PANGEA Private Family Offices - The Silent Paradigm Shift in Family Wealth Stewardship, Part II: A Primer on Private Family Offices

A primer on privAte fAmily offices

the silent paradigm shift in

family Wealth stewardshipPart II

Welcome to PANGEA Private Family OfficesTM.

Our purpose is to help global families flourish for generations.

Pronounced pan-jee-aah, the word pangea is a neologism created from two ancient Greek words, pan meaning all, entire or whole and gaea meaning earth or land. The words taken together mean whole earth, all lands or entire earth. We chose the name because we believe it epitomizes our thinking.

We recognize that while political boundaries create international separation, technology has unified the whole earth in a manner that makes the continents appear to fit harmoniously to-gether as one. We care for multiple family generations, and so we recognize that economic and geopolitical shifts that occur half-way around the world will have some impact on the lives of the different family members who may be attending school, attending to business or on hia-tus abroad. We also recognize that opportunities to help families achieve their wealth strategy objectives sometimes exist outside their primary country of residence.

We don’t claim to know everything that is happening at all times aroundthe world, however we are diligent to keep watch and ask questions of our international network of professional associates. At PANGEA Private Family Offices we help global families flourish for generations.

For more information please visit www.pangeafamilyoffices.com

THOUGHT LEADERSHIP PERSPECTIVES from PANGEA Private Family OfficesTM

the silent paradigm shift in

Family Wealth Stewardship Part II: A Primer on Private Family Offices

By: Declan Winston Ramsaran | Managing DirectorPANGEA Private Family OfficesTM

In part one of this report we discussed the current state of trust in financial institutions and the related client response. At the conclu-sion of that report we committed to follow-up with insight into the private world of family offices and expand on reasons why wealthy families are forsaking the unfulfilling relationships they have with their existing advisors. This report is intended to serve as an intro-duction to the private world of family offices, and while not an ex-haustive study, it will provide the reader with a better understanding of what a family office is and why families are drawn this form of family wealth management model.

The name Oprah Winfrey is one that you’re likely familiar with. In addition to her being a media mogul and international humanitar-ian, Oprah has also formed her own family office. She’s not the only one. Many superstar athletes and entertainment A-listers have also seen the value in the family office model. Away from the stage and screen, people you see in your neighbourhood like business owners and professionals who have created significant wealth like-ly have a form of family office established to oversee the wealth management needs of their family. If you’ve never heard of the term family office (or you’re only vaguely familiar with it) you’re not alone.

Meaningful information about the private world of family offices is relatively difficult to come by – especially if you don’t know what to look for. Even some seasoned wealth management professionals and senior leadership finance professionals aren’t familiar with the term family office.

WILL OPRAH WINFREY REDEFINE THE FAMILY OFFICE MODEL?

campden FB

Oprah Winfrey Opts for a Family Office

The New York Times

Oprah Winfrey Hires Money Manager, Setting Up

Family Office To Manage Billions

Huffington Post

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I recently had lunch with someone whose ongoing tenure in the financial services sector surpasses two decades. To protect her identity, let’s call her Jody (not her real name). For lunch with Jody, I ordered the roasted lamb shank – a rich treat that I indulge in on rare occasion. Sharing time with Jody was the rare occasion I need-ed as an excuse.

The CV of this highly talented professional is impressive. Super-latively accredited, Jody once held a senior role in the Canadian business tax advisory practice with one of the big four accounting firms, then later held a senior leadership role at a prominent Cana-dian full-service brokerage firm and then moved to the bank side of the business to head research that was regularly published in the Canadian media. Jody is well informed about the Canadian wealth management sector and is also widely acknowledged as an indus-try expert - she is also published.

Over lunch, as our conversation unfolded I engaged Jody in con-versation about changes taking place in the family office space to learn from her perspective. After a short while speaking, I paused to acknowledge and inquire about her uncharacteristically blank stare. When I asked Jody if she knew what a family office was she replied in the affirmative saying, “Yes, I know what a home office is.” I de-tected the misapplied terminology home office but listened further to learn if she misspoke. She continued unaware of the terminology slip, “I’ve worked with home offices before. Some families run their business out of a home office.” As she persisted, I quickly realized that Jody did not know the term family office and was doing what most professionals do when asked about a subject they know little or nothing about: save face by switching gears and talking about a topic that they do know something about.

