Is a Poorly Performing Family Office Eroding Your Family Fortune? You Won't Know if You Refuse to Measure Its Returns
Building a fortune is one thing, managing it successfully through a family office is another. Serial entrepreneur, investor and philanthropist Michael W. Sonnenfeldt explains the risks and proposes a solution.
If you have to ask …
That line is usually attributed to J.P. Morgan. Someone asks the financier what it costs to run his yacht, and Morgan replies, "If you have to ask, you can't afford it."
The phrase has survived because it flatters the person it describes. It suggests that not knowing the number is itself a kind of arrival. Accounting is for other people.
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I have spent much of my working life among people for whom that line is more than a joke. Twenty-seven years ago, I founded TIGER 21, a global network of some of the most successful entrepreneurs and executives in the world.
Eighteen months ago, I ceded control to a new lead owner. I now spend much of my time running my own family office, though I remain non-executive chairman.
Over the years, I have sat through countless conversations about wealth, investing and legacy, and I have come to believe that the Morgan story survives for a reason its tellers never intended. The indifference to cost did not stop with yachts. It migrated, quietly, to portfolio performance.
How that wealth was built
Many successful entrepreneurs know what their assets are worth. Far fewer know what actual returns they have generated to build that wealth. Fewer still know whether those returns justified the risks taken, the complexity embraced and the fees paid.
This is not carelessness. Quite the opposite. These are often among the most accomplished business builders of their generation. On average, members of our family office groups in the U.S. are roughly 1 in 50,000 by financial accomplishment. What they understand deeply is how wealth was created. What they often understand less clearly is how wealth is managed once it has been created. That distinction matters.
It is here that a soft impression hardens into something measurable. The surveys that ask family offices about a single year's returns produce numbers that often swing with the market and reveal little — 15% in a boom, a fraction of a point the year before, maybe even a loss.
But the durable, across-the-cycle figure that keeps surfacing is sobering: The average family office investment portfolio compounds over time at something between 6% and 7% a year.
What to consider
It is worth sitting with that, because compounding is unforgiving. A dollar growing at 6% becomes about $5.74 over 30 years — a single generation. The same dollar in the broad American stock market, at its long run rate of roughly 10%, becomes about $17.50 over the same 30 years.
That's three times the money for likely taking less idiosyncratic risk, paying lower fees and making almost no decisions at all. The family office, with its staff and managers and quarterly meetings and access to everything, runs hard and arrives at a third of where it would have landed by doing nothing but invest in the indexes.
Yet many wealthy families employ investment committees, consultants, managers, advisers, private funds and specialized strategies only to discover that, over time, they have produced results that compare unfavorably with simpler alternatives. Why? Because the activity of managing wealth is fundamentally different from the activity that created it.
Entrepreneurs typically build fortunes through concentrated conviction. They identify a specific opportunity, commit extraordinary energy and accept substantial risk. The family office, however, is often designed to do the opposite. Its purpose is diversification, risk control and capital preservation.
Both approaches are rational. But they are not the same. The concentrated risk that created the fortune is frequently retired the moment the family office is established. What follows is not wealth creation in the entrepreneurial sense. It is wealth management.
This is the point
Over 42 years, I compounded capital at what my accountants calculate at a 21.7% return. I do not offer that as a benchmark for any investment office, mine included. It is not a portfolio return. It is the return on a life spent concentrated in things I largely created and largely controlled, and it carried risks no prudent steward of family capital should be fully exposed to. That's the point.
The person who builds the fortune likely earns financial returns three to five times the annual returns the later family office will likely produce when investing the proceeds.
The cure is not more software, though better tools certainly help. The cure is a decision about what the investment function is for. Twenty years ago, Billy Beane and the Oakland Athletics changed baseball by asking a simple question: What if many of the statistics everyone relied upon were the wrong statistics? The genius of Moneyball was not finding better baseball players. It was finding better ways to measure performance.
Wealth management may be approaching a similar Moneyball moment. For decades, wealthy families have measured success by account values, asset allocations, manager reputations and access to exclusive opportunities. Those metrics may be interesting, but they are not the scoreboard.
In the Morgan story, the man asked what it cost, and Morgan made him feel foolish for asking. The family office that refuses to measure its returns does the same to itself.
Measuring performance sensibly was never the foolish thing. The foolish thing is being able to find out, and choosing not to. That self-inflicted blindness compounds over a generation, and the wealth it quietly forfeits can end up larger in scale than the entire fortune the family started with.
To avoid the actions that quietly erode many family fortunes, I suggest these disciplines:
1. Measure performance over multiple time horizons and liquidity
Instill the discipline to track returns across short, medium and long-term time horizons, as well as liquidity and risk. Most families organize portfolios by asset allocation — stocks, bonds, private equity, real estate and cash — but that only tells part of the story.
A second framework groups investments according to how quickly they can be converted to cash and level of risk. These tiers include:
- Immediately liquid assets
- Less liquid assets that can be sold at a discount within 90 to 360 days
- Illiquid and cash-flow oriented assets such as operating businesses
- Aspirational investments such as venture capital, start-ups and development projects
Looking at returns through both frameworks often reveals strengths, weaknesses and concentrations that conventional reporting completely misses.
2. Recognize that investing is a different skill than entrepreneurship
Many entrepreneurs assume that creating wealth was the difficult part and managing it will be comparatively straightforward. The opposite is often true. Successful entrepreneurs usually built businesses where they possessed a genuine competitive advantage. After a liquidity event, however, they enter global capital markets — perhaps the most competitive marketplace in the world.
Without exceptional investment skills, or exceptional investment talent around them, a family office's portfolio returns will inevitably fall below the entrepreneurial returns that created the fortune in the first place.
3. Decide what the family office is aiming to accomplish
Before discussing investment strategy, answer three more fundamental questions:
- Do future generations want to keep their assets together, or would they prefer to manage them independently?
- Under what circumstances should financial and philanthropic assets remain unified or eventually divided?
- What role, if any, should spouses and heirs play in governance?
Questions of governance and structure almost always determine the success of a family office far more than investment selection.
4. Measure what matters
Organizations tend to improve the things they measure well. Businesses understand this instinctively. Understanding that most family offices earn only 6% to 7% over time will shape decisions about whether to sell an asset, how to staff and whether creating a family office is justified at all.
Once returns are consistently measured across both time horizons, asset allocations and risk to liquidity tiers, weaknesses become visible, edge becomes repeatable, and better decisions naturally follow.
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