A headline that has left a lasting impression is ‘How to lose a billion.’ My initial encounter with it was during a presentation by Michael Southam from Rockliff Partners, a Swiss-based firm, several years ago. While it may appear attention-grabbing and possibly even alarmist, Michael’s findings (derived from interviews with 70 families worldwide) underscore that the prospect of losing a billion is a stark reality for numerous family offices.
How many family members do you have in your Family Office?
If less than 50, you may not have another entrepreneur for a few generations to come.
The stats Michael discovered were also insightful: 19 out of 20 family members spend more than they made; one in 20 family members helped sustain the fortune; only one in 50 family members help make worth.
When considering starting a Family Office, it is important to know the potential pitfalls that may affect your wealth position and how every family member has the potential to impact this wealth positively and negatively. And many are often an untapped resource.
How do you first make a fortune?
A fortune is typically formed by a combination of factors: luck, character of individuals, certain circumstances, economic trends / conditions and optimised structures. There’s a lot at play: they say odds are around 1 in a million to make a fortune.
So while multiple factors make a fortune, how many can lose it? Knowing common pitfalls can help you hold your position for future generations.
We look at the five pitfalls Michael found in his research, complemented by our experience and observations. At its core, we know that education is the most important defence for a Family Office and ensuring all generations not only receive a school education but also an education on finances and common pitfalls to be mindful of.
Common pitfalls affecting family wealth
- The predator decline: When in a position of wealth, you also receive many investment opportunities. When these opportunities go wrong, they leave you vulnerable to dubious schemes. In Michael’s study, he learnt families are at most risk with family members or close advisors managing and losing their wealth and not getting advice from the right people on the right topics. It is important for family members to receive education of being mindful of predators who can be envious of your family’s wealth and befriend family members.
- Defend your position: Similar to the above, many opportunities do come to those with wealth – some are positive, but also many can put your Family Office at risk. Constant education of all generations must be a priority as this will arm all members with financial capability with sound judgment when it comes to investment decisions.
- The great offspring divide: A husband and wife have made a significant nest egg (let’s say $1 billion to reflect Michael’s heading) and two or three children. There is plenty to go around. But when you consider some typical scenarios: multiple marriages, extended families, children, step children, and so on, this value does start to thin out.
- To whom much is given, much is asked: Those born into wealth carry great expectations to deliver big things, and families often place higher expectations on their own members than on anyone else. But as Michael commented, only 1 in 50 will display entrepreneurial skillsets and grow the family wealth. That means, there is potential that 49 out of 50 family members are not meeting family expectations.
Beyond growing family wealth, families expect it to be done meaningfully and sustainably. Traditional education alone won’t get you there. The rising generation needs real financial education: a deep understanding of money, and the values that drive the family forward. Values underpin every strong Family Office, and for many, making a genuine difference in the community sits at the heart of everything they do. - Family conflict: When family members don’t see eye to eye, this isn’t only costly for the family business but also the Family Office. Family members may have different expectations, different investment ideas, different costs of living and priorities.
Working with clients
As you start to build your Family Office, you don’t want to leave it all to luck. Education for all family members (in particular, the next generation) to understand the legacy you are creating, your family values you live by and how to ensure they don’t put themselves in a position where they could lose the family fortune.
Financial education is a skillset all family members should have. We work with clients to develop financial education courses tailored to your family and needs. All courses are underpinned by traditional financial units, but also units on personal financial goals, and a commercial awareness for operating in different economic climates and the ability to soundly and robustly assess opportunities and investments.