Conference Discussions on Family Office Viability
A recent two-day family office conference in Germany brought together principals, next-generation heirs, family office executives, academics, and advisers for candid discussions regarding the structure and management of family wealth. The event featured panels conducted primarily in German, with some sessions held in English, according to Matthias Knab of Opalesque.
One central topic of debate was the financial threshold required to establish a single family office. Panelists cited costs associated with aggressive tax planning and asset complexity as approximately one million dollars. However, other estimates suggested that if those specific factors are deducted, the cost could be as low as $100,000.
Academics on single family office boards noted that the definition of a family office remains ill-defined. One academic stated that holding only a brokerage account with exchange-traded funds does not necessitate 150 million euros in assets. Conversely, serious due diligence in private markets involves significant fixed costs.
Panelists highlighted the operational expenses associated with scaling these entities. Once a family office employs three to five staff members and incurs annual costs of two million euros, it represents 2% of 100 million euros under management. Speakers warned that such fees can consume half of a family's wealth over the course of a generation.
Strategic Priorities and Investment Errors
A panelist with a long career in private markets emphasized the correct sequence for establishing a family office: defining purpose and targets must precede asset allocation. The panelist observed that most individuals begin with textbook asset allocation and invest too quickly.
A moderator at the conference admitted that his own organization overlooked what wealth owners actually wanted to achieve for ten years, spending 99% of its time on technical issues such as strategic asset allocation and risk management.
Within Frankfurt's private wealth circles, the cost of skipping the step of defining what money should do is referred to as the "product of the week." This term describes a scenario where advisers execute actions based on their incentives rather than the owner's goals if those goals are not clearly defined.
A family office executive and private wealth veteran noted that banks steer centrally what gets sold. Consequently, owners should not expect highly individualized wealth management without clear goals.
An academic at the conference identified a specific error causing the ruin of fortunes: founders continuing with the investment strategy that made them rich. The academic explained that strategies for creating wealth differ from those required to preserve it over a generation.
Entrepreneurs who succeeded by concentrating everything in one bet tend to underestimate risk. According to the academic, learning humility usually comes with the experience of losing half the wealth.
Risk Management and Fraud Prevention
The academic described family offices as the prime target of fraudsters, particularly those who believe they are sophisticated investors and pile into private markets without proper diligence.
A private markets veteran advised special caution in this sector because once committed, an investor is partnered for 10 to 14 years until a fund is wound up.
Another panelist proposed that a family office should be defined as a "family risk manager." This definition covers financial, operational, and behavioral risk arising from dysfunctional family dynamics.