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2023-10-20
The Why, What, and How of Talent Management.
Successful family offices require talented people and talented people require rewarding careers, both financially and professionally. So how can families position themselves to attract and retain the right talent that is imperative to their success? An investment in talent management structure and practices can help chart the course. However, one major challenge is that a portion of family offices operate as standalone entities that are typically small and lean, making it harder to justify the time, money or resources needed to invest in such talent initiatives.
While many family offices have become ‘institutionalized’ over the decades, approximately four out of ten have been created in the last decade and therefore have a much more entrepreneurial, start-up way of operating. While these early-stage family offices are more likely to be fast-paced, dynamic settings, focusing on taking care of people’s careers is naturally harder in this environment. Given the highly skilled nature of managing/growing wealth and the challenges of hiring for roles in high demand, it makes sense for family offices to place greater emphasis on initiatives that take care of their human capital. Embracing talent management practices is a good way to do this, even if it means starting small and building gradually.
What is Talent Management?
Conceptually, talent management is about futureproofing your organization/family office. It means having the right people in the right place at the right time and understanding that adopting an integrated strategy can positively impact many areas of a family office’s ecosystem.
Practically, talent management is the collective process of attracting, developing, retaining, and deploying talented individuals within a family office and/or its portfolio companies to help meet its current and future needs.
Components of Talent Management
Talent management is a strategic part of HR and takes a business beyond thinking about transactional aspects of hiring and managing people (i.e. legal compliance, payroll, benefits administration, etc.) and is tied to the belief that having better talent at all levels allows a family office, and any connected family enterprise, to outperform its competitors. It’s the recognition that better talent pulls all the other performance levers and contributes to the creation of a high-performing team. Given that 60% of the costs of running a family office are dedicated to internal staff*, it is surely worth the consideration and investment to hire, develop, and retain the best people, not to mention what it could add to the bottom line.
Why talent management
Analysis has shown that organizations that look after their people outperform competitors, and that cohesive, engaged teams perform better across all business areas. Talent management is about a family having an actionable strategy in place to ensure it remains committed to a vision. While a one-off gesture to address talent management will not necessarily deliver instant profit, sustained, embedded processes should result in tangible, measurable benefits to a family over the long term.
Preservation and Growth of Wealth
For many high-net-worth families, their objective is to sustain multigenerational wealth, create and protect their legacy, manage personal affairs, and support philanthropic efforts. This is achieved through hiring the best investment, finance, tax, legal, and operations individuals, retaining those people, and creating institutional knowledge that can be passed on to the next generation of family members. Like corporations, families experience greater success when a high-performing team is in place, with a shared understanding of the vision and values.
Confidentiality and Trust
Many families value their privacy and wish to keep their financial matters discreet. Hiring and retaining professionals with the right focus on integrity, and the capability of building trusting relationships with family members is the foundation of reputation management. With the personal nature of building trust, hiring people who can navigate the interpersonal dynamics within a family is important. Evaluating trust in an interview setting can be challenging. How one family defines trust can be very different from another. This is why it is important to develop an interview process based on ‘measurable behaviors’, also touched upon later in the article.
Sustainability and Family Legacy
Legacy is partially built by creating a succession plan for critical roles in a family office or family enterprise. It can take years/decades to nurture internal talent to grow and transition into leadership roles. This is commonly cited as a challenge within family offices and their enterprise(s), partly because it’s hard to know which roles, if any, the next generation will step into and, also, because external changes are hard to predict.
Developing future leaders, whether sourced externally or internally, takes focused training, mentorship, and professional development to be able to reach the C-suite level. There are some compelling examples of successful leaders exposing their progeny to the family business early in life to foster understanding, work ethic, and motivation to take over the family enterprise/family wealth. Bernard Arnault of the LVMH empire and the richest man in the world* is reported to have taken his children on store tours from a very young age, and now all five of them hold senior positions across the group. His daughter, Delphine was made Chairman and CEO of fashion label Christian Dior Couture and is seen as his likely successor. Conversely, there are cases of billionaires passing unexpectedly and not having any succession plan in place for their empires. This lack of succession planning can throw a grieving family into turmoil and worse, divide the family.
Multifaceted Expertise
The transition from a founder-led family office to a full-service, multi-generational family office entails a change in organizational design and thinking. Such evolution can constitute a critical juncture for the entrepreneurial family office, and there is a risk of losing key talent, not having the right structure in place, or opportunities missed as the in-house teams lack crucial knowledge. With maturation comes the need for more specialists, for example, an investment ‘team’ can grow from a stand-alone CIO whose primary role is to allocate capital and manage external partners to a multi-disciplinary team of investment professionals across real estate, private equity, public equities, and venture capital. More on succession planning later.
