First published on Family Wealth Report on March 28, 2019
Dennis Jaffe and Jim Grubman last year produced a paper entitled The Resilient Single Family Office*. Jaffe has also undertaken other work to explore what makes family offices last the test of time. Jaffe is research associate at Wise Counsel Research. He is also a faculty advisor of the UHNW Institute, the not-for-profit organization with which Family Wealth Report is an exclusive media partner. (See the Institute’s website at www.uhnwinstitute.org)
Joseph W Reilly, a member of FWR’s editorial advisory board and a regular writer in these pages, interviews both men here. He interviewed them several years ago (see here and here) and it is good to catch up with their work again in these pages.
Joe Reilly - I wanted to talk to you both today about your 2018 paper entitled: The Resilient Single Family Office, and also the massive project Dennis recently finished called Generative Families - the 100 Year Family Enterprise, which was done in conjunction with Wise Counsel Research, Merrill Lynch and the former US Trust. One of the things you both have noted is that the first iteration of a family office often tends to fail over time. Why is that?
Dennis Jaffe - There are essentially two ways to form family offices: focusing on the individual property of the wealth creator is one way, and the family office as the collective expression of the next generation is the other. These are very different approaches. One way or another, the family needs to go through an evolutionary process to reach a setting in which the next generation can work together. If the family doesn’t think that way, then it leads to problems. The founder structure is not well-set-up for the next generation because they have different needs and different interests.
Jim Grubman - A founder who sets up a family office nominally “for taking care of the family” still has a very individualist orientation. The family itself may not have a lot of involvement with how the family office is set up. That is very different from having a true collective family orientation in which the whole family is understood to be the client and to have these collective influences. One is for the family, the other is by the family. They are very different.
Is this a new way of looking at the family office?
Jim Grubman – We have always thought of the family’s development as a movie and not a snapshot. There is a dynamic aspect of things changing over time. Often, it seems the family office’s development is said to begin at wealth creation. The nature of our work has been to say, wait a minute - remember there was a time before the wealth creation. You have to take that family line and extend it back in time before the family was wealthy. What culture was it grounded in? Where did they come from economically, before the wealth and the family office began?
Dennis Jaffe - When one generation invents something and puts together a governance structure or family office, it is perfectly designed for that generation, but it is not really designed for the problems and the challenges of the next generation. The idea of resilience is that the next generation has to reinvent their structure and even their purpose and nature. Too often, there is a generational transition and the family does well for a while, but again it is just not set up for good re-adapting. The family then gets stuck during the next crisis when they have to cross generations with a structure that was invented for the problems and culture of the earlier generation. Many family offices are overbuilt for simple family functions because they are based on self-aggrandizement of one generation rather than a real model of what the family needs for many branches and households.
There is a curious aspect to the upper end of the real estate market here in Greenwich, Connecticut, where newly-built mansions sit on the market for years. They are hard to sell because they are too customized by the original owner. Potential buyers don’t want to deal with making all the changes necessary for someone else to live in the house.
Dennis Jaffe - Yes, the houses are monuments to the founder, rather than residences for a growing family community. We accept they want to build something beautiful for themselves, and we can accept some of their rampant individualism, but at some point you have to say, well, what do you want for the next generation? Do you want to start gathering your next generation to define who they are, what they want to do together, and whether they want to do things together? It is like setting up a study group for the next generation while you are still completing the manifestation of the founding generation.
Jim Grubman - That is such a great metaphor - it is what founders often do with their family offices. It is self-focused, they want everything really great because of what they have done, but they are not thinking collectively, they are not thinking strategically for the future. Just because you have had great success at building a business doesn’t mean you know how to build a long-lasting family office.
Why does this happen?
Jim Grubman - Realistically? There is often a degree of self-centeredness for some founders. They really don’t care about setting up the family office more collectively. The family’s needs are to be a reflection of the founder’s needs, just like everything else. My sense in working with those individuals is that you are going to make only limited progress, unless there is something in it for them that will reflect well on them. Clients who have a more open mindset, who are looking for guidance in a genuine way, they may be strong-willed but they are open to feedback and to input. It can go much better.
