← How I Invest with David Weisburd
How I Invest with David Weisburd
E197: Why Most Family Offices Fail—7 Lessons from Harvard Professor
00:49:01
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- [00:00]
David
So you teach the family office class at Harvard Business School, and you believe that 90% of family offices are structured incorrectly. Why do you believe that?
- [00:10]
Christina
What I teach is the family enterprise course, and family offices are a family enterprise. And that is exactly why 90% are not structured correctly, because people think of them as something that's not a business. And so when we say family enterprise, we teach about the. The business of family offices and the business of operating companies needing the same types of governance and planning. The whole word family office is one of the main reasons that 90% aren't structured right.
- [00:43]
David
So how should family offices structure themselves correctly?
- [00:47]
Christina
Family offices should structure themselves just like any other business. There should be a business plan of why you're creating it. Then you should put together a team that could execute on the business plan that you created, and then you hire the team instead. Families tend to have come either come into liquidity and or inherit money, and they hire their best friend or their cousin to run the money.
- [01:15]
David
What are some best practices? What are the very, very top family offices do when it comes to managing their money?
- [01:22]
Christina
So, ironically, because business is so much about speed these days, the best family offices go slow, to go fast. And so they kind of take a beat and they think, why am I creating another business? So, you know, first of all, they have to realize they're creating another business. And many of the people we work with, when I say, oh, so you retired from this and then you decided to create another business, they're like, no, no, no, I don't want to do another job. I'm like, but you're creating another business. And if they realize they're creating another business, that's the first step in succeeding before they do anything else. And so then, all right, great, I'm creating this business. What does that mean? What is the purpose of the money? Now you might sit there and say, well, Christina, that's a silly question. The purpose of the money is to make money. That's not the purpose of every family office. Some family offices, the purpose of the money is preservation, not growth. Some family offices, the purpose of the money is to spend it all philanthropically, which means you need a different type of team. And some family offices, the purpose is to absolutely grow the money to the most possible that they can. All three of those scenarios need different business plans and different teams.
- [02:41]
David
There any families that have gotten this governance right? And who would you point to as somebody that has been really good at building their family office?
- [02:52]
Christina
The concept of who's gotten this right is still very Much in question. And what I mean by that is that we're in early innings of family offices. You know, in family businesses as a whole, excluding family offices, we're in generation 11, 12. We're not really in generation 11 and 12. In many family offices, barring a few like the Rockefellers and others, the families that are getting it right right now are separating concierge services from investment management. And so if you take one of the larger US Families, the Koch family, Koch Industries is a family run, founder driven business. The Koch family also has a family office that's completely separate from that business. And in their family office, they have separated the investment functions from the concierge functions. So they have an elegant investment team in Denver that is focused on making money. They pay their employees similar to private equity, venture capital, hedge funds, whatever job they might be doing for the money. Then they have concierge services in an entirely different state that deals with the estate planning and the taxes and lifestyle things. And then to double click on what at least Charles Koch has created, he also has separated his philanthropic giving from his investment arm and has a whole other area called Stand Together run out of D.C. that is about how to deploy investment dollars. So the beauty of those three entities is each group has a mandate and is paid based on the services they provide. Where we get in trouble is when one family office has everything in under house. And so you have an investment team and then you have the concierge team and you have other foundation and other things. And so as the head of the family office, what are you in charge of? Are you being paid on the investment returns? Are you being paid on the bills, being paid on time and you know, certain lifestyle things being done, or are you being paid on evaluating a philanthropic activity? And so when you put them all under one, the head never knows what's most important. And I mean the head of the family office. So think of it this way. If you were a surgeon and your job is to save lives, but your job is also to run the hospital and then your job is also to deploy philanthropic dollars for a hospital. Like, like we can sit here and say, clearly saving lives is more important than the other two. However, maybe running the hospital property is more important. When you take important jobs and have different variables of what you can be measured, you, you rarely do them. Well.
- [06:02]
David
Said another way, doing something better week after week is hard. It's hard to constantly improve. And absent of those metrics being attributed to a specific function or specific team, teams are gonna more or less take for Granted their current state and not really push the envelope, but once you put them into their own silos, then they start really optimizing on the numbers, similar to how Google created the Alphabet Holdco and made every single vertical responsible for its own metrics, and it's for its own growth in its own being A lot default alive.
