A recently published book, Family Wealth Management: 7 Imperatives For Successful Investing In The New World Order, sets out what sort of issues UHNW families must understand before setting up a family office. The authors are Mark Daniell, founder and chair of the . (Northwood is based in Toronto.)

When I started to read this 445-page book (it is not a short study), I must admit to inwardly groaning when I saw certain items of management-speak (we get a few words such as “holistic” along the way), but pretty quickly the book gets into a good pace; on page 19 we are reminded of the contrasting fortunes of two families in how they managed, or did not manage, to protect their wealth – the Rothschilds (who protected it) and the Vanderbilts (who did not). And in the early sections of the book are some sobering reminders, based on real history, of how families can, within three generations, return to the humble state of the original founder (s). And data later in the book is particularly sobering: some 92 per cent of family businesses don’t last for three generations; 70 per cent of wealth transfers fail to achieve their objectives, and 70 per cent of wealthy families lack a strategy.

Strategies

The book sets out the need for a family to have two main strategy positions in setting out how to run a family office: a Long Term Strategy document and strategic asset allocation model, giving guidance on a family’s philosophy and purposes of wealth, family vision and family goals, and guidance for long term investment principles. Secondly, there is the Investment Policy Statement, an annual document that is as “granular as the longer-term LTS is strategic”, the authors say. This is clearly set out.

The sort of issues that arise include how to have an investment approach that can cope with the sometimes conflicting and varied goals/needs of a family. Should there be ring-fenced portfolios to ensure certain fundamental spending (health, education) can be funded regardless of what happens to other investments? Should family money be pooled entirely or should individual members have their own portfolios to deal with any conflicts over strategy? And so on. The book also sketches out the variety of investment ideas now out there, including the “alternatives” of hedge funds, private equity and commodities. There are some worked examples of actual family office approaches to these issues – case studies are often very powerful tools in explaining how these things should work.

The recent financial turmoil is explained well in terms of how family offices need to operate; the book likens the situation to a ship sailing through stormy weather and makes its points very well. There is also a vivid description of how many once-accepted ideas on investment have been torn asunder by the financial crisis (such as the need to review Modern Portfolio Theory). I also rather like this almost heroic understatement (page 9): "For many families, disappointing financial performance and their failure to achieve objectives over an extended time frame are signs that a different approach is needed.” (You don’t say!)

One of the best chapters, I think, is that which covers the importance of preparing children for wealth and ensuring that the next generation is brought into the understanding of what is at stake as soon as possible. The book covers a lot of the “softer” side of wealth management and does so with an assured touch.

One of the distinguishing aspects of this book is how it thoroughly sets out the kind of issues that a family office needs to address. There are lots of lists, and of course there are the “seven imperatives” from the book’s title:

1, How to establish clear family vision, values, and goals as a critical foundation to a sound wealth management strategy;

2, How to establish a practical, integrated investment framework that will ensure a consistent, disciplined approach in all environments;

3, How to set up a long-term family wealth strategy and define an asset allocation model that will produce the desired results;

4, How to draft an annual investment policy statement and refine investment tractic based on capital markets trends and any changes in a family’s economic situation;

5, How to effectively monitor performance against goals and benchmarks;

6, How to select and manage an ecosystem of experienced, trusted advisors who will provide critical guidance through the challenging period ahead;

7, How to engage and educate the family to preserve and enhance the family’s financial wealth and human capital over generations.

This book is not bedside reading and it does not make light of how complex and challenging it is to set up a successful family office. But that is also its merit: as the family office industry expands, it is important that those creating these structures avoid easy mistakes and realize what the challenge is. I can highly recommend this book.