State of Family Offices and the Greatest Hurdles Facing Them

Kathryn McCarthy has over 25 years of experience in advising wealthy families and managing family offices and other private entities.  She is currently an advisor and consultant to families and family offices.  She is a director of the Rockefeller Trust Company, NA, and serves on its audit committee. Kathryn serves on several private family investment committees, is on the board of directors of several family offices, and acts as a strategic advisor to a number of family groups. She is also a member of the board of directors of SEI Investments, a public company, and serves on the audit and compensation committees, and is the lead independent director. 

Kirby: Welcome to the Tamarind Learning Podcast. Today, I am thrilled to have Kathryn McCarthy with me, who has been one of the family office, family enterprise, and wealth management leaders, for more than three decades. I know she is much, much younger, and more glowing that you would never believe that. But she has literally been a luminary in our space. And is someone who I dearly adore and respect, and I'm so thrilled that she's here with us today. Kathryn had sat on many seats at the boardroom table for her clients, she sits on publicly traded boards, she has sat on wealth management boards, and so she's really had a catbird seat to some critical family office and wealth management arenas.

So, we're thrilled to have you here today, Kathryn. And Kathryn was also incredibly instrumental in the Second Edition of the Complete Family Office Handbook as she was a sage and counseled and helped edit and helped bring some incredible resources to make that book so much better. I am very indebted to her on so many levels. So, Kathryn, I am excited to talk to you a little bit more today about the state of the family office. Maybe you can share your thoughts on what you think some of the greatest hurdles facing family offices today.

Kathryn McCarthy
Well, thank you, Kirby and congratulations on the birth of the Second Edition of The Complete Family Office Handbook, and I was privileged to be working with you on that and I'm sure it will be a wild success at many levels. You know, it's interesting there are there are a lot of hurdles that's specific to vary to a specific family office. So, when you asked the question, I thought, well, maybe the best answer would be a generic answer. And so, I think that the biggest hurdle to family offices in general is the reluctance to change. Or, as I would say, short-term thinking. Family offices tend to be reactionary. They tend to be in the moment, but they need to look forward, and they need to anticipate changes in the offices and changes in the family.

Now, this is complicated by the fact that the families themselves, as I've said to you many times, can't take family out of family office, the families themselves are probably even more reluctant to change, So, I'm reminded of a of, a quote from a book review by The New   York Times many years ago. I don't even know what the book was, it was about a family situation. But what I remember about the review is this quote, and the quote is, “Families are characterized by relentless inertia in the face of constant change.” That stuck with me, and it also informed me in when I'm dealing with families, because I expect inertia. And I expect change, and also, then, I expect the family offices to be subject to that environment. But planning for the future is a key challenge in every generation, and it's going to affect everything you do in a family office, assuming then you want it to last for more than one generation.

That's really why I was so pleased for the Second Edition of your book that you devoted time to planning, and particularly to the Mathile family case in the second chapter. You know, that case showed that over 20 years in really distinct strategic planning cycles, the family went from first generation to third generation, and they embraced change. They embraced change in leadership, they embraced change and services. They embraced the change in the generational focus of the family office, in a purposeful way, and it's very hard. I give them a lot of credit for planning out their office that way and at the same time sticking to their day to day.

As a former CEO of a family office, another hurdle is alignment. Particularly, if the family itself is larger, multi-generational, and can't get aligned around the purpose and the value of the family office. So, alignment is a huge challenge. It's alignment within the family. It's a lot alignment with the family office. And many times in these situations, when there's no alignment in the family and by default, there's not a good alignment with the family office. The family office becomes stagnant, they become disengaged from the family, and their issues, because they're siloed away. And they're not viewed as a resource, let alone as a strategic resource. The family office cannot function effectively without a consensus on the “why” of the family office, and then the “what,” the “who,” and the “how” that follows.

So I go back to your book and the Mathile case and, I think it's the Godspeed case in chapter three, and that's a really good example of the, what I call, the ossification of a family office. Basically neglected, even though there was a family member there. The family just didn't really care about the office. They had no interest in the office. They had no interest in the family office’s future. Luckily, they were able to come to some consensus, about closing the office, because they didn't really care about it, and then move on.

So, I think to sum up that the biggest hurdles that family office face today are, and today, and always, are this reluctance to change. And the difficulty of alignment, both within the family and stakeholders, and with the office. And, in particular, in a multi-generational setting, which is what you find yourself in a family office very quickly, even if you have that, even if it's just a one generational office.

I think talking about the value of the office among the people in the office and with the family is really important, and talking about the long-term purpose of the office, and those are two topics that don't get discussed much. They just kind of loom. You hear a lot today about resilience and relevance. A family office that is not resilient and lacks relevance is not a healthy environment. But those offices who plan, in the long term, I think we'll be more resilient because it comes from the planning process. They develop this resiliency memory, and those who are aligned with their purpose, particularly the purpose of the family office, are on their way to being relevant because purpose will allow them to discuss what's important to them - what's important for the current generation and then what's important for future generations. So, relevance and resilience can be enhanced by alignment, conversations, and by planning. And if you have relevance and resilience, you've got a healthy office.

I can't not mention COVID and how it's affected family offices. COVID has brought out a willingness to change. It may be temporary. It may be a willingness to talk about alignment a little bit, but we have people working from home, We have awareness of cyber risks and other risks that were just kind of put under the table from “We're not going to do that” to “We have new technology and new ways of communicating.” And in particular, we have awareness of the needs of the staff, and their psychological moment. That's led to really a greater effort on preparedness, which you've got to plan to be prepared for and scenario planning.

