John Michael (JM) Elder is president and chief investment officer of the Wellspring Family Group, his wife’s family’s family office. The family owns and runs Landmark Realty and Development Co., a real estate and development company based in Spearfish, S.D. He talks about the unusual path he took to the family office and how it was formed:
How did you get started in the family enterprise?
In 2020, my wife and I were living in Phoenix, Arizona. I was teaching flight lessons and was a few days away from interviewing with an airline to join as a pilot. I got a call that said, ‘Hey, we’re going to pause our hiring for a little bit. There’s a virus going around.’ My wife was pregnant with our first child, and we decided to go back to South Dakota, where she was from.
Prior to that I had very little knowledge of what the family business was. My father-in-law is a real estate broker, and I knew that they did a little bit of development and they owned some land. But I really didn’t have a grasp of what the enterprise was. The family’s unofficial tradition was that sons-in-law joined the business, so I knew that was an option.
When we moved back to South Dakota, there were a lot of transitions happening. I got my real estate license to learn what their day-to-day looked like. This is where things started to go toward the family office.
How did you learn more about the family enterprise and investments?
I was asking a lot of questions: ‘Do we need to be putting money aside for retirement? My wife says we probably don’t.’ The answer I got was, ‘You’ll probably be OK.’ I thought, that’s not very good information. I started to pull on that thread. Also, our taxes every year were up and down, and I never really understood why. So I continued to pull on the thread.
I started to notice that a lot of the questions that didn’t have answers — or had very unclear answers — also mattered to my wife’s siblings and parents. It became clear that they had been running their enterprise for so long that while it had their investments housed in it, there wasn’t much of a strategic business model around it.
There were also two generational transfers happening simultaneously: one from my wife’s grandfather — who today is 93, and still shows up to the office every day – to the next generation, and another with me and another member of the third generation joining. But nobody was talking about it.
As I’m pulling on these threads, I’m noticing that things are changing. When I married-in there were a variety of trusts in place. I started to ask questions like, What’s the governance around this dynasty trust?’ As I’m asking those questions, all of a sudden those trusts started to change and things started to take a different form. That’s when I realized that there wasn’t a clear plan for succession or strategy for intergenerational transition up to this point. When these trusts were set up in the early 1990s, they were the cutting edge thing of how to pass wealth on. But now, a lot has changed, and they were realizing that there are better ways to go about this.
So that’s the milieu I found myself in 12 months or so after moving to South Dakota.
How did you decide to form a family office?
As they unwound the trusts, and the capital started to flow down to my wife and her siblings, it became clear that there wasn’t a plan in place to catch those dollars and to invest them wisely.
My father-in-law and I were getting calls from the siblings, saying, ‘I’ve got this cash that just got distributed. Can you help me invest it?’ We said, ‘Yes, we can put it in this project. But we’re going to have to start an LLC to hold it.’ We realized that the complexity of what was passively happening needed some oversight.
At that point I still had no idea what a family office was. Then a buddy of mine came to visit. He works for a massive family office in Tennessee, and I shared my woes with him. He said, ‘Have you ever thought about a family office? It sounds like that might be a good structure for you.’
I Googled it and took the executive education course from Harvard on family office wealth management. I quickly realized this was what we needed: a place for us to centralize the responsibilities of managing this family’s assets and wealth.
We’ve been going pretty full steam ahead since then to design and execute the family office.
What process did you go through to set up the family office?
Shortly after taking the class, I sent out a survey to the family that asked what was most important thing a family office could provide to them. They said, resoundingly, that first was philanthropy, second was education, and third was investment management.
We worked on building out governance first rather than the technical structuring.
It’s been tricky. Before this work, I did a partial master’s in performance psychology, which helped me to realize that as we were entering some difficult conversations, I needed to say, ‘Let’s pause, and let me pull some resources from that former life to create a common language for us.’
So we integrated that from the start: If we’re asking questions about succession, we need the tools to be able to converse about things openly as a family. There are a lot of feelings involved with a conversation like, ‘All right, what if your father is hit by a bus tomorrow?’
Those are the conversations that are so easy to avoid. I wouldn’t say that we are excellent about them — it’s not like we have this language and then, all of a sudden, it’s just easy to have those conversations — but I think it made it so that we don’t avoid them as much as we did before.
Then, the last nine months or so have really been focused on the technical structuring. We made the choice to run an endowment model investment portfolio rather than individually managing each of the families’ portfolios separately.
It’s a work in progress. Right now everything is in the process of centralizing and being pooled. There are a couple of reasons for that. One is with the way the assets have been held for so long, there’s not a lot of control for taxation planning. We hold a lot of a lot of land, commercial buildings and residential space, so when something sells, it triggers a taxable event. One year we might be in a high tax bracket, and then one year we might be in the lowest. There’s been no consistency. Pooling — and setting up a C Corp. specifically — allows us to meter the capital flow out of the firm that then impacts those individual families’ tax brackets.
The trickiest part of my work is that most of our assets are co-owned by multiple families and multiple partnerships. And so it’s not like our family can just unilaterally decide we want to liquidate so we can move toward a balanced portfolio. It becomes a process — every day is a new adventure on how we’re going to strategically get our value out of the assets that we currently have it in.
