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Zsolt Gregor Raffai is a seasoned financial expert with a diverse background in wealth management and Family Office operations. He holds Masters degrees in Business Administration and Applied Physics/Engineering, along with professional qualifications including Chartered Management Accountant (CIMA) and Chartered Fellow in Private Client Investment Advice (CISI).

With experience spanning Venture Capital, Investment Banking, Strategy, and Private Banking at institutions including J.P.Morgan, Citigroup, and LGT/Vestra, Mr. Raffai has worked in financial hubs including London, New York, and Zurich. Notably, he served for seven years as CIO/COO of a Single-Family Office.

Currently, Mr. Raffai is establishing a Swiss-based, narrow-spectrum Multi-Family Office for prominent European Families (www.theflairgroup.org), aiming to alleviate the burdens of wealth and enable clients to focus on their passions. His approach combines deep financial expertise with a commitment to enhancing clients’ quality of life.

Family Offices have long been the cornerstone of wealth management for ultra-high-net-worth individuals and Families. However, as the needs of wealthy Families evolve, so too must the Family Office model. The traditional structures, while effective in the past, often struggle to adapt to new challenges, from blurred lines between Family and business to the complexities of managing multi-generational wealth. This article delves into selected myths, dilemmas, and best practices that define modern Family Offices, as follows: 

1. Myth: The Jack-of-All-Trades Family Office
2. Myth: Personalized Service at All Costs
3. Conundrum: Trust vs. Skill
4. Myth: “I Can Read All People”
5. Myth: Attractive Work Environment Justifies Lower Remuneration
6. Myth: Financial Planning and Budgeting are Administrative Chores
7. Myth: The Investment Portfolio Must Be a Profit Center
8. Conundrum: Going Direct
9. Myth: Generational Wealth Creation
10. Myth: The Next-Gen MUST Take Over or Work in the Family Business
11. Myths: Family Office Wealth Structuring
12. Myth: Philanthropy is Best Delegated to External Managers or Reserved for the Next-Gen

1. Myth: The Jack-of-All-Trades Family Office

Family Offices often find themselves grappling with fundamental questions: What is the purpose of the office? What should it accomplish? The answers vary, with each Family’s needs, assets, and risk profiles influencing their approach.

However, a recurring dilemma is the blurred lines between Family, lifestyle, business, and philanthropy. When these areas are mixed under one umbrella, accountability, risk management, and decision-making become muddled, leading to inefficiencies and expensive mistakes.

Recommendation: Mr. Raffai advocates for a structure that separates different activities into distinct entities, each with its own focused management and employees. This could mean creating separate organizations for business interests, financial assets, philanthropy, lifestyle management, Family properties, and other key areas.

While this approach may seem more complex initially, it offers clearer accountability, better risk management, and more efficient asset allocation in the long run. It ensures that responsibilities are well-defined and that each segment operates with the required focus and expertise.

2. Myth: Personalized Service at All Costs

A common belief among Family Offices is that internalizing all services—from wealth management to security—ensures personalized care and more tailored services. Mr. Raffai challenges this notion, pointing out that keeping all services in-house can create isolated “bubbles” that fail to keep pace with the rapidly changing external environment.

“Routine entrenches imperfections, blocks improvements, leads to avoidable mistakes.”

Mr. Raffai warns: Excessive internalization can often result in captive service providers who are isolated and outdated. Internal staff, confined to a bubble of identical, repetitious routines, may lack exposure to new risks, challenges, and best practices, making them less effective and adaptable.

Recommendation: Mr. Raffai suggests engaging specialized external service providers who are more likely to stay current with industry best practices and global trends, for example, sector and asset class focused investment managers, estate management firms or security companies, which are well-versed in the latest industry standards and challenges. Many such firms have the skills and the tools to provide highly personalized services. This allows Family Offices to access high-quality, up-to-date, tailored services without the inefficiencies of internal bubbles. 

This approach does not mean completely outsourcing all functions. Mr. Raffai proposes a lean, three-member core team for Family Offices:

1. Executive Chair: a Family member to ensure that the strategy and implementation of the Family Office always match the interests of the Family
2. CEO: An experienced organizer with extensive C-level experience to setup/select, organize and monitor the performance of captive and external service providers
3. Office Manager: Scheduling, organizing, and record-keeping

This structure allows the Family Office to benefit from external expertise while maintaining strategic control and oversight over core matters such as financial planning, risk management, and governance.

