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2023-04-12
The term family office covers many forms of organization that manage substantial wealth on behalf of a family.
These organizations are sometimes structured as a group of family-owned companies, where the family’s wealth is pooled and managed by an ‘office’ that provides financial and investment services for the family members.
The source of wealth and background of the founders/principals will greatly influence appetite for growth and investment preferences: a first-gen entrepreneurial principal is perhaps more likely to be involved in direct investing and the day to day running of a single-family office (SFO). Other principals may be more conservative in their approach and their priorities focused on traditional wealth preservation via an external partner. Alternatively, some families have taken a slightly different approach, combining with other families to share operating costs, and formed multi-family offices (MFOs).
Unlike many public companies that relish publicity for brand building purposes, family offices often (but not always!) desire discretion. Founders/family members wish to protect their privacy and prioritize trusted relationships when choosing who to bring into the fold to handle family affairs. Yet multi-generational wealth preservation is a complex, specialist field that typically requires a team of highly skilled, experienced professionals to oversee diverse functions such as investments, tax planning, trusts, real estate management, philanthropy, insurance, legal and governance. The family orientated nature of most SFOs makes talent acquisition a challenge, particularly at the senior level where the tendency is to rely on existing networks to source candidates. The understated ‘brand’, need for confidentiality, lack of information regarding a career path and legacy relationships, mean families are not optimized to attract the best calibre talent in the market.
As the sector continues to grow, the competition for external talent will certainly increase. According to a 2022 Citi Private Bank survey over 52% of global family offices stated talent and succession planning as a priority over the next five years. For example, developing existing family members or hiring externally.
Due to the complexities associated with talent acquisition in SFOs, there is an opportunity to review current recruiting practices and make changes to become more competitive in attracting the best and most appropriate individuals. This guide explores the way in which a new or established family office can incorporate strategic planning tools and embrace talent acquisition best practices to elevate their recruitment processes.
Start with structure and a cost analysis
There is much debate about how much money is required to create a financially focused single-family office – minimum numbers range from $100m to $500m. While there is no set minimum threshold to form a family office, there are some important questions to consider. Are the ‘active’ or investible assets substantial enough to warrant an in-house team? What size team is needed, and which activities can be outsourced? Will the corresponding budget be big enough to attract the right talent?
Most family offices want to recruit from top tier investment banks, wealth management practices, law firms and from Big 4 professional services that typically reward their employees extremely well.
Multiple sources, including a Citi Private Banking white paper, suggests family office expenses should amount to 1-2% of the family’s ‘active’ assets. The table below provides a useful guide to help calculate approximate budget for expenses (the greatest expense being salaries at circa 60% of total budget).
Example structures
Based on USA current compensation data, a small to medium size team could cost between $800k and $1.5m with core team members being a CEO, CIO and a CFO. At this size most aspects of investing will likely be outsourced, and the role of a CIO will be to oversee assets and fund managers. A CFO would likely utilize specialists for tax advice and planning rather than have a dedicated person in-house.
Larger family offices salary expenses could be $2.1m - $4m per annum. That is likely to consist of the core CEO, CIO, CFO, and depending on the particular focus of the family office could have a venture specialist, portfolio manager, real estate analyst, equities analyst etc. to support the CIO. The CFO will oversee a team of finance professionals such as an accountant, controller, tax manager and bookkeeper. Operations typically sits under a Chief of Staff or COO and if there is not a separate Chief Legal Counsel role could include general counsel. Technology, administrative staff and other specific operational roles vary hugely depending on the complexity and size of the family. See below for a typical family office structure (in the large to very large category).
Cost is one of the main factors to consider when determining the structure of a SFO. Developing a total budget and apportioning to roles according to complexity, seniority, return on investment and market value is an appropriate starting point for strategic planning purposes. It’s also worth exploring the different ways to address team structure and people requirements. For example, is this an activity that could be outsourced more effectively? Is it necessary to hire a full-time person or is it a project that could be filled on an interim or fractional basis? Working with a specialist recruitment partner can open your network to a range of interim and permanent specialists.