So, I know a little bit of a shift there and maybe we'll see more.

Kirby Rosplock
I was going to ask about your thoughts on the pandemic because it really has become an introspective time. While for many this can be healthy, it can also be very isolationist and scary.And I would imagine that it's impacting your clients and the family offices you know, on so many different levels as they may be re-evaluating their investment process or are looking at risk controls and  redundancies, because so many of family offices don't have a lot of redundancies necessarily. And now you're realizing maybe we have more exposure. I'm just curious what other kinds of changes COVID has created. I love the idea that maybe it's bringing people to the table virtually, right?  They're not able to be together, but what is it doing? What has it inspired or in some of the families that you work with, and what changes are you seeing?

Kathryn McCarthy
Well, I don't know whether this is a good thing or a bad thing, but people can't hide from meetings. It's really hard to say, Oh, I'm on an airplane. I can't be on the Zoom call. So, I'm seeing this opening of conversation, and more contact.

The other thing, I've been working with  one family where we're trying to help them re-establish a family office and one of the things that I've seen is the willingness to have short meetings and then debrief and let people think and contemplate, because there is a little more time. So, at the family level, there's this feeling of wanting to take this time and use it well. That's on the positive side.

On the negative side, I haven't seen a whole lot of negatives other than in situations where you need a lot of sidebars to get things done. You can't sidebar that easily. You can't sort of press the button and say, sorry, I gotta go talk to Uncle Joe because I need a special room, and I need a special Zoom room. So, maybe that's the reason why lots of lots of interaction through these shorter, more punchy, more agenda driven conversations are, are really getting things done. And I'm actually seeing people get things done. People are thinking more about succession planning and mortality. It's certainly something that's at the higher level. Preparedness, as I said before, is really at the higher level documentation.
I had a family office, a family member who realized that he couldn't just run into somebody's office and get information, you had them do a whole map of how things were done in the office and yes or no outside of the office. So there's been some very positive experiences through this period ...and knock on wood, I haven't seen anybody in an office get sick terminally.

Kirby Rosplock
I was also wondering with this transition, if there maybe are some different opportunities in terms of change. I mean, you've identified some hurdles that people have been able to address and actually start to communicate on because they've sort of found time. I do think the you talked a lot about in the handbook about virtual family offices and whether this might actually trigger more offices to think we just can operate virtually Like we don't need to have the same physical presence. So, I'm curious what you think about what will happen post pandemic. I'm already looking forward to those days because I really think this time is forever changing how we operate.

Kathryn McCarthy
Well, I've had a couple of really interesting surprises. Senior family members in their seventies saying we should go virtual. I was like, whoa and these are sort of the guys who kept everybody in the office, nothing everything was locked at your desk and very suspicious of the cloud. Now they're starting to embrace this idea that that you know even though they everything was in the cloud they just didn't want to acknowledge it that there could be ways to work virtually. And I have one patriarch who could barely find his computer. Now I have monthly sometimes quarterly calls depending on his schedule and he was really excited to let on the last call. He said, I'm going to set up the Zoom meeting. Next time. You don't have to do it. And it's like really? And now he's got an office in Midtown. The lease is up. Lovely Office. And he's basically saying, Do we really need this? I think he doesn't fit in the WeWork category. So that's not an option. But I think what he'll do is actually downsize the Office. He’s at the stage where he doesn't need to do that big office anyway. And he's got five people working for him and they're all communicating pretty well. So, he's really thinking about changing and going to a quasi-virtual office. We'll see. I’ll miss it because I loved going to see him in his office, but as long as he can work on Zoom, it's fine.

I think family office boards are really now under the spotlight. I have been on a number of boards where we have dinner before the traditional dinner before a quarterly meeting. Some require international travel. That’s going to change dramatically. We're finding that we can be just as effective. We don't need to be together four times a year to be effective and the times we're together will be much more quality time. I think the board management is going to be totally turned on its ear.  I think as long as we can have some contact with each other, we'll be fine.  When I think about the way investment committees are operating today, I don't see any panic … that's good.  I see some downsides in look, you know, I was talking to managers, You really need to get in their offices to get that feel. They're smart about their pitches. So, on that side, that's kind of a negative for the investment committees. But I've had many more zoom calls between committee meetings, just, you know, just tweaking the asset allocation. I mean, when we think about investment process, it's pretty much the same, nothing is really changed. It's more education to families of and about expected returns and what should they expect going forward in the future. And it's not this balanced portfolio, moderate risk five, you know, six to 8% returns annually. It's take it down a notch.

That those conversations have been really difficult, and they've been actually difficult on Zoom. Anything about expectations, particularly investment expectations. The other thing that looking into the future, we've, we've talked a lot to family members, because expected returns are lower about spending policies, distribution policies, and that's been kind of hard in a COVID environment, again, because it's so personal. But I've had a few meetings and, you know, people who have resolve, that they want to know they want to stick to their budgets, particularly on the family side. On the philanthropy side, lots of people are spending way beyond their budgets, their annual budgets, just because they have to they want to.

So, I hope that answers your question is kind of what's rattling around in my head about the future and how we're dealing today with what's going to happen in the future.

Kirby Rosplock
Kathryn, thank you so much for talking to me today. Kathryn McCarthy, again, you have been so helpful. The Mathile family was so gracious to share their story. The other anonymized case study happened thanks to your help, Kathryn. So, we are really lucky to have you talking here today on this Tamarind Learning Podcast and I look forward to our next time we get to see each other.

Kathryn McCarthy
It's been a pleasure. And again, congratulations on the book.