It is often thought that the job of a family office is to maximise returns for a family. But the right investment strategy can also embed and deepen the family's ethos.
How a family office should invest is often taken as a question about asset allocation. But the family’s culture is equally as – if not more – important.
The head of a family office that serves several Middle Eastern families who have been working together for more than a century, recently told me that the family members he works with have two options of what to do with their money.
First, they can invest it in the families’ operating businesses, with a bit of private equity thrown in; or second, add it to a pool of broadly based liquid marketable securities. Typically, the family members invest in both, and are able to decide how much they place in each. The effect is to “prioritise the long term over the short term, a unity of interests over individual choice and simplicity over complexity”, the family office head said.
The family’s philosophy is, he continued, very distinct from the “individualistic” ethos behind the typical American family office investment strategy. This raises the interesting question of whether culture influences family office strategy.
It is true that many American family offices will often offer individually-tailored investment portfolios, and that German ones are - as you might expect - often more conservative.
Also, many people who work with wealthy south-east Asian families say that they are dominated by patriarchs, who make decisions that they believe are best for the family. “They listen; then do what they want,” says one adviser.
However, is this cultural? Others would suggest that this is more related to the age of the family enterprise, which tends to be run by a powerful founder. As families become multi-generational, their aims and needs become more varied and listening to more voices becomes necessary.
Far more influential than the culture or the country where the family office is based, is the family’s culture which can be influenced by, for instance, how long they have been wealthy. People whose family business has been running for three or more generations are born as investors, and they are therefore often better at it because they learn it young.
Clare Stirzaker, who advises family offices for PwC, says: "Family dynamics shape the culture in a family office more than anything else. If the next generation are more involved, then there tends to be more of a focus on what they can achieve together.
She adds that if a family office is to survive, then it is vital that the family behind it are united in terms of what they want for it. "Different views will damage the family office's ability to achieve its aims," she says, adding that having a fairly straightforward set of aims also means that when things get complicated - as they will, especially when banks get involved - there is a benchmark the family can refer back to.
One of the major reasons that family enterprises break down is that their interests diverge to such an extent that they no longer feel that they have any common project. They don’t fall out; they drift apart.
A family office strategy that is designed to promote cohesion can raise the odds that the family stays together. That might be a more worthwhile aim than finding the mix of assets that will maximise returns.
A version of this article first appeared in FT Wealth magazine.