My Understanding of Family Office Service: Making Succession Simpler

In 2015 I left my old employer to strike out on my own, and I have now been working in family office service for seven years. The road along the way has twisted and doubled back; my exploration of the family office has risen and fallen more than once, and only gradually have I found, in the mist, a few traces I can follow. I cannot say the road is clear, but a “roughly right” direction seems to be coming into view before me.

What Is a Family?

“Family” is not simply the acronym for “Father and Mother, I Love You.” It reaches into deeper realms of sociology and psychology.

I looked up how Wikipedia explains “family” (since Baidu offers next to nothing on the deeper meaning of the word). Wikipedia says:

In human society, a family is a group of people related either by blood or by marriage.

The purpose of a family is to maintain the well-being of its members. Ideally, a family offers its members a measure of certainty, structure, and security as they prepare to go out into society. In most societies, within the family, a young child can rehearse, in miniature, the scenes of life outside it—including cooperation with others, the raising of children, and social interaction.

Wikipedia

In The Complete Wealth, the author James E. Hughes Jr. writes:

We have shown time and again that one of the principles of a flourishing family is the recognition that they are bound together not by blood alone but by a somewhat broader “intimacy.”

This broader “intimacy” is not merely one of blood or genes; it also rests on a shared, acknowledged vision and a certain “distinctiveness.” That vision, or “distinctiveness,” is reflected in a seemingly paradoxical relationship—that altruism is the key path to self-interest.

A family brings in new members through marriage or partnership: a child’s godparent, a mentor, a close friend, a partner in business or in philanthropy.

This broader family relationship also includes trusted advisers who, through years of service, come to understand deeply the needs of family members and work on their behalf.

The Complete Wealth

So the family is an enlarged concept, something like a set of concentric circles: the core family at the center, the “intimate” relationships—including the family office adviser—arranged around it, and other professional advisers or social resources ranged in the outer rings.

What Is Succession?

All things move in cycles—so it is with a human life, and so with a family. In May 2021 I enrolled at Hundun Academy, chiefly to study the Second Curve. I had thought of the family’s first generation as the First Curve and the second generation as the Second Curve, and imagined that there must be some logic and science to how one moves from the first curve to the second—so I took the team to study it in particular.

A human life is an S-curve. When a venture succeeds and grows rapidly, it has passed the “breakthrough point.” The stage of rapid growth will in time meet its “inflection point”—that is, growth continues, but its pace is already slowing, and this is the most important signal before the “limit point” (the stall point) is reached. And the limit point is the beginning of the road downhill. Among mobile phones, Motorola was such a case, and so was Nokia.

The First Curve is so powerful. Every successful entrepreneur has their own distinctive traits, and it is very hard for the rising generation to grow up wholly independent; most of them are small fractals within the First Curve, benefiting from its foundation yet also constrained by its resources and its ways of seeing.

One day, one of these small fractals is able to grow out of the First Curve into an independent Second Curve, and to pass its own breakthrough point, proving that it can develop rapidly on its own—and this process is succession. Let me stress it again: it is not the Second Curve itself that is succession; rather, it is the “discontinuity” in the process of developing from the First Curve into the Second Curve that constitutes succession.

What Is the Methodology of Family Succession?

Drawing on the record of The Complete Wealth and the practice of Flourishing Tree Family Office, the methodology of family succession begins, first of all, with getting clear on what exactly the family is to pass on. Flourishing Tree divides what a family passes on into two great modules and six forms of capital:

• The wealth-related: structural capital and financial capital
• The people-related: legacy capital, human capital, relational capital, and social capital

Structural Capital

Families that hold great wealth usually operate within a framework or network of family trusts, partnerships or other holding entities, contractual documents, financial products, and the like.

Financial Capital

This includes both industrial capital and financial capital, a point easy enough to understand.

Legacy Capital

This is composed of the family’s core values and shared goals. It is the “family brand,” what sets the family apart and gives its members a certain shared sense of identity. Legacy capital depends, to a degree, on family members’ pride in the family, on the family’s stories and traditions.

Human Capital

A healthy family is made up of healthy people, and human capital is the foundation of the family. This includes the physical, emotional, and spiritual health of family members, as well as their capacity to learn, to grow, and to adapt.

Relational Capital

Effective communication is at the heart of every successful family, and a family’s ability to engage in and support cross-generational communication is especially important. It reflects family members’ ability to discuss difficult questions together and to collaborate on complex work; more fundamentally, it reflects whether there exists a family culture of trust, respect, and fairness.

Social Capital

A family is shaped by, and also reflects, the community and social network in which it is set. This represents the family’s relationship with the outside world—the sum of the social relationships, networks of connections, and reputation and credit the family possesses.