I quickly realized that Jody did not know the term family office and was doing what most professionals do when asked about a subject they know little or nothing about: save face by switching gears and talking about a topic that they do know something about.”

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Current state assessment

“ Mid-way through lunch, I had the opportunity to tactfully explain the concept of a family office to Jody, taking care to respect her industry tenure. This explanation, opened up a wonderfully rich conversation about Jody’s past experience at the accounting firm where she was part of a special advisory team assembled to ad-vise UHNW Canadian families on complex tax matters. Jody went on to openly share her thoughts on the topic of conversation while reflecting on her past experience at the accounting firm. She said, “Oh yes, we did something like that back at [name of big 4 accounting firm omitted from article]. But it wasn’t profitable for the firm and there were other issues too. We spent a lot of time structuring and recommending tax strategies to clients but our advisory team fell apart.

What happened was that one of the firm’s partners, who was on the advisory team, found that he could make a lot more money on his own by selling the insurance solutions that were part of our tax recommendations. The way he figured it, all he’d have to do was close three or four of these big insurance deals a year and he’d be earning seven digits. We weren’t making anywhere near that back at the firm. I don’t blame him for leaving to do that. After he left, others on our team followed.”

While listening intently to Jody’s recount of the situation, I won-dered what had happened to the families after the advisory team fell apart so I asked. “Oh, they were fine, they were happy” she said vaguely while ensuring to protect the reputation of the firm. “We did what we said we were going to do for the clients.” I recognized the quasi-elusive nature of her answer. Not wanting to prolong this part of the conversation, I didn’t press for a deeper response. As we concluded our lunch together we made plans to reconnect. While walking away from the restaurant I realized how little was known about the family office space – even at some of the highest levels of leadership in the Canadian wealth management sector.

Oh yes, we did something like that back at [name of big 4

accounting firm omitted]. But it wasn’t profitable for the firm and there were other issues too. We spent a lot of time structuring and recommending tax strategies to clients but our advisory team fell apart...

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While Jody’s story was insightful, comprehensive tax planning and the relat-ed risk management strategies are only one of many considerations within a family office. Jody’s story behooves me to define what a family office is and so here it is, the description of a family office, the way we see it:

Created to serve the 360 degree wealthcare needs of a family as it’s sole purpose, a family office is a private, family led organization that orchestrates comprehensive, full balance sheet & income state-ment quantitative management in conjunction with appropriate qualitative services that address human complexities through family governance & lifestyle management while considering an extended time horizon that naturally includes multiple family generations.

In the above definition, we have deliberately underlined critical elements of what we believe to be essential to a genuine family office. Those key ele-ments are expanded upon below. Families of significant wealth who, after reading this report and doing more research, still knowingly choose to partner with a large institution that claims to offer family office services rather than establishing or partnering with a genuine family office are settling for a fake.

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Our word of caution is this; making this choice would be akin to knowingly buying, wearing and bequeathing a counterfeit Patek - the next generation will certainly pay the price.

Prior to discussing the underlined, critical elements in the definition of a genuine private family office, consider the perspective of very wealthy families expressed in this excerpt from an article in the Financial Times:

“The super rich are victims like anyone else,” says Michael Shelton-Agar, chief executive of Global Partnership, a London-based membership organization for family offices. “Very wealthy families also feel betrayed by the banks – they have also lived through the sales culture in financial services.” Wealth advisers say these clients have lost patience after paying large commissions and fees to banks and investment managers on products that have largely failed to deliver. Many are setting up family trusts to manage their financial affairs independently.

“They have become incredibly frustrated with financial institutions and money managers who have delivered largely mediocre returns and adopted a product-led approach,” says Jon Needham, global head of fiduciary services at SGPB Hambro, the wealth management arm of Societe Generale. “They have now increasingly taken ownership of the management of their money, working with key strategic partners and, where the need and opportunity arises, working closely with their own in-house talent.”

- Financial Times

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the description of a private family office, the way we see it:

Created to serve the 360 degree wealthcare needs of a family as it’s sole purpose, a family office is a private, family led organization that or-chestrates comprehensive, full balance sheet & income statement quantitative management in conjunction with appropriate qualitative services that address human complexities through family governance & lifestyle management while considering an extended time horizon that naturally includes multiple family generations.

