Quantitative Analytics Integrated with Qualitative Skills in the Single Family Office

It is becoming more and more common for high-performing single family offices of institutional quality to incorporate big data, statistics and advanced analytics to quantify their results. It is essential that high-performing single family offices embrace a strategic, forward thinking approach, not just relying on in-the-moment reactive and tactical. They must be long-term-focused, with standards and repeatable methodologies.

Single family offices that do this are highly attractive to diverse and talented professionals, because they can offer that rarity in this field – a career path. And we all know talent is the lifeblood of the single family office.

Most single family offices lack a quantitative, analytical and statistical approach to defining and measuring their success and identifying areas for enhancement. As Peter Drucker famously said, “You can’t improve what you can’t measure.”

Most decisions in a single family office are made subjectively, not objectively.

Most single family offices operate on trust and a more qualitative, or subjective, approach, often without true long-term strategic leadership. The human element and emotions are important; they cannot be discounted, as they determine the perception of success from the ultimate judges – the family. With that said, families and their single family offices would benefit greatly from a more balanced approach combining quantitative with qualitative analysis.

Of course, as I have said over and over, there must be clarity on the family’s objectives and the written and articulated goals that follow. The single family office must have clear goals, and a process for pursuing these goals, if it is to excel in planning, execution and service.

This brings us to the question: How can families bring a more quantitative approach, utilizing big data and statistics, developing metrics and measurables into the single family office? 

Taking a quantitative approach may be most straightforward when it comes to investing. Metrics and measurables can be created and organized around investing goals relative to needed returns (matching liabilities with resources, a subject for a future white paper), time horizon, risk parameters, etc.; culminating with an investment policy statement, resulting asset allocation plan, implementation and monitoring.

Different investing goals require different investing approaches and risks; again, it is moderately easy to develop metrics and measurables to define success in this area.

Other goals are more subjective, and therefore more difficult to measure quantitatively. How do you measure whether your estate plan or tax plan is great? It’s so technical, and the family’s situation may be so unique, that quantitative measurement is difficult. Family education and training of the next generation, philanthropy and other areas are harder, but not impossible, to quantify.

While it’s not the purpose of this white paper, statisticians, big data professionals, technologies, even blockchain resources now make it easier to quantify with metrics and measurables.

At the end of the day it’s how the decision makers in the family “feel” about the single family office and the goals being met that matters most. You can’t get around the fact that this is often subjective. Nevertheless, I think the industry would benefit greatly and become more professionalized and institutionalized (in a good way), if we could define success through more objective means. Importantly, this would help the single family office improve and therefore benefit the executive as well.

Single family offices must illustrate their progress on goals, develop greater quantitative measures that show where they stand, and provide a roadmap for improvement. This begins with the process of true benchmarking, eventually leading to the development of best practices.

This is in no way an automated process. It requires active management and strong qualitative communication.

Mitigating risk, including in the areas of investment, cyber, geopolitical, etc., while defined and articulated differently from family to family, is a near universal concern for families of great wealth, and it’s an invaluable benefit the single family office provides. In other words, the single family office ensures that the family remains rich through varying and often unforeseen circumstances. What will the future look like, and how can this impact the family’s long-term goals? The single family office should help the family be better prepared for the future. 

One challenge for the single family office is how to compete for talent. Let’s look at Major League Baseball (MLB) as an example. The New York Yankees, the Los Angeles Dodgers and the Chicago Cubs are in the biggest cities with the most money and resources (and MLB has no salary cap); however, the biggest market teams with the biggest payrolls do not win the World Series every year.

Smaller market professional baseball teams have had to think differently and be hyper-creative; they often must zig when others zag. Going back decades ago, small market teams first began utilizing quantitative metrics and statistics (well before bigger market teams), hiring non-former players, and relying on big data and statistical professionals to analyze data and help team leaders make better decisions.

In addition to being the first to utilize big data and statistics, the best teams developed effective leadership and culture. (Culture is basically the operating system of the business, in our case, the single family office.) They drafted well, honed the skills of their rising players in the minor leagues, made frugal financial decisions on players and free agents, and utilized what were at the time proprietary metrics.

Whatever the title, the chief executive in the single family office is primarily responsible for clarifying and communicating the goals of the office, hiring the right people to achieve those goals, leading, training, and then getting out of their way, allowing talent to do what they are employed to do. Jeff Hunter, founder and CEO of Talentism, defines this as “purpose + talent + opportunity.”

How do you make your single family office employees more productive? Chief executives should be humble, open-minded leaders, educating and providing resources to their employees on being more productive. Eliminate distractions and educate them on practicing Richard Koch’s 80/20 principles, the Eisenhower Box and other proven productivity principles.

