How to Spot a Bad Family Office

Family Office red flags

Author

Mr FamilyOffice
April 19, 2024

How to Spot a Bad Family Office

Family Office Red Flags 🚩🚩

The allure of a family office can be undeniable - prestigious, intimate and managing vast wealth

However, all that glitters may not be gold

If you're looking to work with family offices, either as an employee or a partner, there are red flags that should not be ignored

Today, it’s a look at those red flags and some related advice for:

👥 Prospective employees

🔧 Service providers (wealth advisors, lawyers, tax advisors, developers etc.)

🏦 Family offices looking to co-invest or enter into alliances

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🚩 Size of the Team

A very small family office can often be a red flag

The average number of employees in family offices is estimated at around 14

Smaller family offices can have just a handful of employees while even the largest family offices seldom have more than 50 people

Small can be beautiful, but it can have drawbacks

It’s not just a question of size but also about the plan for scaling

👥 For Prospective Employees

The size of the team in a family office can significantly influence your career trajectory. A smaller team means a steep learning curve and the rapid accumulation of diverse responsibilities, but career progression can be stifled if there are few higher positions to aspire to

  • Consider the team size as it might affect career progression and personal growth

  • Seek roles in family offices where you can handle early responsibilities and rapid role diversification

  • Be aware of the close-knit atmosphere, which can impact work dynamics

🔧 For Service Providers

Service providers to family offices should also consider the size of the family office as it affects their client engagement strategy. A smaller team may require more comprehensive support and expect service providers to play a quasi-internal role

  • Tailor your engagement strategy to the size of the family office, often requiring comprehensive support

  • Build deeper client relationships by adapting to their needs and demonstrating flexibility

🏦 For Family Offices

A smaller family office might be more agile and open to innovative investment opportunities but might also carry higher operational risks due to fewer checks and balances

  • Evaluate the agility and operational risks associated with a smaller team

  • Consider how team size influences investment processes and risk management

🚩 Investment Mandate Limitations

A severely restricted investment mandate may signal potential problems

A lot of family offices only invest in what they know

A restrictive investment mandate can significantly narrow options for employees and partners. If a family office focuses tightly on certain industries or asset classes, you might find your experience becoming pigeonholed, limiting cross-sector exposure

👥 For Prospective Employees

Prospective employees should evaluate how a family office’s investment mandate aligns with their career goals and areas of expertise. A specialized focus can offer deep insights and significant expertise in a particular field, which can be highly beneficial for those looking to become industry experts

  • Assess how the family office’s investment focus aligns with your career goals

  • Seek opportunities to specialize if the investment mandate matches your aspirations

🔧 For Service Providers

Service providers need to understand the specific investment mandate of a family office to tailor their services effectively. A narrowly focused mandate may require specialized knowledge and a bespoke approach, whereas a more diversified mandate might benefit from a broader range of services and strategic advice

  • Adapt your services to fit the specific investment mandate of the family office

  • Offer specialized knowledge and bespoke services as needed

🏦 For Family Offices

Alignment in investment focus and strategy is crucial for successful collaboration. Mismatches in investment mandates can lead to conflicts or inefficiencies, whereas compatible investment focuses can enhance the synergy and potential returns of co-investments

  • Ensure alignment in investment focus for successful collaborations

  • Conduct thorough due diligence to understand potential partners' investment strategies

🚩 Family Dynamics

Beware of toxic family dynamics

At the core of every family office is a family

And with families come family dynamics. From overt office politics to subtler undercurrents of intergenerational tension, these environments can either be invigorating or draining

👥 For Prospective Employees

Understanding the family dynamics is crucial for prospective employees. The dynamics can significantly affect day-to-day operations and overall job satisfaction

But discerning family dynamics from the outside is not easy

  • Understand the family dynamics as they can significantly affect job satisfaction and daily operations

  • Evaluate how personal family matters influence business decisions

  • Speak with existing family office employees to get a clearer view on the family dynamics

🔧 For Service Providers

A successful partnership with a family often depends on service providers understanding the family dynamics. Awareness of family roles and influence can guide how they present information, make suggestions, and handle sensitive issues

  • Recognize the importance of understanding family roles and dynamics for effective collaboration

  • Develop personalized communication strategies and maintain clear professional boundaries

🏦 For Family Offices

The dynamics within potential partner families can have profound implications on cooperation between family offices

  • Assess family dynamics in potential partners as they can impact cooperation

  • Evaluate governance structures and conflict resolution processes before forming alliances

🚩 Professional Growth Opportunities

A lack of personal growth opportunities should be a concern for prospective employees

