Wharton@Work

August 2024 | 

Beyond the Balance Sheet: Business, Wealth, and Family

Beyond the Balance Sheet: Business, Wealth, and Family

In the world of ultra-high-net-worth family wealth management, success isn't defined by financial prosperity alone. It also involves preserving a legacy, defining and maintaining shared values, managing conflict, and fostering harmony across generations. As Wharton’s Raphael (“Raffi”) Amit notes, “It is a very fine balancing act. For most families, harmony and unity are as important as maximizing returns, because they know that conflict within the family not only destroys wealth, but weakens their legacy.”

Amit has been studying and advising ultra-high net-worth (UHNW) families and their businesses for over 25 years. The Wharton management professor and co-founder of the Wharton Global Family Alliance says meeting these unique challenges most often falls to the family office, a strategic hub where financial management intersects with the needs and wants of family members who represent a range of interests, lifestyles, risk tolerances, tax situations, and more. In the U.S., single-family offices are typically set up by those with investable assets of $250 million or more.

Addressing Unique Investment Priorities

Providing guidance to these families and the financial advisors who work with them is the aim of two new Wharton Executive Education programs, Family Wealth Management: Advanced Financial Strategies and Wharton Family Office Program: Balancing Family Harmony and Financial Prosperity. Both are co-directed by Amit and fellow Wharton finance professor Bilge Yilmaz, who also heads the school’s Harris Family Alternative Investments Program. “These families have different needs than other clients,” says Yilmaz, “both in terms of dynamics among the investors — many decisions may be good for one family member but not for another — and the portfolio options they should consider. There are many specifics that a wealth manager needs to understand to be successful in family offices.”

One distinction, says Yilmaz, is that UHNW families have less need for liquidity because they are investing with a goal of generational wealth transfer. “That means they can design a portfolio that is quite different than those who are saving for their children’s education or their retirement. The portfolio can be more heavily tilted towards the endowment model, which often includes significant investment in alternative investments like private equity [PE]. The program teaches that model in terms of its application to these families.”

Finance professor Christopher Geczy also helped design the programs. He notes that UHNW families are interested in investing in asset classes that aren’t available to many other investors, including private credit. That makes managing their portfolios more complex, and requires financial advisors to develop a deeper understanding of alternative investments. “These advisors may have to bring in private investments and private credit, but also know their limits. The new programs will teach both advisors and families the most recent thinking about these investments, but in the context of a multiple generation approach to wealth.”

Interest in private equity is growing in family offices, says Yilmaz, “because it can provide higher returns in exchange for a lack of flexibility. The overwhelming majority of family offices make these illiquid investments by picking a portfolio of PE funds. But how do they do their due diligence and choose which ones to invest in? It’s complicated and challenging, just like picking individual stocks. We're going to help participants understand how to construct a PE portfolio in the Family Wealth Management: Advanced Financial Strategies program. It's an important skill, and very few schools teach it.”

But while most start by investing in private equity funds as a limited partner (LP), as their investment skills advance they may seek co-investment opportunities. Those arise when a PE fund seeks outside investors to acquire a company with them, and Yilmaz explains that as families “get comfortable evaluating portfolio companies as a PE investor, the fund managers may begin to recognize them and start offering co-investment opportunities. We will help them speed their conversion from being LP only to becoming a co-investor or eventually making direct investments.”

Integrating Theory with Real-World Practice

Amit’s research, which includes a biannual family-office benchmarking study that looks at data from family offices around the world, has uncovered best practices including investment management, costs, governance, control and fiduciary, family-office management processes, technology, human capital, and more. “This study is only shared with the participating families,” he explains. “They use it both to benchmark themselves and to incorporate best practices into their family office.”

Amit’s vision is to conduct research that “moves the needle for families. Our studies address the issues that families run into when it comes to succession management, governance, taxes, estate plans, education, and philanthropy. It becomes very complicated in large families with multiple branches and multiple generations.”

A recent published paper, authored by Amit and fellow Wharton management professor Emilie Feldman, addresses the current issue of activist investors. “Families wanted to know the likelihood of being targeted, how to minimize that likelihood, and what to do if they are targeted,” says Amit. Although they found that activists are less likely to initiate campaigns against family firms than non-family firms, they are more likely to use hostile tactics and demand more substantive changes when targeting family firms.

Sharing Best Practices

Amit says the role of family officer is a complex one, and recent research is revealing more and better ways of running family offices. “My hope is that participants in these new programs will understand the difference between investment and family wealth management. Family wealth management is a holistic process that concerns the deployment of capital while balancing multiple goals. They want to increase the return while also maintaining family harmony and addressing the philanthropic issues that are important to the family. Different branches of the family have different tolerances for risk, different lifestyles, different tax situations, and more. Balancing all of those issues is what makes family wealth management so unique.”