The Broken Family Office Model: Insights from Max Pog’s LinkedIn Analysis

In a recent LinkedIn post, Max Pog shares a compelling analysis of the state of family offices, drawing insights from a conversation with Ronald Diamond, who leads a large family office syndicate. Pog highlights critical issues facing the management of significant wealth, particularly in light of the upcoming generational wealth transfer.

The Looming Wealth Transfer and a “Fundamentally Broken” Model

Pog’s post begins by framing the immense scale of the wealth transfer on the horizon. “$124 trillion is moving from baby boomers to next gen by 2048 – the largest wealth transfer in history,” Pog relays from Diamond. However, he immediately pivots to a stark assessment of the current family office structure.

“But today the family office model is fundamentally broken.”

This assertion sets the stage for an exploration of why so few family offices successfully navigate generational transitions. Pog, relaying Diamond’s insights, points to a significant drop-off in longevity: “Only 25% of families make it to Gen 2, 10% to Gen 3, and 5% to Gen 4.” The primary culprits identified are a lack of a clear operational playbook, the intrusion of ego-driven investment decisions, and a failure to establish robust governance from the outset.

The Misconception of “Direct Deals” and Ego-Driven Investing

The analysis delves into the recent performance challenges faced by many family offices. Pog explains that the post-crash, pre-COVID era fostered an environment where many investments, including direct deals, seemed to perform well due to a rising market and low interest rates. However, as he notes from Diamond’s perspective, this has changed dramatically:

“Post-crash pre-COVID, everything went up. Direct deals worked until interest rates rose 3 years ago. Now, many family offices are losing money.”

A significant portion of Pog’s post is dedicated to the detrimental impact of ego on family office management. He relays Diamond’s observation that entrepreneurial success does not automatically translate to expertise in managing diversified investment portfolios. Pog uses a real-world example to illustrate this point:

“Ego is killing families,” Pog quotes Diamond as saying. “Because you built a $1B company doesn’t mean you’re good at venture capital, real estate, or private equity – completely different skill sets.” The post references Ty Warner, creator of Beanie Babies, as an example of a brilliant businessman who reportedly faltered when venturing into other investment areas.

Building the “Playbook” and Essential Resources

Pog highlights that the family office industry is relatively young, with a significant number of offices established since 2000, and many more since the 2008 financial crisis. This lack of historical precedent contributes to the absence of a standardized operational manual, a gap that Ronald Diamond is actively working to fill through the University of Chicago Booth Family Office Initiative.

A crucial insight shared by Pog, stemming from Diamond’s advice, concerns the correct sequence of operations within a family office. The most common mistake, according to Diamond, is to begin investing immediately after a liquidity event. Pog outlines the preferred order:

• Governance
• Mission statement
• Investment policy
• Estate planning
• THEN invest

Furthermore, Pog touches upon the importance of tax-aware investing, particularly citing private credit returns that can be significantly diminished after taxes. He suggests strategies like using a PPLI (Private Placement Life Insurance) wrapper to potentially eliminate income taxes on such investments.

For those seeking to learn more, Pog relays Diamond’s recommendations. While acknowledging the value of resources like Bill Woodson and Eddie Marshall’s book, “The Family Office,” the most potent advice is to engage directly with other family offices. Pog emphasizes learning from their experiences, particularly their mistakes, which can involve issues like unintended consequences from sudden deaths, estate planning oversights, and structural errors.