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A true family office aims to direct the potential of family capital (financial, intellectual,

community) to serve the family’s vision. Employees in the family office consciously ar-

range all quantitative & qualitative affairs for the sole benefit the family and their com-

munity. A genuine family office does not view family capital as a source of revenue for

corporate profit via fees charged. An inherent conflict of interest smolders between pri-

vate family objectives and large corporate profit motives. A genuine, private family office

extinguishes this conflict of interest.

family as it’s sole purpose:

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A genuine family office is owned by a private family – akin to the family owning a private family busi-

ness. Furthermore, true family offices are not owned by large financial institutions like accounting

firms, or publicly traded banks, or wealth management firms. Large, corporate interests that are legally

separate from the family who have temporarily pasted the term family office onto their moniker are

doing so as a marketing ploy. Designed to serve the mass market, large corporations with sustainable

business models are guided by the principles of systemization and standardization to increase profit-

ability and create an enterprise wide “consistent client experience.” This mass market institutional fo-

cus and business objective are polar opposite to the required competencies and established intent of

private, family offices.

Simply put, the aim for large corporations is to have customers receive the same service experience

wherever they may be located – think McDonalds. Now contrast this mass market McDonalds expe-

rience with the ne plus ultra fine dining experience at the privately owned, Noma (consistently voted

world’s best restaurant located in Copenhagen, Denmark). A true, private family office delivers what a

large corporation cannot; a ne plus ultra, bespoke family wealth experience. In addition to this unique

tailoring, being private means that confidentiality remains within the control of the family.6 c

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2. private:

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3. In conjunction with the aforementioned, a true family office will be under the

leadership of members of the family. In some cases, a co-leadership arrangement

is agreed upon. This co-leadership arrangement generally takes the form of a

partnership with the in-house CIO, CFO or Wealth Executive. Being family led

makes all the difference in long-term performance – and by performance we don’t

mean only investment rates of return. Families with a clearly defined purpose are

equipped to be at the helm of their wealth strategy for strong leadership and

proactive decision making rather than being subject to reactive decision making

based on random suggestions from multiple advisors - the result being that the

strategy ends up looking like a Picasso.

family led:

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To illustrate how centralized decision making easily slips out of the hands of the family when working with multiple advisors,

we’ll share an experience from a family office conference that we attended at the NYC Harvard Club. One of the speakers was the

CIO from a prominent, bank-owned “family office” operation. In his eloquent talk, he dedicated the full hour to exclaim the merits

of investing in REITS. His position was supported by graphs and charts and tables all framing REITS as “THE” solution for UHNW

clients who wish to invest in real estate. In our minds however, we were thinking that the families we work with prefer direct owner-

ship of real estate (be it multi-unit residential, hotel or commercial) because of the control it affords them. Not only do they prefer

the control, they also have the resources to self-fund or co-partner with other like-minded families on these types of deals.

As this thought was going through our minds, a family office principal who was at our table sitting to our right piped up during

a pause in the presentation saying, “Why would families do this?” referring to REITS as he gestured to the screen where the pre-

sentation was being projected. “We can buy these properties directly and hold the hard asset.” Heads around the room nodded

in agreement with the statement, and then all eyes turned to the CIO looking to him for a response. In a tone not as confident as

before, the CIO at the front of the room conceded that families of significant wealth, like the ones present in the room, could indeed

directly acquire real estate assets and build their own diversified portfolio. To save face however, he shifted gears and went on to

say that REITS may also serve as a complement to those hard real estate assets that families already own. For example adding

exposure to a market segment not represented in the hard asset portfolio. This was a reasonable suggestion. As we listened to the

presentation we understood how a client or family looking on at this presentation in a private room with catered lunch on fine china

would be convinced that REITS were the solution for them – especially if they weren’t aware of the alternatives.

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“It’s partly the realization of the conflict between private wealth and the financial services industry, and it’s partly because now there’s a lot more opportunity out there for private wealth relative to that available for the financial services industry compared with pre-crisis.”

- Peter Douglas, Principal at GFIA Pte,

advises investors seeking to allocate money to hedge funds.

An insider’s perspective.

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4. Decision making with incomplete or inappropriate information usually leads to ongoing performance disappointment. Such was the case of families who once managed their wealth in a fragmented, piece-meal fashion with multiple siloed advisors, each advisor protecting their own competing agenda.