Unlike corporate giants with robust training programs, family offices often lack formal paths for professional development. This doesn't mean opportunities are non-existent, but they might require you to be more proactive

👥 For Prospective Employees

Prospective employees should thoroughly investigate how family offices approach career progression and personal development. Without structured training programs, learning opportunities might be informal, such as mentoring or on-the-job training. Candidates should ask specific questions during the interview process about past examples of employee advancement and the typical pathways for progression

  • Investigate opportunities for career progression and personal development within the family office

  • Ask about mentoring and on-the-job training during the interview process

🚩 Compensation / Payment Structures

Compensation and vendor payment strategies at family offices might signal red flags

👥 For Prospective Employees

While family office pay is generally competitive, some families still view salaries and bonuses as a cost to be minimized

Prospective employees must thoroughly assess how compensation in a family office compares to industry norms, especially given the unique demands and potentially limited resources of smaller family offices

  • Compare compensation packages to industry norms to ensure they meet expectations

  • Consider the comprehensiveness and stability of the offered package

🔧 For Service Providers

Service providers need to understand the family office to structure their fees and services appropriately

  • Prepare for potential tough negotiations with budget-conscious family offices and justify value

  • Consider offering flexible payment structures to align with client needs

🏦 For Family Offices

When family offices look to co-invest or form alliances, understanding each other’s internal compensation structures can provide insights into the organizational culture and financial health of potential partners

  • Understand compensation structures in potential partners to gauge organizational culture and financial health

  • Align compensation strategies in joint ventures to ensure motivated teams

🚩 Co-Investment Opportunities

For me, co-investing is a major benefit for senior family office staff. If this is not offered, this could be a warning sign

In the U.S., less than half of family offices offer co-investing options to their staff

👥 For Prospective Employees

The availability of co-investment opportunities can significantly enhance the attractiveness of a position in a family office. Co-investment allows employees to directly participate in the financial gains from successful investments, which can not only boost financial returns but also lead to a greater sense of commitment and alignment with the family office’s goals

  • Evaluate the availability and terms of co-investment opportunities as they can enhance job attractiveness

  • Consider the level of risk and alignment with personal financial goals

Click here for more on long-term investment plans in family offices

🔧 For Service Providers

Service providers should be aware of a family office’s stance on co-investment as it can affect the types of services and advice they offer

  • Understand the family office’s co-investment policies to tailor financial advice

  • Align investment strategies with the personal interests of office staff

🏦 For Family Offices

Co-investment practices can indicate how open a family office is to sharing opportunities and risks with others. This can be a key factor in determining the alignment of investment philosophies and the potential for collaborative success. When two family offices with similar co-investment attitudes work together, it can lead to more synergistic and mutually beneficial relationships

  • Assess co-investment practices and philosophies of potential partners for better synergy

  • Evaluate investment philosophies to ensure collaborative success

🚩 Structural Organization

An informal or embedded family office can be a major red flag. These settings can suffer from inefficiencies and a lack of professional management

👥 For Prospective Employees

Prospective employees should be aware that working in an informally structured family office can involve dealing with ambiguous roles and responsibilities, which might hinder personal productivity and professional growth. They should evaluate how their skills and experiences can contribute to creating more structured processes and whether such contributions will be recognized and rewarded

  • Be prepared for ambiguous roles in less formally structured family offices

  • Evaluate the family’s support for professionalizing the office

🔧 For Service Providers

Service providers can find significant opportunities in less formally organized family offices. These offices may need expert guidance on implementing effective structures and processes

Providers should approach such engagements with a clear understanding of the family’s goals and readiness for change. However, providers must be prepared for potentially slow decision-making processes and should build flexibility and patience into their engagement strategies

  • Identify opportunities to help informal or unstructured family offices implement effective systems

  • Offer customizable solutions to meet the family’s specific needs and readiness for change

🏦 For Family Offices

Misalignment in management practices can lead to complications in joint endeavors. Before entering into any partnership, assess whether potential partners have the necessary systems in place to manage shared investments or projects effectively. Family offices with more structured approaches may need to assist or lead in the creation of joint management frameworks to ensure smooth cooperation

  • Ensure potential partners have necessary systems for effective joint management

  • Assess the structural organization of potential partners before committing to alliances

🚩 Work-Life Balance

Depending on your outlook, a family office that makes excessive demands in relation to work-life balance may sound alarm bells

The intimate nature of family offices can sometimes blur the boundaries between professional and personal life