How to deliver talent management
It is well documented that each family office has its unique structure and culture, often influenced by the complexity of businesses connected to the family, the size of AUM, geographic reach, and the vision of the family/Principal. This uniqueness means there isn’t a one-size-fits-all approach to talent management.
Most single-family offices are not large enough to warrant an HR function, therefore this important strategic approach to managing talent is likely to fall on the executive team. Where the family office is embedded in the family enterprise, they will likely need to consider talent management, particularly succession planning, for the company/ies at large as well.
Strategy and Planning
Purpose (sometimes described as the ‘why’ of a business*) helps orient teams and organizations in their daily work. A defined purpose can be translated into a set of ‘vision and values’ that drive the appropriate culture, decision-making, hiring practices, compensation structure, investment priorities, governance, etc. Having a set of strategic priorities helps to create a roadmap for achieving objectives from year to year, decade to decade. Strategic imperatives can and should be part of each function of the family office and be woven into the human capital/talent process. In practice, this means a senior executive overseeing the talent strategy, and the leadership team, family councils, and/or advisory committees contribute to the regular review of a strategic talent management plan to ensure it stays current and embedded across the organization.
Sourcing and Recruiting
Employer Brand
Family offices often exist in financial centers around the world and compete with investment banks, hedge funds, international law firms, and professional consultancies for talent. Attracting talent can be easier if a family consciously develops their employer brand, just as they might develop their brand for investment purposes. This can be done in a way that protects the privacy of family members. For example, having a family office name that is not the same as the family name, nominating a non-family member to be a brand ambassador, publishing insightful articles, speaking at conferences, referencing values on the family office website, or building a profile on LinkedIn are easy steps.
Building a talent pipeline
If a family office takes a more proactive approach to sourcing and recruiting, they can move from reactively responding to talent needs to hiring in a planned, thoughtful way, which inevitably means there is less pressure to make a rushed decision when the need arises. That means, meeting people and networking in and across related industries to create a group of candidates that could be viable for the future or liaising with a search firm to ask about building a pipeline on their behalf.
The latest Botoff Consulting Compensation Report* of 400+ single-family offices across the USA suggests over half of these offices have difficulty filling roles in accounting, tax, and investment areas. A recent Stryde Search project in New York supports this data. In this situation, the family office had advertised this senior finance role which produced poor-quality applications. Stryde consequently conducted significant targeted outreach to family office candidates and built a sufficient pipeline. The diagram below details the scope and results of Stryde’s efforts.
Talent Pipeline
The lack of qualified accounting professionals is a national phenomenon attributed to fewer individuals choosing to pursue accounting at college, and an increasing number of people quitting the profession. The big accountancy firms have responded by improving salaries and covering tuition fees for entry-level employees as a way of locking them in for the longer term.
Selection and Hiring
Robust and thorough evaluation of candidates is critical for any role in a family office but particularly crucial for executive-level positions. As mentioned above, a family’s vision and values should be translated into job descriptions and selection criteria to ensure that recruitment processes link back to the desired values. Importantly, having objective criteria helps reduce bias and discrimination, and increase the effectiveness of the decision-making process.
A talent-driven approach to selection and hiring means thinking about needs in advance (see section on talent pipeline and transition). If a family office embarks on regular performance reviews and career/development conversations, it should have a handle on who the ‘flight risks’ are, which people are looking for more challenge, or a change in career direction, and which people are high potential and worth investing in.
Another useful tool for recruitment is to have a consistent framework for creating job descriptions (i.e. a competency framework or success profiles per level). These can be linked to job descriptions (and used in hiring), used for performance evaluation, cross-referenced with external benchmarks, and help to determine compensation and benefits plans across the family office team.
You may also like to read our article A Guide for Single Family Offices – Recruitment
Learning and Development
Family offices are smaller in size than corporations and as a result, must be more creative about implementing professional and personal development for employees and family members.
There is a plethora of family office executive education programs at leading business schools (i.e. Kellogg Business School, Harvard Business School, Columbia Business School, Wharton Business School and Stanford University) which are some of the top-tier programs in the USA. IMD Business School (Switzerland and Singapore) and HEC Business School (Paris) are two well-known programs outside of the USA. They are aimed at educating and preparing family members looking to step into leadership roles or seniors stepping into executive-level roles.
Learning and development could also come from:
Peer-to-peer mentoring, either within a family office, across a family enterprise, or as a quid pro quo with another family office.
- Membership organizations to assist with knowledge sharing and best practices in specific functional areas of a family office.
