are held up as early examples of inside family offices. These families created multi-generational institutional administrations to service the management of family members and the legacy of the family. Internal family offices begin exclusively within the family and often draw some initial resources from the principle operating company. The scope of the work at the outset tends to focus around a specific project: designing a multi-generational trust, managing a philanthropic project, or administering a complex, privately owned, asset portfolio. Regardless of the genesis, as family wealth and needs grow over time, the office adapts to the new forms of complexity. It’s these individual growth paths that lead one to the concept of the first law of family offices. In many ways, these internal family offices have the character of a closed system: they are designed purely to manage and administer a set of internal dynamics; their charge is typically not to “grow the business,” but rather to serve the family as they design and implement their legacy.

Family offices that emerge outside of families typically refer to the groups and operating divisions that wealth management companies have created to utilize the language of “family offices” in order to put a container around their largest and most complicated clients. In this sense, “family office industry” describes a particular market segment that private wealth firms find useful for organizing their sales and marketing teams within their own firms. In this way, multi-family offices, private banks, and other wealth management firms attempt to co-opt the language and best practices of successful internal family offices in order to create a product offering for their wealthy customers. Viewed from this perspective, the “family office industry” is simply a segmentation strategy designed to describe a middle ground between institutional and high net worth retail sales and marketing.

These two categories of family offices utilize and rely on each other in different ways. Internal family offices invariably bring in expert advisors who often have developed their expertise in the context of a wealth management firm, trust, risk, or law firm with a particular background with family office clients. Associates, managers, and executives often migrate into external family offices because their unique experiences inside a family office is rare in the marketplace and the skills, understanding, and relationships acquired can be readily leveraged on a larger platform which benefits from broad economies of scale.

The Business of Legacy

The relationship between internal and external family office groups is therefore more symbiotic than parasitic. Thus, it is incorrect to frame the dichotomy in moral terms—it is not the case that one is good and the other is bad—however it is useful to understand these different categories of family office because they speak directly to the schism that exists between the first and second law of family offices. Whereas the internal family office strives to understand and serve the family in accordance with its idiosyncratic and individual features, the external family office seeks to distill universal processes and operations that improve overall efficiency and allow professionals to take skills and experiences from one setting and apply them to a new setting. As a family office principal or professional, you would be well advised to use this framework for your own professional audit and consider how you can best act within the internal and external structure that you inhabit.

If the term “family office industry” persists, then we should use it carefully and with the understanding that family offices are in the business of legacy. And, in our opinion, while many external family offices engage in helping families with defining and executing their legacy, internal family offices are usually more closely in-tune with the family on this issue. Legacy is the key word that sits above the industry. The question of legacy is more aesthetic than mathematical. Some families aspire toward multigenerational legacy models, while others seek to wind down their entire portfolio within one or two generations. There is no formula to tell you what your legacy should be. Instead, careful discussion and consideration with your family, especially the younger generations, should serve as the foundation for the vision of your family’s legacy. From there, advisors can help shape that vision and develop executable plans in order to achieve your vision. Internal family offices excel at designing and implementing legacy plans for the family they serve, but struggle to apply those same systems in different contexts. External offices excel at designing repeatable processes, but they are constrained by their operational demands to fully dedicate themselves to the question of individualized legacy. The most durable and resilient family offices rely on a mix of internal and external features in order to get the most out of each area of strength.

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 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.