by David Drake
Family office management can be both rewarding and challenging at the same time. For beginners, families can be overwhelmed by the sense of liability and complexity that is associated with wealth management especially when it has to extend across generations.
Whether these offices are self-managed or coordinated by outsourced managers, there is always an astonishing amount of time spent by families trying to balance all the different elements of their family wealth, in addition to the struggles they face when it comes to wealth consolidation.
One of the greatest concerns, however, is that family offices normally experience huge losses of capital and opportunities owing to mistakes which might not be too obvious to many. Lack of proper cooperation and communication, lack of investment strategies, improper tax planning and poor control are just some of the common issues that family office management has to contend with.
However, there are also other misjudgments you should be aware of, and avoiding them could help simplify management, mitigate risks and enhance wealth creation while leaving a legacy.
Here are 7 of these mistakes:
Lack of investment strategy
Very few family offices have a clear investment policy implementation. This means that they are just moving without a clear aim or reliable structure to help channel the family assets.
Lack of a clear investment portfolio will result in picking any available opportunity that looks good as long as it’s fronted by your private banker, stockbroker or a real estate agent. As such, this leaves the family office with multiple small holdings in varied asset sectors and classes, most of which are in no way aligned with their objectives. It is important to have a document that clearly articulates the office goals and how they are to be achieved.
Uncontrolled cash management
Many family offices operate multiple bank accounts in different financial institutions, and these are absolutely hard to track. When there is a case of unruly cash management, the first solution is to always consolidate the cash holdings by first reducing the number of bank accounts and then identifying additional cash holdings which are more than the agreed benchmark.
This will create an account that is central to investment activities including dividends, fund transfers, trades and bill payments, among others, while giving a clearer overview of the family cash position and allowing for the reinvestment of surplus liquidity.
Overpayment of taxes
Family offices normally waste too much when they fail to do basic tax planning. Without proper tax advisory, family tax affairs could end up being overbearing for any family office.
There is a need to come up with strategic reviews on different operating and holding structures. This is to ensure that families are not losing too much in the form of legally-required taxes.
Surplus cash can be moved away from personal names and rather placed into companies and trusts to help defer or reduce taxes. There also other strategies that could work depending on the unique situations of various offices.
Paying excessively for assets
The value of an asset does not necessarily translate into pricing. Many family offices normally invest their money when the markets are hot, thus paying too much than the returns could be realized.
Additionally, many investors do not take the time to weigh the risks associated with capital loss in relation to additional income generated. It is important to invest in assets that are sustainable with long-term growth prospects, motivated growth in income and a structured capital base.
Signing deals without review by an attorney
When signing contracts, you must understand that not everything is always included in this legal document. Some seemingly inconsequential details are normally left out and contract adjustment becomes increasingly difficult with time.
If the contract you are signing has been written by the other party, it will be important to run it by your attorney before putting pen to paper.
Failure to anticipate future investment rounds
Many family offices do not expect or even structure their deals with future investment potentials in mind. As a company, it will be important to raise capital a few times and this should be considered at different stages of operations.
Structuring your deals properly will help prevent share dilution which is ultimately caused by future capital increases, or losing the opportunity to participate in future investment rounds.
Failure to dispose owing to low costs
Nobody likes the prospect of losing money even when it is apparent that the prospective gains are disproportionately smaller than the gains. Family office managers don’t like selling shares, property or even private business interests at a loss even when it’s obvious that they’ll be better off once they redeploy the capital in other promising assets.
Most family office managers hope that things will become better to help them recover their investment thus driving underperformance in their portfolio. If you find yourself in a burning house, finding the nearest exit is always easier than trying to put the fire out.
Family office management does not have to be overwhelming. However, families need to delegate and empower teams to make things easier and manageable.
Advisory teams must be given enough elbow room to carry out their work. This means owners will have to let go even when it seems that the stakes are high.
This way, family office owners will be able to boost funds, save time and prevent against wealth destruction. These seven mistakes can be avoided, but it takes courage and confidence in advisors and professional teams in order for them to do their work efficiently and successfully.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.
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