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.

One of an advisor's tasks should be to mentor young family members and help them grow and develop their skills. Yet, for a variety of reasons, many advisors fail to do this, to their detriment. They miss a chance to do what the father and mother often cannot-help prepare the next generation to take their place.
"While parents want to develop responsible and caring children, the actions they take to make that happen may be irrelevant or actually produce the opposite result," says Dennis T. Jaffe, author of Stewardship In Your Family Enterprise: Developing Responsible Family Leadership Across Generations. "Too often, they initiate a few well-intentioned, but very limited, actions that don't really respond to the deep challenge of raising children amid wealth."

Strategies For Success
The "freedom to fail" is what distinguishes the extraordinary success of American venture capital and entrepreneurial culture from all others. Family offices should expose young family members to fiduciary responsibilities before they take on the mantle of leadership. Advisors also need to realize that accountability is a two-way street. Just as the younger generation must be given greater responsibility and held to performance objectives, family advisors should welcome opportunities to objectively define their own performance standards.

Family offices and their advisors can be well served by focusing on establishing clearly defined programs for next generation leadership development in two areas: (1) the charitable foundation; and (2) investment management.

Many family offices have charitable foundations or organized giving programs, but they are underutilized as fiduciary development tools. Younger family members are usually given superficial roles with the important responsibilities handled by outside professionals. The younger generation should instead be more engaged in the giving process so they can develop the skills they will need when they become leaders. Creating such a program also gives a family foundation the opportunity to review its mission.

A similar opportunity exists in the investment arena. A portion of a family office's assets could be set aside for younger family members to manage, either directly or through the selection of outside managers. This gives children an environment for learning about risk versus reward, fiduciary duties, business analysis, due diligence and investment management. Most importantly, next generation leaders can directly experience winning, and losing, in business.

The Family Mission
Advisors may sometimes find that the core issues facing their client relate to leadership transition. Family leaders may assess the enterprise they've created and be unsure of its future. They may struggle to answer questions such as, "Is there anyone who wants to take my place, and are they going to be as committed as I have been? Do I have successors who are qualified to take over the reins?"

That's why advisors need to provide a process that examines the fundamental values and decision-making framework of the family and involves both the existing senior decision makers and the next generation. "Often the most fundamental questions have not been answered in an open and transparent way," says Dell Larcen, an organizational development professional who has coached family members in such businesses for many years. "Thus, family members do not become aligned around the basic questions of who are we; what are we here to accomplish; and what guiding principles must we embrace in order to succeed in achieving our goals?"

Answering these questions is only the beginning. The process should make family members and their advisors mutually accountable. The next generation should be part of the process and their views should be actively solicited. Explicit, mutually agreed upon performance expectations should be established that are supported by objective benchmarks. Family office professionals and principals can both benefit from a leadership development program driven by independent advisors.     

Pascal Levensohn is the managing director of Presidio Strategic Services, a division of San Francisco-based wealth management advisory firm Presidio Financial Partners, and an internationally published author on board governance best practices.