03. Conundrum: Trust vs. Skill

Many Families believe that trust in the Family Office employees shall prevail over their expertise and skills. Therefore, they tend to hire from their trusted circles of Family members, friends, colleagues, and business partners – even if they do not have all the necessary skills and personality traits, which often leads to expensive mistakes. While understanding the psychological and historical roots of this tendency, in Mr. Raffai’s view, skills are as important as trust because the bias for trust can lead to a lack of diverse perspectives and the creation of an echo chamber that fails to challenge the Family’s assumptions or adapt to changing circumstances.

Trust is certainly important. Fortunately, in today’s world there are many professional organizations where trustworthy thinking and behavior are actively and continuously nurtured. There are also specialized recruiters to assist Single-Family Offices in finding, selecting, hiring, and continuously motivating the most trustworthy and skillful external hires.

Recommendation: Mr. Raffai suggests a hiring process that focuses on skills and experience. He even proposes adopting practices from large organizations, such as anonymizing applications to reduce personal bias. Additionally, he recommends extensive vetting, including psychological testing and trial periods, to ensure candidates can truly put the Family’s interests first under real-world conditions. Engaging external experts for these processes can help mitigate biases and ensure the best fit for the role.

04. Myth: “I Can Read All People”

Family Principals often dismiss the above-mentioned precautionary measures in hiring because they, as successful leaders, tend to believe that they know exactly how to read people. And they can - to some extent. However, it is almost impossible to notice on the spot some of the Jungian Shadow aspects of personalities and some psychological challenges such as a narcissistic personality disorder. Another risk is that numerous professional high fliers tend to dominate their work environments. They naturally try to continue that when they are hired to work in a Single-Family Office, which often leads to clashes with the members of the Family. In Mr. Raffai’s experience, only very few candidates can understand and are capable of putting the Family’s wishes first over their own ideas of what would be optimal.

When drawing the attention of Family Principals to such hiring pitfalls, many tend to reply that if they ended up with hiring such a person, they would simply fire them when the problems surface. The risk of this approach is that by the time of firing, the problem-person would learn lots of sensitive details about the Family, their assets, and other interests, which could lead to years of substantial challenges to the Family even after firing them.

Recommendation: In addition to the recommendations under the Trust vs. Skill section, Families might want to engage candidates first as consultants for a few months and watch closely how they manage conflicts as well as the ups and downs in life.

05. Myth: Attractive Work Environment Justifies Lower Remuneration

There is a belief among some Family Offices and recruiters that Family Offices can ‘get away with’ offering lower compensation packages to their employees than market rates at similar jobs in traditional companies. Their justification is that the work environment in Family Offices is more (i) flexible; (ii) secure; (iii) patient and long-term-focused than in other sectors, and; (iv) some Family members working in the Family Office also receive lower compensation than their peers in other type of organizations. Let us examine these myths one by one:

1. Flexibility: Family Office employees often get exposures to a broad variety of activities, roles, opportunities, and challenges. Some of those are of higher value and complexity than what their non-Family-Office peers are normally dealing with. Also, to find solutions, Family Office employees can use more of their own creativity instead of being driven by established policies and procedures. While this might be thrilling, it also carries the risk of making costly mistakes – and being solely responsible for such mistakes. Flexibility also means that priorities and timelines in a Family Office can change very often, which, over time, can lead to confusion, exhaustion, wasted time, and efforts. For an employee coming from more structured environment, such a high level of flexibility can lead to a quick burnout.
2. Job security: Many Single-Family Offices are lightly regulated entities. Their policies, processes, jobs, and employees can be and will be changed in line with the changes in the priorities and the power structures of their governing Families. Accordingly, Family Office jobs tend to offer no more job security than traditional companies.
3. Patience and long-term-focus: Although some traditional Family Offices serving their Families for multiple generations might be more patient than the average commercial enterprise, others, particularly those Family Offices that are led by first-generation wealth-creators and those that still having substantial operating businesses tend to be less patient. Understandably, those Family Offices are mostly being driven by the spirit of getting continuously better, faster, and more profitable. Although they might be planning for the long term, their often benchmark their results against the results of traditional companies that operate with shorter term focus.
4. Low-paid Family Members as a benchmark: Such comparisons often fail to take into consideration the Family Member employees’ personal participation in the Family Office’s wealth creation. Of course, the Family might create wealth-creation related compensation schemes for all employees to share the wealth-creation benefits. However, that rarely happens and, given the unstructured nature of the Family Office environment, it is difficult to implement, let alone, enforce such schemes, especially if the non-Family-Member employee leaves the Family Office.