- [06:38]
Christina
You're getting to a question that I never want to answer, and that question is, well, then, how much money do you need to run a proper family office? And what I mean by that is the analogy I just gave around the Kochs. They have a lot of money, but there are a lot of people that have family offices that have 50 million, 100 million. They still can have a family office, but they need to understand that they're never going to be able to hire the talent to go toe to toe with people that do private equity every day, or hedge funds every day, or venture every day. And so how do those people in family offices succeed if they want to have their own? They outsource. And so what that means is they might do a little bit in house, but they're going to outsource and use professionals to do the rest. Because somebody that's running a smaller family office can't afford the talent to. To compete with people that do it day and day again. And that is kind of where the extra rub comes. The rub is, how do you structure it? And then how much money do you have and how can you afford talent?
- [07:48]
David
I had Randall Quarles on the podcast who was partner at Carlisle. Is that who the top family offices are competing against, like the top private equity firms, or are they mostly competing against other family officers, executives? In other words, is the pool truly family office versus every other asset class for talent, or is it just between family offices?
- [08:10]
Christina
It's definitely against every other talent pool because there aren't enough good people working in existing family offices to be poached for all the new ones being created. And so what you're seeing is you're seeing excellent asset allocators, investors, other types of people being pulled from the top firms in the world to run family offices. And the pitch that they're getting is you never have to raise money again. We have permanent capital. You're going to have autonomy, you're not going to work the same number of hours, and I'm going to be very hands off. Well, that sounds great, but you have to really do your due diligence because it's pretty hard for a lot of matriarchs and patriarchs to be that hands off. But this talent gap is going to be one of the main things to watch with this great wealth transition, because if we don't get the talent gap right, these family offices are going to blow up and that's going to just be devastating to the economy.
- [09:12]
David
What are some examples of either very large family offices or just extremely well run family offices that have found a way to make it in a revenue driver versus a cost driver?
- [09:24]
Christina
So what's interesting about that question is I believe almost every owner of a family office will still say that their family office is a cost center because for some reason they don't understand that even saving them a lot of money can be viewed as profitable. But they want to see revenue. So the best example would be MSD Capital, where Michael Dell set John Phelan and the team years ago on a mission to make money. And he separated that from the concierge services and MSD crushed it. They ran themselves equivalent to one of the best private equity firms. They paid their people like that. And it continued on until John left and then MSD merged. So we'll see what happens with MSD and BDT now that they're together and they've become more institutional. But the places that have brought in the right talent from the beginning and the patriarch and matriarch have been hands off are the places that have done the best. Similarly, Pritzker.
- [10:36]
David
I know you weren't inside the room in these conversations, but what do you imagine the pitch was from somebody like a Michael Dell to John? How is he able to recruit him into that role?
- [10:47]
Christina
I would think that the pitch would be, I'm going to save you the time of raising all this money. I'm very focused on my existing business, which is making computers. So I'm not going to meddle. I'm also going to be in Texas and you can run this in New York and hire who you want and pay them like it was a private equity firm. And all I'm going to do is look at the returns. I think that's the pitch that gets somebody of a very high talent level to want to take this on, because there has to be a little bit of ego in any investor. And so many top investors, when given that pitch, would say, well, I can raise the money. And so if raising the money is the only thing a family does for you, then that's not good. I would also imagine that Michael Dell said to John and the team, I'm also going to open doors for you and show you investments you might not see but their match worked for 20 plus years. That's pretty darn good. That actually is longer than a lot of private equity.
- [11:52]
David
Summarize. Michael Dell probably said something to the can of first of all, what I'm not going to do, I'm not going to meddle in your business. This is going to be a professionally run organization. And also I will send you my relationships as I meet opportunities, as I meet people, and you have the funds to get started so you could accelerate your business plan and you have control over compensation and the ability to retain and recruit the very top people.
