A famous line in an F. Scott Fitzgerald short story declares that the very rich are different from you and me. The obvious difference: While the 99.9 percent strive to make a living, the 0.1 percent are working out what to do with the wealth they already have.
Preserving and investing and donating and spending wealth is more than a full-time job and requires multiple types of expertise. Pitfalls abound, especially within families. Speak to a few family office experts, and you’ll hear the phrase “When you’ve seen one family office, you’ve seen one family office.” In other words, there’s no uniform method for handling great wealth. But press them on common errors, and they have a lot to say about patterns that trip up even those with the best intentions.
Here, a group of professionals from family offices, investment managers, estate planners, art advisors, and other disciplines describe mistakes they’ve seen. Fitzgerald wrote that there are “no types, no plurals.” But it turns out there are some lessons we can all learn.
Co-Founder, Cresset Capital Management
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The biggest mistake a wealthy family can make is not having a family governance structure in place [that provides] education, a clear mission, and clear communication. If you don’t get that right, nothing you can do—taxes, wealth planning, you name it—is going to save you. The percentage of families that go from shirtsleeves to shirtsleeves in three generations, driven by failures in communication and lack of a mission, is incredible.
Head of Global Family Office for the Americas, UBS Group AG
We see families that, in an effort to maintain cost control or to decrease costs, try to put an entity together with a bare-bones crew. In that effort to contain costs, they end up putting in a lot of inefficiency. In some cases they are not setting themselves up to be successful, to achieve the goals they set out as a family.
We had one client last year who ultimately ended up severing all their relationships on the Street and basically replacing their entire investment team from scratch. We have others that are a little more thoughtful—that have had multiple generations, that are constantly monitoring or seeking out guidance on best practices, and that are making more minor adjustments. Then, unfortunately, we have some clients that are very set in their ways. They appreciate getting guidance and thoughts but continue to operate with the status quo, without making any changes even though it’s detrimental to their goals and objectives.
Partner, Venable LLP
I’ve seen a couple of family office clients recently get blindsided by a cybersecurity risk. More than one had a pretty significant exposure, even a potential ransom scenario, with a virus [accidentally] downloaded. It’s something that needs to be incorporated more into the family office setup structure. The entire purpose, generally, of using a single family office is the privacy, the anonymity, the protection. So a successful cyberattack undermines the family office structure at a baseline level.
Senior Vice President and Managing Director, PNC Financial Services Group Inc.’s Hawthorn
The biggest mistake that ultrahigh-net-worth individuals and families make is defining success based solely on how much their portfolio returns.
Instead, wealthy families should quantify success based on what they’re trying to accomplish and do with their wealth.
Success should be measured against how you achieve your goals and live your values, rather than just having a portfolio benchmarked to an artificial number.
CEO, Forbes Family Trust