Recommendation: Mr. Raffai believes that Family Offices should offer top compensation packages to attract top performers. Therefore, he advises Families to critically examine Family Office compensation surveys, some of which might be biased for lower remunerations, and to consider the true value of experienced and loyal professionals in protecting and growing Family wealth. Ensuring that employees feel valued and appropriately compensated is crucial to maintaining a stable and motivated team within the Family Office.

06. Myth: Financial Planning and Budgeting are Administrative Chores

One of the most overlooked aspects of Family Offices is the importance of financial planning and budgeting, often dismissed as mere administrative chores. However, these functions are crucial, especially in managing liquidity and risk. Without proper planning, Families can face significant challenges, such as being forced to liquidate assets at inopportune times, turning paper losses into real ones.

Recommendation: Mr. Raffai stresses that these activities should never be fully outsourced, as they form the core of wealth preservation and growth. A well-structured financial plan should account for all aspects of the Family’s wealth, including personal budgets, private assets, business interests, and financial investments. The financial plan should be a ‘living being’, regularly updated to reflect changes in Family needs and external circumstances.

07. Myth: The Investment Portfolio Must Be a Profit Center

Many Families view their investment portfolios as profit centers, expecting them to generate significant returns akin to professional investment firms. However, running a portfolio as a profit center, Families would need to:

1. Be fully aware that this is a diversification into the financial sector. Before doing so, they should ask themselves: Why into this sector and not into another one? Is the financial sector the most suitable sector for the Family? E.g., is it an attractive sector, at all? Are the related risks acceptable? Would the active Members of the Family enjoy working in the financial sector? Does the Family have the relevant financial experience or relevant transferrable skills?
2. Run it as a company, e.g., governance, internal organization, and controls
3. Build sustainable competitive advantage, e.g., best professionals with deep sector/subsector experience, cutting edge technology, proprietary information, effective policies and processes, scale, top brand. Among these, scale and access to proprietary information are the most challenging. E.g., does the Family have the will and resources to build a scale that would challenge Citi in currency trading or Goldman in stock trading? Or, how can the Family get access to / generate proprietary information in less efficient markets? For example, how can the Family find and assess the potential of emerging venture capital funds with focus on a nascent industry such as using AI for generating computer code? Based on these considerations, it is likely that for most Families the diversification into the financial sector, i.e., running the financial portfolio as a profit center, is not desirable or not possible. What to do then?

Recommendation: Instead of aiming for the highest returns, most Families should view their portfolios as tools for risk and liquidity management. For that Families should

1. Prepare a long-term liquidity plan to match their expected personal, business, and investment needs with their expected personal, business and investment income (not investment returns!)
2. Get very clear about their risk appetite and be content with whatever returns markets deliver for the Family’s liquidity needs and chosen risk profile
3. Focus on efficient markets and diversify across geographies, currencies, and industries by investing in low-cost Exchange Traded Index Funds
4. If the Family still wants to build some expertise in the financial sector, start it in inefficient markets where scale matters less such as private equity, hedge funds and real estate. First, they should develop skills to find the best managers in a chosen sub-sector and invest with them. It is important to understand that fundamentally different management selection skills are required for each geography, industry, and asset class.

For example, if a Family has developed skills and a network for finding the best commercial property buy-out managers in Spain, it is still likely that they will find it difficult to find the best venture capital managers for US space tech investments. Therefore, each Family should be very cautious about in how many investment subsectors they would like to build manager selection skills because this is a resource and time intensive exercise. Mr. Raffai recommends to start with one subsector where the Family has transferrable skills and seek the assistance of well-known and respected specialized advisers for other subsectors.