Compensation and benefits
The key to attracting and retaining talented individuals is an appropriate rewards package. While a competitive base salary and bonus should attract good candidates, a long-term incentive plan (LTIP) will retain individuals longer-term.
The typical structure follows base salary, bonus, benefits, and long-term incentive plans. There is no one size fits all approach in terms of how to structure a LTIP, they are typically linked to long term performance and can take the form of phantom stock (future cash payment based on market value of shares), co-investment opportunities, transaction bonuses and in some cases, partnerships. Duration of such plans tend to be a minimum of three years, at which point they may renew or be renegotiated. There are many factors that contribute to an LTIP but getting this aspect of an offer right will be crucial to landing senior talent. Considering the type of LTIP structure best suits the SFO in advance of hiring is advised to build it into the recruitment plan.
Another point to note is the variation in total compensation depending on geography. The 2022 Morgan Stanley Compensation Survey suggest salaries are 20-30% higher in New York and San Francisco, so budgets will differ if a candidate is recruited to work in higher salary areas.
When making an offer to a candidate it is worth mapping out what compensation could look like over the first 1-5 years of their tenure, including modeling potential payouts, to prevent any unexpected surprises. Having clearly documented offer/contract plus explicit incentive plans should be a non-negotiable at this level.
It's worth noting here that eight states in the USA (New York, Connecticut, Colorado, California, Washington, Nevada, Rhode Island, Maryland) now require organizations to stipulate a salary range on any advertisement or job posting in a bid to improve pay transparency and equity. It is important to understand the ever changing employment laws in states where the FO operates to be sure recruiting practices are in line.
Be clear on roles and responsibilities
Whether you are in the process of establishing a family office or working through team transitions, it’s vital that the principal and/family members spend time defining and clarifying the requirements of a role. It is particularly important for the family to be aligned on the ‘why’ and ‘what’ of a role.
In an established family office, this might mean consulting various members to gain consensus on the priorities of a position. It’s better to invest time at this point than face disagreements further down the line. For example, if hiring a Chief Investment Officer, clarifying the investment mandate, reporting line and specific metrics will ease the decision-making process when weighing up different candidates. If it’s difficult to gain consensus, try bringing family members/leaders together to drill down into the ‘non-negotiables’ of a role; perhaps use an outside advisor to aid the discussion if there is potential conflict. This is what a senior HR business partner or talent acquisition leader would do in a corporate setting. Following this a formalized job description should be written and approved by decision makers.
If a family has a clear vision, defined values or guiding principles, these should feature in the job description too. These will differentiate and bring your family office ‘to life’ for potential candidates and tend to be more engaging than the bullet list of tasks and responsibilities. Values should tell a senior person what the culture of a family office is and will enable both sides to determine cultural fit through the selection process.
A common area of concern among executive talent is wasting time in a recruitment process that goes nowhere, or far worse, taking a role that turns out to be different to that described at interview. Equally, a poor hire can set a family back in many ways. Being able to present a formalized job description during the recruitment process helps set expectations for all and will encourage self-selection out of a process by an under-qualified candidate.
A well written job description should include an overview of your family office (vision/purpose and values), how the role in question links to the purpose, clear responsibilities, defined performance metrics, behaviors/soft skills and level of experience, education, and professional qualifications necessary. An abbreviated, confidential version can be created for early conversations.
Plan the process
Having a well-planned search and selection process will help manage expectations of stakeholders and/or family members and candidates that enter your process. A plan should outline which people in the family office should co-ordinate the recruitment process and who will form the hiring committee or decision makers.
