Succession is a critical priority for family offices. But the transfer of power is complicated by numerous factors, including power dynamics and the emotions that come into play when family members deal with one another. Without succession plans, however, conflicts arise that can hinder the effective functioning of these entities.
We recently conducted research with single-family offices and their private counsel and learned that the founding and inheriting generations often have different views about how to run them and what the priorities should be in the future. That, in turn, makes it difficult to construct and execute plans to ensure the continuation of a family’s legacy, wealth and values.
Here we’re passing on our key findings and observations that can help these entities (as well as other types of family enterprises, including family-owned and operated businesses) navigate the transfer of power.
Succession Plans
Single-family offices are typically created so families can preserve and build their wealth for future generations while also retaining control of that wealth. It’s not surprising that these entities are more likely to focus on the financial aspects of succession planning (as opposed to the operating plans). On average, 80% of single-family offices have a financial succession plan, though it’s worth noting that 88% of the offices with plans are still under the control of the founders, while only 67% of those offices under the control of the inheritors have plans in place. Again, conflicts arise when there are no succession plans, but the same can be true if the financial plans are outdated and no longer reflect the family’s composition or objectives.
Operational succession plans are a different story. On average, only 29% of single-family offices have such plans in place, while founders are much more likely to have one than inheritors (42% of founders, as opposed to 8% of inheritors). Such operational plans are crucial if inheritors want to take over an organization with minimum disruption, but most inheritors need additional experience and advance planning to do so seamlessly.
Multigenerational Planning Rationale
Some founders have plans for their family offices that span multiple generations—including not just children but grandchildren. Some 58% of the offices have multigenerational plans that are often coordinated and drafted in conjunction with estate planning. Interestingly, inheritors are more likely to use these multigenerational plans than founders—71% of inheritors compared with 52% of founders. Private client attorneys say families lean toward the multigenerational approach for two primary reasons: 82% say it helps ensure family control and 70% cite the ability to pass on wealth and assets more tax efficiently.
A smaller percentage of attorneys, 34%, cite the use of such plans as a way to foster family unity before and after the founder or controlling generation steps down. While forcing family members to collaborate can be detrimental in certain circumstances, there are some productive and proven methods that can help promote family cohesion.
Preparation And Conflicts
Despite the immense responsibility ahead of them, only 13% of inheritors feel well-prepared to assume control of their family office. When heirs aren’t prepared to assume control, 89% of private client attorneys said they expect a moderate to high likelihood of family conflict that can further impede succession plans. Aside from causing bad feelings that damage relationships, these conflicts may also end up wasting family assets and harming the family enterprise. However, family office founders may be able to avoid or blunt these clashes if they put legal structures in place to compensate for their inheritors’ present lack of knowledge or abilities.
Expanding Operations
Among the single-family offices we surveyed, 36% have a strong interest in expanding their operations to work with non-family members. This interest is significantly higher among inheritors (55% of whom said they were interested) than founders (25% of whom cited an interest).
Different generations of ultra-wealthy families often have different reasons for opening their offices to other families (in other words, turning their single-family offices into multifamily offices). Founders are likely more motivated by the idea of using their knowledge and infrastructure to support people they know, understand and trust. Inheritors, meanwhile, are thinking more along the lines of building the family office into a business. Specifically, 89% of founders said they wanted to bring other families like their own into the venture, while only 10% of inheritors said the same. At the same time, 82% of inheritors cite the ability to use their in-house expertise and capabilities in ways that can help them generate profits and amass larger pools of assets that can result in lower fees and better access to managers, which is of interest to just 22% of founders.
Closing The Gap
It’s clear there’s a generation gap in single-family offices, and that future opportunities are gauged against each generation’s own unique set of criteria. This disconnect exposes some critical fractures that, if left unattended, worsen and detract from family harmony, profitability and success. To not only survive but prosper and thrive across generations, these family offices will need support from investment, tax and legal professionals to make sure several things are accomplished:
• They must ensure that their financial succession plans are up to date and reflect family composition and objectives.
• They must evaluate and adopt operational succession plans.
• They must identify skills that are weak or lacking in the inheriting generation and build professional development objectives into operational plans to ensure that operations are stable and continuous.
• They must identify possible reasons for multigenerational succession and estate planning, and ensure plans are drafted to meet those goals.
• They must evaluate the need for personal and family tax planning and wealth protection.
• And finally, they must incorporate family meetings, governance, mission development and philanthropy into planning when there’s an interest in passing on more than business assets or wealth.
Hannah Shaw Grove is the chief marketing officer at Foundation Source, the nation’s largest provider of specialized support services for private foundations. Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius.Together, they are the co-authors of Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy (2004) and The Family Office: Advising the Financial Elite (2010).