When Richard Reese retired in 2013 after leading storage and information management company Iron Mountain for 30 years, he shifted gears to form Fermont Capital. He discusses how he approached setting up his family office:
Why did you decide you needed a family office?
I didn’t start off to build a family office. I didn’t think I needed it and didn’t want the hassle.
I knew I needed to organize my investing, which had been haphazard while I was the CEO of a public company that had grown rapidly. Suddenly, I went from running a company where I had all the infrastructure to running a company where I had all the assets but no infrastructure.
I realized I needed help, so I hired a CPA firm that had done my taxes. They were helpful, but our complexity outran them quickly. As I started to understand what the issues were, I realized there were better alternatives.
How is your family office set up, and who does it serve?
There are four of us in the family: me, my wife, our two sons. We are beginning to formalize a real family office.
Right now, we have most of our investment assets managed through one investment entity: Fermont Capital. It holds our real estate holdings, timber properties – a bunch of different kinds of assets. We are actively investing in entrepreneurial activities, such as early-stage tech startups, and some direct M&A funding. We also have several trusts and a family foundation. Ultimately, we have an overarching family office. Fermont Capital is owned by one of our trusts to make our infrastructure continuous.
How do you think about insourcing vs. outsourcing?
One of the real challenges of early-stage family offices is they get big, typically, over time. The growth opportunity happens over several years, which makes it difficult to attract the quality of talent you’d like to have. That’s one of the reasons I chose to outsource some functions to firms who aggregate clients like us so they have enough business to get and keep good talent. It’s hard to do with a small family office.
What trends are affecting how family offices invest?
One trend is there are a lot fewer public companies that you can buy and sell, and a lot more private companies. There are a lot of reasons for that, but the short answer is there’s enough organized venture and private equity — and the world of being a public company has gotten more expensive and more difficult.
The family office has really been on the forefront of this trend because, by and large, family offices take a longer view to the investment cycle. If you pay money management people who have a fund, they get compensated off performance and, in order for them to make money, they have to churn the portfolio. Most family offices are very tax aware, and in churning a portfolio you realize taxable gains when you would rather hold the asset and let it compound without paying the taxes.
Another trend: The younger generation is about to inherit trillions of dollars, and the money is going to fall into the hands of people who may not be ready to take on those responsibilities. Older family members may realize they’re not going to live forever and have to get the operational infrastructure in place to manage the money so other people can run it. Then they have to figure out how the money will be dispersed: What are their charitable intentions? How do they structure it so the next generation benefits but isn’t hindered?
Why do these trends lead to challenges with document management?
When you do all this private investing, the complexity just explodes: You tend to put these assets in special purpose entities for reasons like asset protection and co-investing. These entities are then typically owned by trusts. That results in a number of documents coming in to set up structure, plus the limited partnership agreements and deal agreements. If you are going to be doing good private investing, you need these documents to track commitments and make good decisions.
One thing you learn about private investing is it’s very hard to really understand performance. It takes a long time with a private asset to really understand how a private asset is doing, what kinds of returns you’re making. There is also a lot of tax friction in a lot of investments, so if you want to protect yourself and your family from risk and taxes, you need great documentation, good reconciliation and review processes and good financial reporting. That gets very complicated in the private world.
How did you approach dealing with all these documents?
Given my career, document management was something I understood. I knew two things: First, we needed a really good performance management system. We made a decision and licensed one of them.
Then, we found in iPaladin a system that was purpose-built for what our problems were: family office documentation. iPaladin is more than document management. It’s really a workflow engine with good document management built in. It’s a closed environment and very secure. It’s not just for private investing: It’s everything about the wealth, wills and estates and trusts and all the stuff that’s going to last forever — permanent documentation. In estate planning, people who are working with the third generation may have 150 years of documentation. That changes how you think about things. I won’t be here that long, but I expect somebody will. A decision trail is the best we can do to help them succeed.
Once we had chosen these two good systems, then we needed to get people to operate them. We have a staff of three people right now: myself, my son, who is joining the business, and the CFO. We will grow some, but we will tend to outsource a lot of the processing and technology. But the foundations are built on the idea that document management needs to focus on the problems we as family offices have. Documents are the foundation of the wealth. Documents validate ownership and workflow validates actions, which results in more documents —and those documents validate compliance.
We also use a service from a company called Arch that collects K-1s and other documents from different portals for private investments and feeds them into iPaladin.
Our system is set up to help us take actions. We’re doing capital calls every week. We’re notified money is coming in or needs to go out, which we track and then have to do the accounting. Everything is set up first by the iPaladin system and then sent to our outsourced accounting team. Everyone sees the same document and subsequent actions — nobody has a different version of where the business stands.
How else has technology helped make your family office run smoothly?
Our headquarters are in Florida, but the office is virtual — the CFO lives in New York. I don’t have an office. It’s wherever I am with my computer, or my son is with his computer. Technology has gotten good enough that we can easily have weekly meetings.
And one of the keys to making a virtual family office work is maintaining one source of truth — so everybody sees the same informationwhen they need to see it, and then the workflow assigns actions to people — everyone trusts what they see and knows what to do. iPaladin continues to alert them until it’s done. My CFO can see where everything is and if anything is behind. You’re not emailing people or going back and forth. People don’t need to be in the same room or the same building — they can work wherever they are.
How can family offices with decades of paper documents make the transition to a paperless system?
I learned a long time ago what works: You look across your legacy data and your legacy documents. There’s a small subset of that stuff that is important, like trust documents and wills and documentation on transactions that are needed for tax purposes. So, you’ve got to find all those originals and feed them into the system to get it started. One of the things iPaladin requires you to do is [have] good hygiene when you bring it in.
You’ll have to spend some money, which we did. While we were at it, we cut out about one-third of our documents because we had duplicates — we had unsigned versions of documents. We also found some gaps which were easy to fill once we knew about them. You’ve got to clean up your records once in a while. Then you jumpstart your workflow going forward, and all future stuff goes in there.
Economically, the big hurdle people have to consider is all of their past history and built-up files. It can be a ton of work and money if you transfer it all, which delays people from doing it. iPaladin’s team helped us focus on the most important legacy documents, and then moving forward, everything important was captured in the system. It’s an economical approach.