- Professional development could be the sponsorship of specialist courses that support upskilling or skills development in new fields such as AI.
- Coaching – business coaching for managers and leaders to provide confidential, 1:1 development from someone outside of the team. Especially useful when a team is very small.
Investing in the development of people is likely to lead to improvements in tenure and employee engagement.
Retaining and Engaging
While compensation and benefits are powerful retention tools, they are not the only drivers of employee engagement, especially in family offices.
According to Gallup, the following areas have a significant influence on the quality of the employee experience and are worth focusing on:
- the quality of the relationship that an employee has with their manager
- the clarity of their role
- the value they bring to their team
- the space and place where they work
- how their work affects their overall wellbeing
Many Principals/CEOs of family offices are from the Baby Boomer generation, whilst the next gen of employees and wealthy owners are Millennials. There is a definite difference in the way the two generations think about the ‘world of work’. As accounting giant EY* has noted, there is more than US$30 trillion of inheritable wealth set to move to the younger generation in the next 20 years in the USA alone. This is not an insignificant sum heading into the hands of a generation that has different values, goals, and desires from their predecessors.
Whatever a family office can do to consider and facilitate their employees’ needs and ambitions goes a long way toward driving employee engagement and the long-term sustainability of the family office/family enterprise. This is an often forgotten but all-important part of talent management.
Performance management and compensation
Performance management is another big topic and hard to do justice within the confines of this article. What’s important to highlight is the integral nature of performance management to the other parts of the talent management system. Compensation is particularly significant in the context of family offices where the top CIOs in the largest family offices earn circa $1m - $1.6 million per annum (base + variable bonus), not including carried interest and other tailored LTIPs*. According to the Botoff Consulting Compensation Report 2023, the use of compensation incentives remains strong at 80%, however, only 60% have formalized metrics in place. This suggests there is room for improvement in the sector to tie performance more closely with measurable objectives.
Compensation and benefits plans should be reviewed regularly and evolve with market changes, such as the cost of living, skills shortages, and shifts in candidate expectations. There is often enthusiasm to make an offer attractive at the beginning of an employment relationship, but that focus sometimes fades and demotivation can result.
Transitioning
Succession planning is an important part of talent management - planning who will be in business-critical roles in the future helps families navigate complex change. Whether a family is planning to promote internally by nurturing a family member to a leadership role or hiring externally, succession planning takes time and consideration. In larger corporations, the business of succession planning is business-as-usual HR practice. However, in family offices, this is an activity that is often postponed and avoided. According to a fascinating report created by The Northern Trust*, which interviewed 32 former CEOs of family offices to learn from their succession planning experiences, one of the cited barriers of succession planning is that it often throws up much bigger questions about the family’s purpose and sustainability. As a result, it can feel easier to postpone these discussions.
On a positive note, there are many upsides to taking a planned approach to succession planning:
- Opportunity to reimagine what the family office/business could look like.
- Conversations to re-engage family members.
- Successful transition of information and planned handover.
- Time to develop a new leader (this can take years of course) or time to identify and recruit the best external person (can take up to a year if you factor in notice periods).
Concluding thoughts
Talent management is critical for family offices because it ensures a family has the right professionals with the skills, ethics, and expertise to effectively manage family wealth, protect its interests, and uphold its values across generations. People play a central role in the overall success and sustainability of a family office; therefore, allocating resources to talent management is vitally important.
Whether a family office is a standalone team of five people or embedded in an operating company of 5,000 people, the principles of selecting and retaining the best people are the same. What is also true is the need for buy-in and engagement from family members and leaders alike to ensure the consistent and timely roll-out of such processes.
Each sub-area of the talent management system discussed in this guide is a specialist skillset and profession in the HR world. If you are Google, JP Morgan, or Blackrock, you can hire a world expert in compensation, workforce planning, or employee wellbeing for example. That’s unrealistic for a family office. In talent management, intention and discipline matters more than size. Small can be a superpower when it comes to looking after people as it’s easier to control employee experience, foster relationships with team members, communicate vision and values, and course correct if processes do not yield the desired results.
The important thing to remember is complacency repels talent. Just as your investment strategies change over time, so should your approach to people management. Your two biggest assets are your financial and human capital, be sure to invest in both.
Sources & References:
- Cap Gemini World Wealth Report, 2020
- Forbes Richest People in the World, 2023
- Botoff Consulting Compensation Report 2023
- https://www.ey-seren.com/insights/how-can-we-better-engage-with-next-gen-investors
- https://simonsinek.com/why-1-on-1/
- Succession Stories: Lessons learned from former family office CEOs, Northern Trust
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