If we set the family’s goals upon “wealth secured, people fulfilled, family enduring,” then among all these forms of capital, the most central for a family to pass on are human capital and financial capital. Excellence in human capital feeds back into financial capital, while financial capital in turn incentivizes human capital, providing a solid material foundation for the growth of the person.

Succession itself can be professionally iterated. As things stand, the second generation is the core of succession, and also the key technical difficulty. If the second generation can carry the succession through—learning, feeling, and coming to understanding throughout the process—then preparation for the third generation’s succession can begin to be planned very early.

This is a cognitive kind of succession: one in which, before the succession itself, one is able to understand that succession is a discontinuous span of time, not a single point of handover.

What Is a Family Office?

Allow me to draw on some material from Professor Rui Meng of CEIBS (with certain modifications to the balance-sheet content); he was the founding professor of the Family Office Chief Architect program I studied in at CEIBS in 2019.

The family office is the highest form of family wealth management, helping a family, in a safe environment free of conflicts of interest, to better accomplish its wealth-management goals, realize family governance and succession, and safeguard the family’s ideals and dreams.

International academia and the financial industry define the family office as an institution that manages and governs the affairs of an ultra-high-net-worth family in a comprehensive way, through a single, complete balance sheet.

“Ultra-high-net-worth family”: according to the U.S. Securities and Exchange Commission, a family that establishes a family office should have at least USD 100 million in investable financial assets.

“Single, complete” means that assets are managed not in a scattered way but in a concentrated one.

“Balance sheet” includes not only the family’s assets in the narrow sense (structural capital and financial capital) but also its assets in the broad sense.

“Comprehensive” means encompassing both the creation and management of the six forms of capital, and the succession and use of the six forms of capital.

“Governance” is deciding who is to make the decisions, while management is the process of formulating and executing those decisions.

Rui Meng, CEIBS Family Office Chief Architect course

What Is the Relationship Between the Family Office and the Family?

The relationship between the family office and the family bears some structural resemblance to Maslow’s five-level hierarchy of needs, perhaps because it, too, has to do with the gradual building of capability, trust, and value.

The family office’s capabilities develop step by step as it meets the client’s needs—much as the world develops not because there is one good answer but because of the new questions it keeps posing.

The services Flourishing Tree Family Office offered in its early days were largely of the executional kind—setting up companies, screening insurance, and so on. Gradually it developed toward professional services—establishing family trusts, identity planning, screening financial products—and then further toward the role of decision-making adviser, able to engage in joint research and discussion around a client’s deeper needs. This is where Flourishing Tree stands today.

In the future it will develop into the role of the great steward, with the family entrusting more of its affairs to the family office in full, and the family office providing regular reports so the family knows the overall picture. The family office’s principal advisers will also become mentors to, or companions of, the family’s rising generation.

What Makes Flourishing Tree Special?

I am forever being asked this question. At the very beginning it was hard to answer, because I myself could not pin down what exactly made us special.

As our service cases have accumulated, we have gradually discovered our own distinctiveness:

Flourishing Tree cannot serve a client through a single product or project, chiefly because we have no product we are bound to recommend to clients. The core of our service is to ask good questions—to help the family sort out the problem that truly needs solving, and then to dig deeper still, to find the real question behind the question.

Compared with a product, Flourishing Tree stands closer to the client. Often we do not simply hand the client a solution; sometimes the problem the client raises is one Flourishing Tree has never handled before. We must confirm a specific problem to be solved, and then explore it together with the family.

Looked at in isolation, financial capital and structural capital are apt to look much the same from one family to the next—family trusts, insurance, identity; or allocations across secondary markets, primary markets, and fixed income. From their conclusions these services are fairly uniform. But the service we set out to provide is one that makes the person the end. Every family is unique, and emotions and people are unique.

So what, then, is the soul of Flourishing Tree? What is the thing that only Flourishing Tree can bring to the world? Perhaps Flourishing Tree is a little like Steve Jobs—in the course of helping clients solve their problems, it creates tools and inspires others. The family office is a service that inspires people, helping family members find the meaning of wealth and, through that, the meaning of life.

What Is Flourishing Tree’s Service Logic?

Flourishing Tree’s service works, on the one hand, toward the “hardware”—structural capital and financial capital; and on the other toward the “software”—human capital and relational capital. Legacy capital and social capital can be taken at a slower pace.

Each time, we ask what looks like a soul-searching question: “For you, what does wealth ultimately mean?” We have discovered, with some curiosity, that every family answers differently—which is exactly why every family’s plan turns out differently.

We usually begin with a family constellation chart: what are the needs of family members, collectively and individually; what goals and outcomes are to be reached. We ask the client to fill out a “Six Capitals Assessment Questionnaire” and an “Asset Holdings Statement,” analyze the gap between the present situation and the desired outcomes, and then propose the overall architecture of the “Zhiqian system” (the story behind “Zhiqian” is one for another time).