- [12:17]
Christina
And I would bet he said, and you're going to get rich too, alongside me. I'm going to get richer and you're going to get rich because people don't go into the field of investing to make a salary. They go into the field of investing to crush it. And so you have to compete with the carry and the other things that you might get at other firms.
- [12:40]
David
Are you familiar with the 10x rule of the Canadian pension plans?
- [12:44]
Christina
Yes.
- [12:45]
David
So the 10x rule is the Canadian pension plans, Ontario teachers plan, CPP, IB. They realized a somewhat counterintuitive lesson in that if they pay their staff significantly more, they could actually save 10 times and in management fees and carries that they were sending out to gp. So they, they could insource that and they ended up paying a lot of their GPS 7 figures. So now US institutional investors, pension funds, foundations, endowments, oftentimes they're hamstrung, I would say, politically or optically, they can't pay, they can't pay a star person two or $3 million or $20 million if they're really like the best of the best, because they're going to have, you know, the public's going to be an uproar. Why are you paying out of our pension plans $20 million, even if that saves them, you know, $200 million a year. But family offices are in a unique situation where they, they're not beholden to anybody but the family. So you think that they would be kind of the second movers around adopting this type of pay scale, but yet they haven't. Why do you think that is?
- [13:53]
Christina
They haven't because they don't value the family office the way they should yet. I mean, many people that create a family office don't really even understand the fees that they used to be paying at banks and other places. So number one, it's that the second reason is they're starting a business that they might not participate in that actively. And so they don't think of it as a for profit. They, they think of it as a cost center that takes care of a variety of different things. And so, you know, some family office heads might not even have any idea of the rigor that goes into making investments, but they remember that you forgot to change the travel for their daughter or the tuition was late and so they're pissed. And why am I paying you millions of dollars when you don't get the tuition in on time? And so the lack of clarity of roles has also done that in the big sovereign wealth funds in Canada. Those people aren't also doing personal things for the individuals. And so the results are very tangible. That it's like we did this, we saved this. In a family office, everything feels like a cost. And I think that many families put much of their consumption through the family office. So it's hard to tell how profitable certain things are because of the way that they actually evaluate the bottom line. Do I hope with all of my heart that family offices start paying competitively? Yes. And the ones that do get loyalty, they get better returns and they get clarity of roles and responsibilities and become a partner with the matriarch patriarchs. The ones that don't are the ones that live in fear of the people that own the business and live in fear that they're going to have to every December go to bat to fight for their team to get paid. That's a really horrible way to run a business when you're afraid that every year is going to be an argument. And, and so my recommendation to family offices is, gosh, pay more and get better talent. Two, have the incentives aligned. So if you're one of the families that is looking to grow your wealth considerably, have an LTIP program where your team gets paid similarly to the returns you make. Give them motivation. If you're a family office that's focused on making money, to give it away, you need a different type of an investment team. If you're a family office that's very focused on asset preservation, then have a two person family office team and outsource everything to other professionals and keep a moderate portfolio. So I think the pay and the mission need to be aligned. And if we can get that right, why wouldn't everybody want to go to a family office instead of somewhere else? It stinks to raise money to, to travel around the globe begging for money for a fund. When you just hit like top quartile, it's demoralizing, it's annoying. If you can have money that's permanently there. Number one, you'll get more investments. Because if I'm selling my business, I much more want to sell it to a smart family office that is going to be aligned with me to just keep growing it than to a private equity firm that's going to have to sell it in seven years. In five years, I'm going to have to get antsy. So as a founder, you should want to sell to family offices. As a family office, it's a competitive advantage to have permanent capital, but you got to pay your people. If you don't pay your people well, you're going to get crappy investments and you kind of deserve them.
- [17:48]
David
So I want to go back to this kind of model family office. We've been oscillating between things not to do and things to do. So let's go back to things to do. So have this MSD capital. Obviously they're paying them more, but how do you actually structure the family office in a way that makes money for the paycheck? In other words, are they creating blind pools of capital where they're raising from other family offices? What are the tactical things that these family offices are doing that separates them from others that are spending there?