In this context, Mr. Raffai also points out to the difference between risk-adjusted vs. absolute returns: “For a well-diversified portfolio, the key risk is volatility. Wealthy Families have the ‘luxury’ to sit out drawdowns – provided, that they have a proper liquidity plan – and they stick to it. Hence, wealthy Families should not worry about volatility and focus on absolute returns.”

08. Conundrum: Going Direct

Family Offices have become increasingly involved in making direct investments in companies. Family Office Principals often commit most of their time to nurturing a few start-ups. Regrettably, many of them succumb to the bubble of overconfidence, particularly when making direct investments in non-core sectors.

However, finding and building profitable companies with sustainable competitive advantages always require deep, sector-specific knowledge such as market information, detailed understanding of added value sought by customers, competitive skills and landscape, regulation, organization structure, tech, best-suited personality types, and tacit know-how of sales and operations. Without those, even successful serial entrepreneurs often lose their investments in new sectors.

Some Families approach this challenge by co-investing in new sectors with other Families, or with private equity funds – both of which require specific manager selection skills because:

1. Private Equity funds have significantly different objectives, operating principles, risk appetite, and time horizons than Family Offices
2. Returns of best performing PE firms are much higher than the average PE performance, and there is no guarantee that even the best performing PE firms will be able to replicate their past successes in the future
3. Family Offices are very diverse and many of them are less open to a full due diligence than a regulated fund. Among other things, co-investing with another Family Office can get quite risky if the relative size and importance of the given investment for the leading Family Office are smaller than those for the co-investing Family Offices. In such situations, the leading Family Office might simply write-off a viable but lower-performing and time-consuming investment without ‘feeling the pinch’, which co-investing Family Offices could experience as a significant loss due to the lead-investor’s perceived negligence - and they all can end up in multi-year litigations.

Recommendation: To counter the myth that a successful entrepreneur can do it all and the overconfidence that can arise when venturing into non-core sectors, Families should ask themselves similar questions to those in the previous sections about diversification and manager selection. Alternatively, they could invest smaller amounts from their ‘Play Money Pots’ to get exposure to new sectors/managers – and immediately write off mentally and emotionally such investments so that they can stay fully focused on learning.

09. Myth: Generational Wealth Creation

One of the foundational believes in the world of Family Offices is the idea that wealth shall be created and sustained across generations. Whole books and studies have been and could be written about why and how. But is it still the case, considering that …

… in developed countries, the timeless values and skills that once distinguished wealthy Families, e.g., loyalty, integrity, respect, fairness, entrepreneurism, have largely become societal norms. High-quality healthcare, and education are now accessible to a broad spectrum of society. The rule of law protects all individuals and properties. This democratization of privilege means that the driving force behind wealth creation has shifted. Furthermore, there is substantial social mobility; privacy and secrets no longer exist; public opinion and medias are formidable forces, and; science has phased out many former social biases such as gender and race discrimination. Therefore, the need to protect future generations from potential economic downturns or societal upheaval might be no longer as pressing as before.

In addition, inherited substantial wealth can have some unintended consequences for the Next-Gen. It can become a golden handcuff that prevents Next-Gen members from choosing and living their own lives – reducing them to faithful stewards of the wealth of earlier generations and the dutiful implementers of the wishes of their ancestors. They could be the happiest people on the planet, but, regrettably, too many of them are not, because the psychological toll of wealthy upbringing can be significant. This paradox of unhappiness amidst abundance stems from several factors:

1. The Shadow of Success: Growing up in the presence of highly successful parents can be both inspiring and intimidating. While some Next-Gen members may be motivated to achieve similar levels of success, others may feel overwhelmed by the perceived impossibility of matching their parents’ accomplishments. This can lead to a persistent sense of inadequacy, even if they become successful in their own right. This identity crisis can manifest in various ways, from overcompensation and the need for constant validation (as seen in high-profile cases like Donald Trump) to a paralyzing fear of failure.
2. The Steward’s Dilemma: Some Next-Gen members become what Mr. Raffai calls “the steward” – individuals who live their lives strictly by the letter of the Family constitution or wealth management plan. While this might seem ideal from wealth preservation and legacy standpoints, it can result in a life devoid of personal fulfillment and individual identity.
3. The Resentful Heir: In some cases, Next-Gen members may harbor long-standing resentment over perceived unfairness in wealth distribution or Family hierarchy. This bitterness can poison relationships and prevent individuals from enjoying their considerable advantages for generations.
4. The Paralysis of Choice: With nearly unlimited options available, some Next-Gen individuals struggle to find direction and purpose. The question “What am I supposed to do?” can become paralyzing, leading to a “bubble of convenience” where difficult decisions and individual progress are avoided. Or, out of the nearly unlimited options some seemingly easy ones are chosen resulting in considerable damages to individuals and property.

