Family offices established by baby boomer entrepreneurs, those who helped build the U.S. economy and who created massive personal wealth, are experiencing an unprecedented transition. A new generation of family office decision-makers is rising, and they may be reluctant to take the reins from earlier generations, whose enormous success may seem difficult to match.
Others may be eager to lead but lack the experience and leadership skills necessary to manage an investment organization and build consensus among their siblings. Just because a family member has been empowered as a fiduciary doesn't mean that he or she is prepared to exercise that power effectively. More importantly, inexperienced trustees may not understand their legal responsibilities as fiduciaries or as newly empowered heads of the family office.
Without a proactive process, this transition can create unanticipated challenges for advisors-the family office staff and professional trustees who are required to work with these new decision-makers.
"The best way to avoid that situation is for the upcoming generation to gain a real working understanding of their responsibilities, learn how to pay careful attention to the trust's investments and, perhaps most important, understand how to select and work with trusted advisors," says Greg Blue, an attorney who advises family offices.
Preparing The Next Generation
The older generation's great success and business acumen have often relieved their children and grandchildren of the obligation to pay close attention to family finances. But the next generation must be prepared to exercise financial leadership when the time comes. Many in the younger generation, however, have neither the management experience required to make the right decisions in hiring and firing professional service providers-financial advisors, accountants, attorneys-nor an understanding of what it means to be steward of the family enterprise. These skills are not easily learned in a classroom. Moreover, many traditional family office service providers are not comfortable providing this level of leadership training because they, too, lack the business experience and seasoned decision-making that normally reside with the original architect of the family's wealth. While peer-to-peer interaction helps, it is essential for emerging leaders in the family office to develop actual experience and receive relevant advice about their responsibilities before the transition occurs.
Establishing professionalism in family offices is a major concern for both founding and succeeding generations. In a survey of family offices that made the transition from first- to second-generation leadership, accounting firm Rothstein Kass found that the second-generation sought "to bring a new level of professionalism and efficiency to single-family office organizations that may have operated in a less formal fashion under previous generations."
The survey of 94 family offices, conducted from 2005 to 2008, showed that younger family members made pervasive changes after their ownership transition was completed. In 86% of the cases, the office's executive director was replaced shortly after a management transition. Also, 93% of single-family offices brought in a new chief investment officer. The goal of increasing the professionalism of the family office was cited by 91.5% of the respondents.
The Role Of Advisors
Advisors need to take an active role in preparing younger family members to be leaders and develop a process to professionalize family office operations. Such a process, however, is often lacking because of the emotional dynamics of family generational changes, particularly as parents succumb to illness or mental incapacity due to old age. Everyone sees the problem coming, but it is the proverbial "elephant in the room" that nobody wants to discuss.
Families are by their nature closed systems and therefore insular and exclusionary. Long-term patterns of behavior rooted in childhood relationships tend to be replayed in the boardroom. Disagreements over substantive business issues can become entangled with a family's emotional dynamics. This can lead to intractable, emotionally rooted business positions that create deadlocks, with potentially disastrous consequences for the family business.
A family office board can become paralyzed when it considers issues such as the sale of a family business or management succession-the types of topics that can become emotional in a family setting. For the board to work toward solutions, hidden agendas should be brought out into the open and diplomacy should be used to build consensus. But this is no easy task. Many advisors are reluctant to confront sensitive yet important issues out of fear that it will damage their personal relationship with family decision-makers.