- [18:14]
Christina
There's two tactical things that family offices are doing to create revenue, one of which is that they are buying and or investing in businesses that are cash generating. And so it's not just the deployment of the money. And I'll see it when I see it, they're investing in businesses that spit off cash right now, so that feels like revenue. So that is one thing that they're doing. The second thing that they're doing is some of them are creating products in house and that they leverage other family office money for. And so you'll see some family offices similar to the Pritzkers when they started. And they don't call themselves a family office purposely, but they are. And that's how they started saying, we have this great team that knows how to evaluate opportunities. We can raise funds from other families so you don't have to build this great team and we will all be investors together. Now, when they do that, they get management fee and they get extra carry for their employees. So you're seeing family offices taking the private equity model and other models in house and creating revenue streams for their family office by deploying with other people's money. It makes sense, but you need to then have a team in house that's willing to do some of the very things that were the reason they didn't want to go to a family office, which is raise money and have the other kind of structured rigor around other investors and shareholders. So it takes the right team to do it.
- [20:02]
David
So let me take a stab on this and I want you to correct me. So I'm a Gen1 family office. Say I have a billion dollars and I first think about how do I want to be allocated? Maybe I want to have 30% venture, 20% private equity, 10, 15% and in hedge funds, private credit, etc. And then the way that I would leverage my money is I would be the anchor check for these strategies. I would go in and let's say in venture, I decide my strategy is venture fund of fund. I would go out and hire one of the top fun to fund people out there in the ventures class. I would say come in, build this franchise for me. I'm the first anchor check. Then I would go out and do that in private equity. Maybe in private equity would be more deal by deal, but same thing, I will backstop these investments and so on. Is that oversimplified or is that how family offices can leverage their capital while also staying consistent with their own investment objectives?
- [20:57]
Christina
It's a little oversimplified because if you are backing an individual to go create a fund, that's different than having a team in house that you kind of get to know, see their strengths and then other people's money comes in. And so what I mean by that is many family offices, the patriarchs and matriarchs are lonely and the CEO of the family office are lonely. Once they meet each other, they're so excited to have people they can talk to. Because it feels really silly when you've never been in the business of wealth to talk about money with other people. But once you realize it's a business and you can talk about it, you start to say, hey David, I did this great deal. My team is amazing. They keep buying this great real estate. And then other families are like, can I get in on that? And so you start by kind of co investing a lot of times. And then eventually when you realize you have a decentralized track record of doing it, then you might say to said young individual who's been doing the real estate, you want to go raise a fund around this with family office money. Here are five friends that I think would be interesting. Let's come up with economics that work for you as well. And then you go do it. That is the more likely scenario. However, there are other families that say, I don't want to have a huge team. But I want to get into the business of lowering my costs by having other people pay for part of my team. And those people go out and identify. Like you said, here's a kick butt woman that wants to invest in the tech space. Let's call her Carol. Hey Carol, I'll back you and give you seed money and you can go raise a fund and we'll run it out of my family office. That's a different model than the first one. That's more natural.
- [23:01]
David
So one is more organic and the other one is more kind of. From the beginning you're thinking from a fun perspective.
- [23:07]
Christina
And I think the people that do the latter tend to be people that made their money in financial services. So there are a lot of billionaires that have been investors all their lives and they get the whole cost structure and everything else better than anyone. Those investors are the ones I see starting their family offices almost more like a search fund model where they back a couple great people and say I'm going to pay your salary and this go raise money and I will take GP interest in your fund. Those people are more qualified to monitor their, these kind of younger uprising investors than people that have never been in the investment field.
- [23:54]
David
One of your unique vantage points is you teach this class at Harvard Business School and you get to see these Gen 2 Gen 3 students in your classroom every day. You get to really know them, they work on projects. Talk to me about the psychological aspects between Gen 1 and Gen 2 or maybe Gen 2 and Gen 3 families and how do those play into the dynamics of the family? Office.