In sports such as basketball and baseball, statistics (and knowing which statistics really matter) make it easier to identify the best players. Bridgewater, the legendary hedge fund, uses baseball card-like metrics to quantifiably measure the skills and success of their employees. Honest and fair statistical approaches in the single family office helps benchmark and then strengthen best practices. This helps leaders evaluate and, importantly, improve employees.

Different measurables and statistics matter differently given the position. In professional baseball, for a middle infielder, being 6’6” with a great vertical leap is no great advantage; however, those are great attributes for a basketball shooting guard. This of course also applies to single family offices. So, what to measure in a specific role?

Having fewer consequences can lead to less accountability and less motivation to improve. In professional baseball, for example, teams nearly never go out of business. This perpetuates bad management.

Can outsiders like analysts, statisticians and big data experts bring a unique perspective to the role of the single family office? Can they help to determine what to measure and which data matters? The employees, in their roles, are also helpful in providing feedback and real “in the field” input.

But – It’s still not all about the quantitative!

Doug Kirkpatrick, author of “Beyond Empowerment: The Age of the Self-Managed Organization,” writes:

Leadership now requires the humanistic expertise to design purposeful and           meaningful work for human beings that inspires them to join an organization. It requires designing and building an organizational context: the connective tissue, or scaffolding, required to create a highly adaptive, open system that enables human beings to grow, and express their creativity. This mastery of new skills will generate massive value through collaborative human relationships across internal and external networks.

We’re not there yet; however, in the future, employees will receive ratings by peers and clients, on their contributions and reputation, and own equity, in the network approach. All this will one day be done without the bureaucracy and inefficiency of management structures.

Self-management and emotional self-mastery will be the most vital skills in the next decade.

Self-managers need a purpose: they need to know their “why.” What is one’s personal commitment to the enterprise? What is one’s personal mission statement? To get at these questions, we often ask why the person chose to work at this particular company in the first place, what excellence looks like in their particular role, and how one’s role supports the overall purpose of the enterprise.  

Interesting thoughts. Thank you, Doug Kirkpatrick!

Jeff Hunter of Talentism, on the value of one’s purpose, states: “‘Compulsion’ is a word that we use a lot. You hear a lot of people on the market talk about grit and determination. And we think those things are great, but they actually sort of counterintuitively dissipate over time.”

Whereas compulsion never leaves you.

He continues: “And when we have done studies of literally thousands of extraordinary people, what we found is they were compulsive about what they do. It’s not that they really hated it. They thought through it anyway. That they couldn’t put it down if they wanted to. And that’s a compulsive act. That’s not an act of determination. And second meaning, human beings are animated by whether their work touches others, solves a problem or does something, produces an outcome that’s really meaningful, that matters to them, gives them a sense of pride and place, a sense of what they’re good at and why they matter. So, purpose as we say, is compulsion times meaning.”

Too many single family offices follow group think, in small communities with no true best practices, metrics, data or statistics to judge success, there is a lack of transparency. This creates a herd-like mentality, but single family offices often needs to zig when others zag, and to be more contrarian in their thinking and approach to problems and solutions. Finding the right balance of quantitative and qualitative measurement can help them do that.

Intellectual humility is important. Ask questions. Ask the questions that everyone else pretends to know the answer to.

Former NBA general manager and now a professor at Stanford, statistical expert Sam Hinkie recommends keeping a decision journal. Write down what you think will happen and why before implementing a decision. Refer back to this later. See whether you were right and for the right reasons. Understand your past reasoning. 

Tim Urban advises: “Be long science. Be humbler about what we know. More confident about what’s possible. And less afraid of things that don’t matter.”

We began with the need for more quantitative measures in the single family office, integrated with active management, and, importantly, transitioned to the qualitative. It’s the balance and combination that can make a single family office a thriving enterprise.

About Angelo Robles

Angelo Robles knows a thing or two about wealthy families. He’s been working with them since 2008 when he founded Family Office Association, a global membership organization for UHNW families and their single family offices. His members say that he delivers the finest in content and programming, including his own proprietary content on designing, accelerating and/or transforming single family offices to thrive generationally. Angelo emphasizes embracing innovation in the single family office. This includes creating appropriate benchmarks, implementing relevant technology, and updating processes to align with industry best practices.

Having worked with multiple generations of families for the past 12 years and their trusted advisors, Angelo has gained an enormous amount of intellectual capital on how UHNW families think and feel — and what motivates them.

Angelo is the founder of the Effective Family Office think tank and is creator of the “Family Office Masterclass Program Series” for families, their single family offices and their advisors. He also personally coaches a select group of global families and advisors.

He is a frequent source to top media outlets like Bloomberg News, Wall Street Journal and Institutional Investor, and maintains a thought-leadership series via his podcast Angelo Robles’s Effective Family Office on iTunes. He has also authored the book Effective Family Office: Best Practices and Beyond, which is available through Amazon. He is the co-author of Maximizing Your Single Family Office: Leveraging the Power of Outsourcing and Stress Testing.

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