A good plan should include where to attract candidates from and what each stage of the selection process will consist of. For example, a first stage interview will likely be introductory, could be virtual, and explore the person’s professional background. Assuming a job description has been prepared, the interviewer should be able to establish if the candidate’s background and experiences meet most of the criteria at this first stage. If the role is CIO of a single-family office with AUM of $3Bn, and the person’s experience has been overseeing investments of AUM $500M, it doesn’t matter how charming they are, they are likely not right for the role.
Second stage interview could be in-person and delve deeper into experience, achievements, and track record. The third stage could be a panel interview and involve a presentation activity and probe important values specific to the family (i.e. trust, integrity, conflict management, community impact etc). The final stage could be more of an opportunity to address any concerns or unaddressed topics through the process by both parties.
Taking a structured approach to the process will ensure a positive experience for both the candidates and the hiring committee. This approach is proven to be more reliable than traditional ‘get to know you’ style of interviews.
Another consideration for your plan should be deciding when it is appropriate to share more specific or confidential information with candidates. What aspects of the family are okay to share with potential candidates, and when? The more you can share upfront, the better understanding the candidates have of the opportunity. The person coordinating the process should ensure each person involved in interviewing understands the process, what to share/not and the types of questions they should be asking. This way you avoid family conflict and repetition at each stage of the selection process. The priority at each stage is to build a deeper understanding of the candidate(s) and allows both sides to do their ‘due diligence’.
See below for a high-level view of what the recruitment process could look like.
Fish in a bigger pond
All too often family offices rely on their network to identify potential candidates to fill senior roles. This can limit choice and lead to biased decision making. There are ways to advertise anonymously or engage with a recruitment partner to increase the pool of candidates into a pipeline. A good recruitment partner will not only save time but should also add breadth and objectivity to the process.
As no two family offices are alike, neither are the approaches for recruiting talent. Executive search professionals who specialize in family office can offer a high-touch approach to recruiting and access hard to reach, busy individuals. The right headhunter should know the market and be able to map out where to find potential candidates. Contingency or hybrid recruitment companies can deliver candidates quickly and are likely to be cheaper than an executive search firm but will likely cap the amount of time they spend proactively headhunting candidates.
A search firm can build a short-list of candidates using a market map and their network of existing contacts; handle the ‘brief’ sensitively and approach active and passive job seekers. The latter is crucial in a competitive market, as the best, high performing candidates are not scrolling job boards for roles, and it may take several conversations for a person to consider moving forward with an opportunity. A thorough recruiter will probe a person’s background, understand their motivations for a change, timing challenges, compensation expectations and longer-term career goals.
If your talent search involves a partner invest time in briefing those involved so that they fully understand the family’s needs, they will then be able to represent you appropriately in the market. A trusted partner will be able to recommend solutions for your talent requirements, for example: creative places to search for talent, engaging passive job seekers, how best to assess leadership capability, handling geographic/cultural differences if a search is in a different jurisdiction.
Checking references
Lastly, it is always important to validate authenticity of any candidates considered for an offer. Recommendations from a trusted contact, peer referral or family member is valuable, but more extensive checks should be made. The process should be rigorous to ensure objectivity and reliability. There are different approaches to employment references and background checks depending on level, role and geography. They can include: educational checks, professional qualification status, credit checks, drug tests, online/social media checks. All of which should be approached professionally to avoid any negative legal claims. If in doubt speak to an HR professional or lawyer.
Conclusion
Reading through this guide may create the impression that hiring for roles in a SFO is arduous and time consuming. While it is time consuming, particularly at the senior level, creating a plan, clearly defining roles and responsibilities and approaches to attract and assess senior candidates will surely improve the outcome of the process. Utilizing these insights to create a recruiting process can help secure and retain a hire that will generate value well beyond their compensation package.
Once a recruitment process has been defined and implemented, it will continue to aid in future hiring. While improvements to the process will continue along the way, a strong structured process will facilitate objecting decision making and a more proactive approach to addressing succession planning.
Author: Katherine Travell, Partner, Stryde Search.
Thank you Lisa Slagel and Richard Geldart for your contributions.
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