- [24:15]
Christina
Office. Oh gosh, do we have 24 hours? Because one of the things that families are famous for never talking about is money. And so the, the irony here is I see I know so many of my former students that had very qualified investment careers somewhere before business school. And they go to business school and their parents say to them, let's set up a family office. And so they come into my office, they're all excited. We're going to set up a family office and I'm going to be an investor with my parents. And I'm like, great, how much money do you have? I have no idea. I'm like, what do you mean you have no idea? Well, we don't talk about that. Well, how do you know if you have the right amount of money to set up a family office to execute on the strategy that you want? Well, I don't want to ask them how much money I have. I, they have, I'm like, okay, well, would you go to another family office and take a job without knowing how much money they have? Absolutely not. And so the first thing is, in order to have generation one to generation two to generation three family offices, you have to talk about how much money you have. If you're trying to recruit your daughter to join your manufacturing company, you start with, we have this much in revenue and your target's to grow. And there's no hiding it. Something about the money makes it difficult because parents feel like talking about money with their children might lower their motivation and, or lead to different types of bad behavior. It makes no sense. People guess, they kind of figure out what people have, they should just talk about it. So number one, my issue is that the second thing is that when you're creating a business that's about money, everyone always thinks it can just end any minute because you don't sell it, you just stop. Well, it's so wrong because so many of your positions are long term or you might own businesses. Whereas if you own a business together, family members don't feel like they can just walk away because they feel like, well, they might have to sell it. And there are all these employees. And. And so the thing about generation one to generation two succeeding in the family office space is treating it like a business, understanding it can't just be shut down tomorrow. It's not all cash. And so you have to learn the roles and the responsibilities that different people have. And then the third thing about the generation two to three is we don't talk about money, but we also don't talk about death. And so we don't talk about what is the succession plan for both the money and the employees if something happens to the matriarch and patriarch. And so unlike other businesses where there tends to be a CEO succession plan and a board governance plan and all these other things, which by the way, are hard to do. We don't do any of it in the family office side. And so you have teams of people running money that don't know if the matriarch and patriarch die in the U.S. do we owe 50% in taxes? Does our business go from 2 billion to 1 billion overnight? Does our business go from two billion to 1 billion and then to four owners, meaning mom and dad are up here with the 2 billion. If they haven't structured things right, they die and it goes to 1 billion. And then it's divvied up between their four kids. So now you have four kids with 250 grand. Are they required to Stay together in the estate planning or can they leave? So do you suddenly have a team that is at the cost center of 2 billion that's now managing 250 million because there's not been the right planning put in place for the family unit to stay together. So it's an entirely different succession set of issues than it is in a different operating company.
- [28:30]
David
In many ways it's, it's pretty cruel. It's like clipping the wings of the kids in that they're waiting around not knowing so they can't pursue something else. And it's the previous generation's reluctance to have those difficult conversations that leads to significant difficulty in their kids lives.
- [28:47]
Christina
I mean, how often do you talk about money in your own family or death in your own family? It's, you know, you don't need to be a wealthy family to not talk about these things. But they're compounded when there's great wealth.
- [29:03]
David
Me and my partner and even me and my fiance, we talk about the step up in basis and death. We think it's a great tax strategy. So I'm a little bit different. Last time we chatted, you really surprised me. You said that the parents are more responsible for the difficult dynamics between the parents and the kids. And I had always thought it was the kids, kind of the spoiled rotten kids that were, that were responsible for that. Double click on that. Why is it that the parents are the ones that are typically creating these problems?
- [29:30]
Christina
I'm so excited that you're giving me the opportunity to say that the rising gen are not all spoiled brats because they're not. They, they are really good people and I'm betting on them. I'm betting on them because they're getting education, they're asking questions, they're trying to get training. The parents are more responsible because they create a dynamic of what's appropriate to talk about at home. And I have parents that I work with that say I'm going to talk to my children about wealth when they're in their 30s. Like in their 30s. Like do you think they're blind? They're on your private plane, they're on your yacht. They, they see the wealth but you're not going to talk to them about it when they're young. If you start talking to your children about wealth, first of all how hard it is to save money and talk to them about their responsibility, not what they're getting, then they're going to be productive citizens. When we run into problems is when parents just give children a little bit of money along the way and don't ever talk to them about a responsibility. And then the child feels this inadequacy between the generation one and generation two and they just kind of go off on their own. I mean by all means are there spoiled people in the world? Yes, but they're not all wealthy. There are a lot of other people that can behave in a spoiled way and whatnot. But when I believe when you share what the responsibility is of anything with people and you make them feel included, they rise to the occasion. And so I don't think all families should leave all the money that they've created to their children but I think they should educate them on the responsibility and the options and the great things they could do with that money. I love my students that come in and have great dreams of having huge social impact and that they have been educated for generations about the wealth that their family has created and they from a young age talked to the family about I want to use some of that wealth to create clean water in India, to bring telephones and things to rule Turkey. And so why not embrace them early. So it's part of everyone's plan. When you wait too long, that's when bad behavior starts. That's why I think it's the parents responsibility.