This siloed approach meant that each advisor, while having the intention to act in their client’s best interest, was advising on only his/her piece of the puzzle, the result of which is an overly biased view in their recommendation. For example, the accountant in the relationship will claim that tax is the most important part of the puzzle and provide advice that is solely tax driven. What’s the problem with that you might ask? Consider the client challenges expressed in the following excerpt from a New York Times article entitled, When the Tax Tail Wags the Investment Dog:

Comprehensive, full balance sheet & income statement quantitative management:

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I had a recent conversation with some friends about a rental home they owned. They were evaluating their options for the property. Should they keep it? Remodel it? Sell it and look for an alternative investment?

As we walked through the details, it became clear to all of us that they have a great lit-tle investment in the context of their overall financial plan. Based on the price they paid years ago, the money they put into the house, the rental history and the income they collect, it appeared to be a much better investment than the alternatives they were con-sidering, even when we accounted for the risk associated with rental properties. But as soon as we came to that conclusion, they asked me this: “Why did our accountant tell us the opposite?”

Now, their accountant prefaced his advice with the disclosure that his job was to focus on taxes. Based on that perspective, his advice was to sell it because they currently qualified for a substantial tax savings on the capital gain that would not be available to them in the near future. To be clear, the accountant didn’t give my friends bad advice. Instead he gave them advice based on one perspective, taxes. The reality is that smart, long-term financial decisions need to take more than one thing into consideration. But because taxes are associated with so much emotion (given how much people truly hate paying them), it’s incredibly easy to let taxes become our sole focus. And that can lead to bad decisions.“Why did our

accountant tell us the opposite?”

- New York Times

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This is an example of advisor risk that families face when managing wealth in a fragmented, piece-meal fashion with multiple siloed advisors, each advisor protecting their own competing agenda.

The preceding example discusses a tax scenario however similar situations regularly occur in legal advisory on trust & estate planning matters and investment recommendations, among other types of advice. Most forms of advisory where the professional is making decisions in a silo, will generally result in poor strategic advice (even though the advice may be technically sound and the professional is acting in the best interest of the client).

Comprehensive full-balance sheet & income statement management orchestrates asset, liabilities and cash flow to work in unison to achieve the family’s defined objectives. A clear, big-picture dashboard showing both balance sheet and income statement information is vital to effective strate-gic decision making. By looking at all aspects of both the balance sheet and income statement, better decisions can be made that yield better long term performance. To emphasize the point, we quote a phrase that some may be familiar with: all things working together for good. A genuine family office delivers comprehensive full-balance sheet & income statement manage-ment. - PANGEA Private Family OfficesTM

nota bene

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5. Tax avoidance, portfolio construction, variance drain, internal rate of return, price per key. These

activities primarily focus on the numbers. And while quantitative analytics are important, they only

consider half of the family picture. Some professionals argue that the other half of the picture – the

qualitative elements – matter more to long term family success than the numbers driven structures

that are put in place. Qualitative elements will include family communication skills development, family

governance, working with a wealth psychologist, making use of concierge services to create time and

retaining the services of a health coach to increase energy and longevity. While not an exhaustive list,

the aforementioned qualitative services are vital to helping the family thrive. Our position is that both

the quantitative and qualitative elements are equally important and demand appropriate attention.

Qualitative services:

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To appreciate the importance of effectively orchestrating the qualitative family office elements, James E. Hughes Jr. says the following about family governance:

“To successfully preserve its wealth, a family must agree to create a system of representative

governance through which it actively practices its values. Each successive generation must reaffirm

its participation in that system of governance. Because a family is, by definition, two or more

individuals, any decision made by a family must involve joint decision making. Joint decision making

expresses a system of governance. Recognizing that joint decision making is a form of governance is

one of the fundamental first steps in wealth preservation.”

thought leadership perspective

- James E. Hughes Jr.

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Our position:Effective family governance is a substantial responsibility, that we believe trumps asset

allocation in priority. If the family is falling apart, no portfolio on the efficient frontier will

resolve the family conflict. No risk-adjusted or absolute return rate will increase the

success rate of a family values transfer to the next generation. Without a strong family at

the core, the wealth that surrounds them may, in some cases, be a curse rather than a

blessing. A true private family office possesses the awareness, competency and time to

manage these qualitative factors for the benefit of the family.