What Is the Overall Methodology of Planning?

First, look at what goal we mean to accomplish. The family office and the family plan for the beautiful state we pursue: wealth secured, people fulfilled, family enduring.

• The isolation of enterprise, family, and personal risk
• Building perpetual cash flow for the family, so that wealth serves the needs of the person
• Attaining continuous positive returns, bringing the family’s wealth into a compounding cycle
• Establishing a way of life both ample and healthy, where quality and a thrifty family ethos coexist
• Beginning the companionship and cultivation of the rising generation as early as possible, with attention to the middle-school years

What Is Flourishing Tree’s So-Called Hardware Optimization?

Flourishing Tree holds that wealth ultimately serves family members, and so wealth should be classified according to the family members’ purposes in using it. We divide wealth into three categories, and build firewalls among the three.

The first category is money for living, which we call “Always-Money” (always a bit corny, I’m afraid). The mark of Always-Money is the building of perpetual cash flow to meet the living needs of the family’s first, second, and third generations, based on a calculation of the family’s cash-flow needs over a hundred-year horizon. It is then broken down further: the money needed each year in the present; future HEW (Health, Education, Welfare); an investment account set up to maintain Always-Money; a succession account (chiefly whole life insurance) set up to supplement Always-Money’s cash flow; and a charity account for philanthropic purposes. Always-Money needs are set up in hedged, backed-up relationships across the domestic and the overseas.

The second category is money for investing, which we call “More-Money” (even cornier, I’m afraid). The mark of More-Money is attaining a target rate of return, and growing from the vantage point of an individual investor toward that of a small institutional investor. Ordinarily, Flourishing Tree will work with the family client to sort out the overall logic of More-Money: where exactly the returns come from, what the underlying logic is, and whether it can be reproduced in the future. In this section, understanding the mechanism of making money clearly and broadening one’s knowledge is at the core.

The third category is money for the enterprise, which we call “Still-Money” (cornier still, I’m afraid). This concerns the development and innovation of the rising generation—how to find, within the First Curve, a suitable model for incubation, and help and support the rising generation in finding themselves. It is not that the rising generation lacks excellence; the crux is that it is hard to find oneself amid the first generation’s “grand, glorious, and correct” aura. In one case, a family set up a family equity investment fund, led by an excellent GP mentor, with a member of the rising generation serving as investment manager. This approach achieved a many-sided win: the rising generation could find their own rhythm and win the family’s recognition, the family’s wealth was managed, and—most important—the generations found a subject and substance for communication.

What Is Flourishing Tree’s So-Called Software Optimization?

Growing Human Capital and Relational Capital

In the Family Office Chief Architect course founded by Professor Rui Meng at CEIBS, the professor, in speaking of family succession, held that succession requires twenty years of preparation—there is no possibility of it being a momentary transfer of position and duty. And the time a person most needs companionship and guidance is from twelve to eighteen: life’s direction, foundational skills, a healthy body, the cultivation of interests—the middle-school years are the most important moment for all of these.

The Growth Academy, which we are developing together with the Xuanwu Family Office, helps families cultivate future family leaders, building a mechanism of whole-person education and cultivation across four dimensions: physical energy, psychological energy, spiritual energy, and professional energy.

By attending to the cultivation of the rising generation during the middle-school years, twenty years later, when the rising generation reaches thirty, they will be able to communicate upward across the generations, to move forward into venturing, innovating, and taking over, and to nurture their own children in turn.

Growing Legacy Capital and Social Capital

Financial assets and figures in a bank account are often hard-pressed to mark a family’s distinctiveness, and hard-pressed to give family members a sense of identity. When a first-generation family leader passes away, the whole family is hard to keep together; kin slowly become relatives, and relatives become distant relations.

The family spirit often has its vessels—a family charter or covenant, family stories, an annual gathering and a private board, a family charitable trust, and the like. Very often a group needs a shared vision and a shared endeavor to strive for in order to be bound together; this is an invisible bond, yet it determines the relationships among them.

A Small Summary

The core value of the family office is to assist the family in achieving the strategic goal of succession;

The methodology it uses is to build, together with the family leader, a hardware/software system for managing family capital—leaving the complexity to the family office and the simplicity to the family members;

At the level of family spirit, to establish the family’s distinctive vision and values;

So that in the end the family runs and manages its own affairs, realizing the family’s well-being: wealth secured, people fulfilled, family enduring.

Afterword

The road of family office service is long and far. Without a heart set on thirty years, on a hundred, there can be no power to drive through the present; without the forebears’ benevolence and the placing of oneself after others’ gain, there can be no meaning in trust and entrustment. There is no secret to it—only a sincere heart.

References and authors:

• The Complete Wealth, by James E. Hughes Jr.
• Wikipedia
• CEIBS Family Office Chief Architect course, Professor Rui Meng

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