- [32:05]
David
All things being equals. I rather work with the Gen1 versus the Gen2 individual. Typically the Gen1 he or she is just self made has similar values to me in Gen 2 probably if I had to put a number 80% of the time there's an entitlement, maybe 20% then they're, they, you know, are exactly like their parents. They work hard, their parents made them work but 80% of the time they are extremely difficult to work with at least from the business context. Now you might argue those two theories might be aligned in that the reason that they're spoiled and difficult to work with is because of bad parenting. I give you that. But isn't there something to that in that this, there is almost a form of entitlement in Gen 2 even if it's not their fault, just grow. Growing up with money leads to this kind of behavior versus Gen 1 is more able to align with people and Gen 1 has learned the skill set of influencing people and partnering with people to do the things that they want to do versus gen 2 kind of has this like do this for me because I'm XYZ name I think you.
- [33:07]
Christina
Know, we could turn it around and say you love founders. And so like I love founders. I am infatuated with how they came up with this idea, how they pursued it, and how they were successful. Now, most of the founders that I've met had nothing to lose. And so their entire thing was, I'm going to create this great shoe company. And they didn't have any money to begin with. Many of them are immigrants, and they're just gritty, hardworking, and you love the story of their family business or whatever they did. Now, many G2s are viewed as not as gritty, and so you already kind of lose the interest in their story. However, I'd argue that many G2s and onward have a responsibility, a guilt and a nervousness of losing what G1 created. And that is where they might behave differently. They might not take the same risks. You might not be as attracted to them because they're not just like all in. And that's because many of them feel this responsibility to carry on this legacy. This is where our opportunity exists. If G1s would remind and continue to teach G2s that the only reason we even call them a G1 is because they were an entrepreneur. Our family is built on entrepreneurship. So you G2, you might have some funds I didn't have, but we're all about growth and entrepreneurship. Get out there, do something. And it can be something for profit. Not for profit, but we better keep being entrepreneurs. Each generation or whatever we did in G1 is going to be gone by G3. And so I think it's more the story. Like, I am consistently incredibly attracted to the story of G1 because I want to sit around a fire with a bottle of wine and hear how they did all this. But I can tell you, I've met a lot of G2s that were raised in the household with entrepreneurship as the backbone, with fiscal and moral just reinforcement. And they are back to be entrepreneurs. They're just as good as G1, but they will never be G1. And so, you know, what's the life of an inheritor? Is being an inheritor mean inheriting money? Or does it. You can also be an inheritor that inherited responsibility. But then the third thing is you can be an inheritor of. Of a legacy. And so it's daunting to inherit a legacy. And there are a lot of people that inherit the legacy of what G1 put out there without any money. And so let's give G2 and G3 and everybody else a chance, but get out there and do something. And I'm with you. Like, if they're lazy, it's the same as any other lazy person, and we all see tons of those. But this. If we don't start betting on the rising gen, we're in a whole world of hurt because this wealth transition that's coming has the opportunity to transform our world in a way that nobody's ever seen. And so let's give them the tools to do it.
- [36:43]
David
You mentioned the G2 should go out and do something and fail. I'm reminded of the Jeff Bezos quote, which is, I'd rather have a child with nine fingers than a child that does not have resourcefulness.