Of course, besides these stereotypes and tendencies, there is the possibility of a Next-Gen to become a fulfilled, self-directed and successful individual.

Recommendation: Instead of planning ahead for generations, wealth owners might consider

1. Engaging more with their children by spending quality time and acting as role models rather than simply passing down wealth. Yes, the opportunity costs are high but the rewards are even higher;
2. Encouraging and helping their children to pursue their own passions;
3. Providing their children with the best education and health insurance;
4. Buying a nice flat for each of their children in locations of the children’s own choosing, and;
5. Spending everything else to support good courses and to enjoy their lives while alive and healthy.

10. Myth: The Next-Gen MUST Take Over or Work in the Family Business

The question of whether to involve Next-Gen members in the Family Business is a perennial one for wealthy Families. Mr. Raffai points out that while it may seem logical for children to take over the Family Business, this path is fraught with challenges. The dual roles of being a Family member and an employee in the Family Business often create a bubble around these individuals, making it difficult for them to be seen solely for their abilities and achievements. Mr. Raffai therefore takes a somewhat contrarian stance, advising against the involvement of Next-Gen in the Family business.

“Even if they are skilled, able, and willing, their relationship to the wealth owner will create resentment in and distort the behavior of the other employees,” Mr. Raffai explains. “Also, their success never will be 100% of their own. Neither will they have to carry the full burden of their own mistakes – hence, they would learn less from them.”

Recommendation: Mr. Raffai suggests hiring top professionals to run the Family business if the wealth creator wants to step back. This approach allows Next-Gen members to pursue their own interests and careers and helps the employees of the Family business in keeping focused on their commercial activities.

11. Myths: Family Office Wealth Structuring

Traditional wealth structuring often focuses on privacy, tax optimization, estate planning, and governance. However, Mr. Raffai argues that many of these concerns are either outdated or counterproductive in today’s world.

Recommendations:  

1. Privacy: In the digital age, true privacy is increasingly difficult to achieve. Instead of attempting to create an impenetrable shield, Families should focus on living sensibly, supporting good causes, and being prepared for potential public scrutiny.
2. Tax Optimization: The continuous effort, high risks, high costs, and anxiety associated with excessive tax optimization may not be worth the potential savings. Mr. Raffai suggests considering relocating to a tax-and-Family-friendly jurisdiction and paying taxes like everyone else, freeing the Family from tax-related worries and risks.
3. Estate Planning: Rather than complex estate plans, Mr. Raffai advocates for a simpler approach: provide children with a solid foundation (education, healthcare, and perhaps a home) and encourage wealth creators to use their wealth during their lifetime for causes they care about.
4. Governance: This remains a crucial aspect of wealth structuring. Mr. Raffai recommends clear governance structures, potentially using established standards like those from the UK’s Financial Reporting Council (FRC).

12. Myth: Philanthropy is Best Delegated to External Managers or Reserved for the Next-Gen

Philanthropy in Family Offices is often delegated to external managers or reserved for the Next-Gen. However, the most effective philanthropic efforts come from those who are directly engaged and passionate about their causes. And so, Mr. Raffai encourages wealth creators to actively engage in philanthropy during their lifetimes.

Recommendation: Family Principals should actively participate in their philanthropic endeavors, leveraging their networks, skills, and resources to make a meaningful impact. For example, they could aim to protect the ‘Global Next-Gen’ from global risks such as climate change, pollution, war, diseases, or a hostile AI by investing in tech, financing research, lobbying and personally appearing in the media. By doing so, they can drive change in areas they are deeply connected to, making philanthropy not just a financial activity but a personal mission.