The family business executive I was speaking with was generally flummoxed. After working carefully to recruit a new executive to their team, the individual had lasted only 18 months or so before leaving the company. The company culture and role were all a fit – so why did the executive leave? Geography. While the executive lived in a larger metropolitan area about an hour away, the company was headquartered in a small Southeastern town. The long commute was a chore, and relocating the family to a small market just wasn’t feasible.
While fictional, this account is an amalgamation of several stories I have heard recently from leaders of both family businesses and family offices alike about the challenges of recruiting into smaller markets. For family offices, geography is an important dynamic that is worth considering closely. Today, we will walk through a few trends and then offer a few solutions for family offices struggling with geographic challenges.
Let’s begin at a macro-level. Globally, urbanization is one of the most powerful forces at work. Urban areas continue to grow at above trend rates. By 2050, the UN projects that 68% of the world population will live in an urban area vs. 55% currently. The emergence of mega-cities is a very real and powerful force. New York City’s population of 8.5MM residents seems puny compared to cities like Mexico City with 21.3MM. Even outside megacities, airports have emerged as a primary driver of economic success and failure for a region. For smaller markets without ready access to easy transport, the airport divide will likely only become more meaningful going forward.
For family offices, this matters for several reasons – recruitment, deal flow, and regulatory.
First, individuals who choose to leave other professional services firms and work for a single family make a delicate career trade. In exchange for the upside of potential stability, collegiality, and long-term time horizon that characterize many family offices, these professionals stake their entire career on the relationship with a single client. While there are draw backs for working for a large tax practice or investment management firm, career risk is relatively lessened through a broader diversity of clients served.
If the professional gets sideways with a client, that client often can be transitioned to a different person within the organization, or even if the client leaves the organization, the exit is unlikely to constitute major business risk. With a single client as in a family office, the break-down of the core client relationship can have real impact on the career of the professional. This is a real risk for any individual working in a family office. If that office is located in a small market, there are unlikely to be many other alternatives in that local market for the special expertise or seniority of the individual.
Consider as well, the junior team members that also comprise any family office team. Markets that provide ready access to peers, entertainment, and potential romantic partners are inherently more appealing for early career professionals who play a critical role in an family office team.
Second, opportunity and deal flow. While there are quality of life advantages to smaller markets, there will be missed opportunities that come from limited peer networks in smaller markets. As well, in larger markets, there is a certain amount of deal flow that comes across the transom simply due to the density of many possible investors being in a single market. Of course, smaller markets have their benefits as well. A smaller market may promote independence of thought and avoidance of group think.
Finally, there may be other advantages to choosing a different location for the office. For example, the tax climate of the family’s geography of origin may be increasingly hostile (here’s looking at you Connecticut). Choosing the right situs for trusts can have significant economic implications when the tax bill comes due.
So how do families and family offices respond?
First, as the saying goes, knowing is half the battle. For families with strong ties and history with smaller markets, it may seem obvious why Localtown, USA is a great place to work. Awareness of how you will be competing for talent will help you build an appealing narrative to prospective candidates. As well, it may impact how you put together compensation packages for team members. While in theory, a lower cost of living should mean a lower comp figure, it is not unreasonable to think you may in fact pay a higher price to lure talent of the desired caliber to help offset career risk.
Second, consider whether geography actually matters. For most ultra-high net worth families, geography becomes more fluid over time as families begin to move (often times to the South for the weather and tax advantages). As such, if greater and greater portions of the family call states like Florida, Texas, Tennessee – all no state income tax markets home – the need for the office to be in the geography of origin likely lessens.
Alternative work arrangements grow increasingly popular. It may be possible to build the family office team in a distributed fashion with certain team members located in different markets. This is commonly seen in the endowment world – where smaller schools in more remote geographic locations site their investment teams in Chicago or New York.
Third, consider helping close the career loop. Does the family the family build in a process for its family office staff for out-placement support to help departing team members with their transition away. Such a structure, while challenging to design and implement may help mitigate the risk of relocating executives.
Geography is a tricky issue. The locales that families build their wealth in are often times closely intertwined with the family’s identity and narrative. As well, the family may be deeply supportive of the local community through its employees in an operating business and its philanthropic endeavors. Like all considerations for a family office, the choice of geography is an important one, and importantly the ‘default’ answer should not be immediately adopted simply because it is the default. Careful consideration of the long-term plan for the office may help reveal additional considerations that would affect this choice.