- [36:54]
Christina
I completely agree. And I also say fail fast. And so if you go back to, what do we not talk about at home? We don't talk about money. We don't talk about death. We also don't talk about failures. And so when we raise our families and the only time we talk about anything is when they won the race or they got an A. That's a problem because you don't always win every race. But my father used to say that when you were skiing, if you didn't fall, you weren't getting better. And, you know, so fall, learn, because you pushed yourself harder and then get up. And so there has to be room in life for failure. And I'm a mother of three. I also struggle. I want to keep celebrating failure because failure is putting yourself out there and trying something. I mean, failure could be going and doing an improv night and nobody laughs. Well, at least you tried. So you have to try. And we as parents have to give the safe space for what is perceived as failure. Otherwise we're going to get mediocracy because no one's going to put themselves out there.
- [38:00]
David
As I mentioned, you have this really great vantage point in that you're now approaching close to 1,000 students from Gen 1, Gen 2, Gen 3, and people that want to work in family offices and. And you see them intimately. Year one from year two. Is being a center millionaire or a billionaire. Is that a curse that these families have? Would they be better off just, you know, being moderately wealthy and not having to deal with these dynamics? Or is it still a blessing in your, in your opinion?
- [38:28]
Christina
I view being incredibly wealthy as an opportunity, not a curse and not a blessing. I think it can be a curse if you don't choose to use the opportunity the right way. And what I mean by that is if you're afraid of the money and it makes you afraid of your own shadow and you never do anything that you love or want to try because of it, then it is probably A curse. But I look at it as an opportunity to change the world. And changing the world does not mean that I want everybody to give all their money away. It means take that money and create more jobs. Take that money and be innovative and rise people up. I mean, there's so many ways to have impact. And families by nature are better stewards of businesses than most. They care for their community, they care for their employees. In the families I work with during COVID not one of my families laid one person off. They just take care of their own. So if you can take this wealth and keep investing it in the people and the community and businesses, then it's an opportunity, not a curse. Where it's a curse is if you have it somewhere where nobody can access it, nobody understands it. And it, you know, you, you, it's used as a weapon. If you don't do this, I won't give you that. Then it's a curse.
- [40:01]
David
To use a Gen Z term. It's main player energy versus npc, a non playing character. So you're walking around the world instead of just being beholden to circumstances, having things happen to you, you go out there and you shape the future for your family and for others. And yes, some of the times, maybe most of the time you fail and you learn, but you're constantly developing yourself in pursuit of your goals of making the world a better place, making your family better off. All these things that family offices have as their Northern North Star.
- [40:34]
Christina
Absolutely. And just to kind of double click again on G1 versus other generations. The prior G1 holds a good amount of responsibility because they typically set the stage for what can be discussed. But G2, G3, G4, step up, ask the difficult questions. If you sit there and wait for somebody to tell you everything, then shame on you as well. It needs to be a conversation. If you're part of the dialogue from an early age, then it works. If you're afraid of G1, then maybe there's a reason.
- [41:18]
David
I love that there's a concept called extreme ownership by Jocko Willick and he explains it in a battlefield Battle could. A battlefield could be very chaotic. And at any point it's not like a movie where everybody's going in rows and everything's predictable, there's bullets flying and at any point you might have 90% lack of control on anything. But even then you have this 10% agency, this 10. Like how you move around, what angles you're. You're going so that you're not sniped. Like how you communicate with your battalion. So even if 90% of what you do has no is set in stone and you can't change, you still get focused on that 10%. And even if you're Gen 2 and you have a difficult parent, which almost by definition, these founders are extremely difficult, you know, unchangeable characters, you still have that 10%. You could focus on that. And how do you change? How do you bring up those tough conversations? How do you make your family better even. And maybe even especially if it's in a difficult dynamic.
- [42:21]
Christina
Absolutely. And persistence is an admirable trait. And so when you said you'd always rather be with a G1, I bet there will be some G2s, G3s you'll meet that are persistent and get things done that you'll like just as much as founders. But we need more of G2 to have that persistency. And you referenced at Harvard that I have the opportunity to work with the rising gen. I also have the opportunity to work with their parents because we have exec ed programs. So I get to see the parent in the room with the child for classes. And that's when it's really amazing. And because when you see a parent that is listening to another two talk and they're shaking their head and afterwards they're like, that's just ridiculous. He should have educated his son on blah blah, blah. And then I'm looking at this one going, you're doing the same thing. You're also not sharing that information. And so when you put them all together and you start talking, that's when people start changing. And so back to where we started. You know, being a founder is lonely and many of family offices are started with founder generation money. We need these family offices to start speaking. And unlike the places they're competing with, they're not competing with each other as much. And so like they can, they can collaborate. And so hopefully you'll invite me back on this in five years and we'll see family offices outperforming all of the other asset categories because they're going to finally get it right. But right now we're still on the hamster wheel a little bit.