👥 For Prospective Employees

Prospective employees should thoroughly investigate the work-life balance offered by a family office. This includes understanding expectations around work hours, flexibility, and how the office handles personal time and emergencies

  • Investigate the work-life balance culture, including expectations around work hours and personal time

  • Ask specific questions during interviews about work hours, availability, and policies on vacations and personal leave

🔧 For Service Providers

Providers should understand what is expected from them in terms of availability and response times. They might also consider structuring their services to accommodate urgent needs

  • Set clear boundaries to manage client expectations around availability

  • Consider offering premium services for urgent or off-hours support

🏦 For Family Offices

Family offices entering into partnerships should be compatible. Discrepancies in how each entity views work-life balance can lead to misunderstandings and friction, especially if one party expects the other to be available beyond conventional hours

  • Discuss philosophies early in negotiations with potential partners

  • Align operational norms to prevent future misunderstandings and ensure smooth cooperation

🚩 Openness to Innovation

The best family offices evolve and change through the generations. It’s a worrying sign if the family office is not open to change

Some family offices maintain traditional approaches due to their long-standing success, while others might be tightly controlled by a single influential figure, often leading to a resistance to change

👥 For Prospective Employees

Prospective employees should look for signs of forward-thinking, such as investment focus, adoption of modern financial strategies, or openness to new ideas. An environment that is resistant to change may not only stifle creativity and personal growth but could also impact the bottom line

  • Look for signs of innovation, such as investments in new technologies and openness to new ideas

  • Inquire about recent technological or strategic changes during interviews

🔧 For Service Providers

Service providers need to tailor their offerings based on the openness of a family office to embrace new technologies and practices

For those providing tech solutions, legal advice, or strategic consulting, understanding this can dictate how they propose and implement services

  • Tailor offerings based on the family office’s openness to new technologies

  • Innovatively driven offices may allow more aggressive service proposals

🏦 For Family Offices

For family offices looking to form alliances or co-invest, alignment in the attitude toward innovation can play a crucial role in the success of those partnerships

Offices that share similar levels of openness to new ideas and business practices are more likely to build a synergistic relationship, driving mutual growth and success

  • Evaluate potential partners’ attitudes towards innovation for compatible collaboration

🚩 Fake Family Offices

Fake family offices are on the rise and are an obvious red flag. These entities often lack the core characteristics of a genuine family office, such as managing family assets and focusing on long-term family wealth preservation. Typically they are raising funds or they are simply fraudulent

👥 For Prospective Employees:

  • Verify the authenticity of the family office by researching its history and the family it represents

  • Be cautious of roles that focus heavily on investment solicitation rather than wealth management

  • Seek transparency regarding the office's financial activities and client base

🔧 For Service Providers:

  • Evaluate the legitimacy of a family office before engagement to ensure alignment with genuine family offices

  • Be wary of offices that lack a clear operational history or established investment track record

  • Consider the legal implications of associating with entities that misrepresent their purpose

🏦 For Family Offices:

  • Conduct thorough due diligence when considering partnerships or co-investments with new family offices

  • Look for signs of established family governance structures and genuine asset management activities

  • Avoid entities with a primary focus on fund-raising or that lack transparency about their operations

Working for or with family offices can be immensely rewarding, and as the sector grows, the opportunities will explode

Family offices are not traditional corporations - they come in all shapes and sizes and they can come with baggage

But that should not put you off all family offices

The trick, as always, is to do your homework, to do the due diligence

And like most things in life… red flags can also be opportunities

𝕏 highlights

Measure success in generations not years

A shout-out to the service providers:

Can you guess the winner…

📚 what to read

On a Twitter recommendation, this week I’ve been reading Family Wealth - Keeping it in the Family by James E Hughes. So far, great insights on building a legacy - beyond just the financial, it explores the importance of values, character, love and identity

📻 what to listen to

A bit of light relief with Smartless with Jason Bateman, Sean Hayes and Will Arnett. Each week one of the hosts introduces a mystery guest. The results are spontaneous, authentic and usually hilarious discussions. Ideal for a long drive.. pick a guest you like and go!

📺 what to watch

A super short video on the death of coding. It wasn’t so long ago that parents were encouraging their kids future-proof themselves by taking up coding

📰 family offices news roundup

And finally…

A long newsletter this week, so a short wrap-up

I’ve been receiving some good recommendations recently on what to read/listen to/watch. Keep them coming

I’m also always open to ideas for the newsletter

Remember, you can always hit reply to let me know your thoughts

But for now, it’s Friday.. it’s time to relax

See you on 𝕏

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