- PANGEA Private Family OfficesTM

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6. Includes multiple family generations:

While this point may appear simple enough on first blush, to graphically illustrate the com-

plexity involved, consider the following:

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Fig.1

Commentary:As you may appreciate from looking at the graphic in Fig. 1, overseeing the complexities of the business,

family and ownership is a magnanimous task that requires unique professional competencies and aligned

interests from advisors working with the family. Considering the multiple dimensions that a family office

oversees you may also recognize the value in defining a family office in the manner that we did. A true family

office manages tremendous complexity to create clarity for the family. Managing this high degree of intersect-

ing complexity coupled with the meticulous focus on customization for the family is not the type of service

that large financial institutions are designed to consistently provide. High complexity and customization in

a private family office is contrary to systemization and standardization and so for large financial institutions,

operation of a true family office model is unsustainable for their business. If their “family office” business

models are to exist, the models will have to be a shadow of a genuine family office with compromises being

made in the level and type of services offered. If this is the case, then their service is no longer a family office

but rather a quasi modo offering masquerading for public attention.

- PANGEA Private Family OfficesTM

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Commentary:Welcome to Big Bank “Family Office.” Caveat Emptor.An ongoing claim from large institutions about their version of a “family office” offering is that they offer the same services as a private family office. While some have interpreted this claim as typical PR rhetoric and therefore disingeneoius, we invite readers to consider the following analogy:

While in conversation with some new friends at a neighbourhood dinner party you find yourself talking with Wayne. When you ask how he passes his time he says, “I play hockey for a living.” Since you’re not a hockey fanatic, you don’t recognize him as “The Great One.” After finding your conversation with Wayne pleasant enough, you top up your glass of wine and next find yourself talking with Josh. Josh tells you that he plays hockey too and you think to yourself, “Wow, another hockey player.” Josh goes on to tell to you that he wears the same number on his jersey as Wayne does, and wears the same size skates and uses the same hockey stick blade pattern that Wayne does. At this point in the conversation you think, Wayne and Josh sure do have a lot in common. After some more mingling and one more glass of wine you decide to leave the party at the same time as your next-door neighbour. As you walk along the quiet street back to your homes your neighbour tells you that their kids’ hockey coach has moved on and their minor professional hockey team is looking for a new coach. Your imme-diate reaction is,“You know, I just spoke to two hockey players tonight.” While recounting the conversations to your neighbour you say, “They both seemed like nice enough guys, maybe one of them would be available to help.”

Unfortunately for you, what Josh neglected to mention (and what you didn’t know to ask) was while he and Wayne both play in hockey leagues, Wayne plays in the NHL and Josh plays part-time in a recreational house league. While it is true that Wayne and Josh both play hockey and on the surface appear have many similarities – they perform at significantly different levels and their respective results from coaching the hockey team will be substantially different. So it is with large financial institutions branding themselves to look like to family offices on the outside, but on the inside their staff generally remain same, their process remains the same, their solutions remain the same and their objective remains the same – sell products and services to clients to profit from the relationship. Blue Ocean Capital Partners Director, Daniel Lin says, “For private banks, because they have certain targets, they need to find something that will give them a financial return pretty quick-ly,”... “For us, we’re not in a hurry to make money out of this; we have time to build on the intangibles such as family values and governance.” Worth acknowledging is the important role that we see private banks and other like financial firms playing in collaboration with private family offices. These large institutions are proven to be innovative and prolific in product design and distribution. Leveraging their core competencies, wealth management firms should remain open to designing custom solutions for private family offices while acknowledging that overseeing strategic family affairs requires competencies they do not possess. To achieve the family’s objectives, the private family office will continue to fulfill its role by negotiating appropriate terms, pricing and solutions for the family from the widest available spectrum of product & service providers. - PANGEA Private Family OfficesTM

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Thought Leadership:

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PANGEA Private Family OfficesTM is part of the PANGEA Global Wealth Group

corporation. PANGEA Global Wealth Group is a Canadian controlled private corporation. Our

clients highly value our independent position because of the candor that it affords in commu-

nication and the allegiance it fortifies to the family’s best interest. We’ve eliminated conflicts of

interest by centralizing decision making authority within the family’s thought leadership council/

Board of Advisors who are loyal to the family. Furthermore, we’ve separated the strategy from the

sale thereby putting the decision making control back into the hands of the family. Confidentiality,

trust and independence are the primary reasons clients choose PANGEA Private Family Offices.

Our clients find us mainly from within our own private circle and therefore share similar family

values, strong community involvement and a yearning for personal growth. PANGEA Private

Family Offices has published many other reports, articles and interviews. Our thought leadership

reports, articles and interviews are regularly sought after by enterprising global families and their

private advisors. Learn more at www.pangeafamilyoffices.com

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