- [44:04]
David
Give me some low hanging fruits. What is something that Gen 1 or Gen 2 family members could do today in order to significantly increase their chance of success?
- [44:14]
Christina
The first thing they should do is make sure they really have a mission for, for their family office. The second thing they should do is make sure that they have a business plan with metrics and that they hire the right people. What I would say for anyone starting a family office, do not hire your best friend or give the job to somebody you know because you trust them with your money. That is so different than trusting them to grow your money. You need to have the patience to find the right people and put a professional team in place. Also low hanging fruit. It is not a place for family members that are unemployable. Elsewhere. Family offices are not a place for unemployable family members. I can't say that enough. And you need to understand you're creating another business. If people listen to your podcast and say, oh my God, I, I didn't want to create another business, why do I really? Is family office really another business? Yes. And if you don't want it, shut it down, put your money, outsource it to the wealth managers and hire one person to do concierge services for your family. But if you've put a team together and they're in charge of all your money, it is another business. And so people need to understand that.
- [45:36]
David
I would posit that those Gen1 Fitness family members that don't want another business should go take three months off, go on, go on a beach and then come talk to us. Because I suspect in three months they will be ready. Probably in one month the, the successful ones will be ready for their, for the next business and for the next adventure, hopefully.
- [45:54]
Christina
And if they took that three months on the beach, they realized they didn't want to hire their two best friends to do it because their two best friends should be their two best friends. And let's go put a business plan together and hire the right people.
- [46:08]
David
It's almost like this advice. When somebody gets a huge liquidity event, they say put it in the bank or put it in S&P 500 or whatever equivalent for 30 days. Do nothing. The best thing you could do for 30 days is do nothing. Let kind of the endowment effect take place. It's a psychological phenomenon that you're now consistent with your new amount of money and just relax and don't do anything crazy. Because typically in those 30 days, people do some make some outlandish purchases and make some poor investments.
- [46:39]
Christina
They do, David. And that's going back to the go slow to go fast. And you know, most of these people were operators of something they loved. And so suddenly if they sold completely and they simply have liquidity, they're twiddling their thumbs because they're used to being on 24 7. And what do they do? They buy another business. And so, you know, take a minute, understand what you want to do, and then do it. Many founders of family offices that we set up, we give them, like, a slush fund to play with because they want to go buy a Dunkin Donut franchise or they want to go buy something that they can tinker with because they don't enjoy the business of money going up and down. And so that's why you have to have the mission. And. And if the mission is to make more money, said founder has to remember to make more money, we have to deploy it. And so, you know, all of them, I love the idea. Three months on the beach. Go do that, and then let's talk. But that's not what happens. They get the money and they start investing. And that's why we call it bottom up instead of top down.
- [47:51]
David
This has been a masterclass on family office investing. How should the audience keep in touch with you and keep track of everything that you're working on?
- [47:59]
Christina
Oh, well, that's very flattering. I mean, I'm very easy to find through the Harvard Business School website, and you can't miss me there. And then also through Wingspan, which is my private practice that advises families and what I will tell all of you that are listening to this, we have yet to meet a family office that's hired us that doesn't need to be completely restructured. And so I challenge come find me and show me one that doesn't need to be restructured. Because to date, everyone we have worked with needs a complete restructuring, and that's something we need to change. We need to start getting it right from the beginning.
- [48:41]
David
Great. Well, thank you, Christina. Appreciate you jumping on and look forward to sitting down in Boston, New York very soon.
- [48:47]
Christina
Come see me. Come to class.
- [48:49]
David
I would love that. Thank you. Thank you, Christina. Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when we review the episode's analytics. Thank you for your support.