Dennis Jaffe - Sometimes, I find myself convening the next generation and telling them: Look, you don’t need your parents’ permission to talk about these things, yet you shouldn’t be secretive about it. Let them know you are doing it, you just need to do it. You can’t dictate to them, but you can begin to talk about who you all are and what you want. I find myself inviting the next generation to begin a dialogue rather than asking permission from the elders for all the adult children to talk together.
There is also an issue where SFOs are often based on the prevailing asset management business models, or on what the founder’s friends have done.
Jim Grubman - Absolutely. Not only is an SFO a child of its time and place, it can also be a victim of the founder’s biases, blind spots, prejudices, and lack of information about many things. Our SFO article is a wake-up call to founders and to the people working in the family office, saying: Give this a lot more thought and get a lot more input than you may realize. Fortunately, if you design it well at the beginning, you create a great foundation for future years. That is where the Hundred Year Family research comes in nicely. True success is not just your investment returns, or whether you can be endowment-like or hedge-fund-like. It takes a long-term understanding of multiple transition points that a family has to face and prepare for. Dennis has some of the latest findings from that.
Dennis Jaffe - We are seeing dozens of examples of how the older generation had done a wonderful job and had wonderful results, but what the next generation wants is different. There was a very well-known, longstanding family office that had a husband and wife team as leadership for the past thirty-five years, and they were retiring. The idea they had was that they would select a successor and it would be a finance person, like they were. The next generation said, wait a minute, we have a different view. We want to be defining who we want and what kind of person we want. The older generation just wanted to name their friend as successor and be done. The younger generation had to interrupt that.
In some ways the rising generation has to flex their muscles and give input. Sometimes they have to be noisy and say, hey, we want to be part of this! They will initiate new ideas like ESG [environmental/ sustainable/governance approaches] or new directions about starting businesses and investments. The story of the evolution of families over generations is one of this continual adaptation. The ones that fall by the wayside (I don’t mean penniless – I mean they divide and fragment into smaller entities) are the ones that didn’t create a new vision or go through a reinvention process for the next generation.
What is the secret to maintaining this over the long term?
Dennis Jaffe - We’re finding there is a “generative alliance” in the Hundred Year work, which is essentially a triad of the older generation, the younger generation, and their group of advisors. What deserves attention is that, to thrive, each of the three stakeholders must be capable. We all talk about having strong founders as leaders of the family. But if the founders are strong and their non-family advisors are just deferential and weak and the rising generation is weak, that is not good in the long run. If both generations are strong but the advisors lack capability, that’s not good. Even when the advisors are strong but the family is splintered and weak – still not good. It takes a lot of work for the system to have strength at each point in the triangle, since families may have challenges in one or more areas of the generative alliance. But those families that work at it see the results.
The system has to maintain the resilience, and it has to be driven somehow, but it can’t be the same person driving it all the time. Is that someone in the family? Is it an advisor? Or is it a function of the system itself?
Dennis Jaffe - It is a function of the system itself. The family has to select strong capable non-family advisors. In turn, the non-family advisors have to be fostering strength in the rising generation, the advisors have to be aligned with that. The system has to want strength at each point; it is a virtuous cycle. When you get strength at all three points, the system becomes much more resilient altogether.
Does the strength ultimately comes from honesty?
Jim Grubman - I would make it broader, more like integrity. Ethical, responsible, learning - all those things.
So without that, one node would fail, and that is where the weakness would come from?
Jim Grubman – Yes. Just imagine inserting Bernie Madoff at a given point in that system.
Joe Reilly – Thanks, gentlemen.
James Grubman and Dennis T Jaffe (2018), The resilient single family office: A developmental perspective. International Family Offices Journal, Vol. 1 (8), pp. 18-26.
"Releasing the Potential of the Rising Generation: How Long-Lasting Family Enterprises Prepare Their Successors" by Dennis Jaffe. 2018. Wise Counsel Research. Available on Amazon - Start reading it for free: http://a.co/4dfIaAm