Wealthy people go to great lengths to pass their fortunes down to the next generation, or pass down their values and legacy. Sometimes they do this with a solid structure—such as a family office.
So here’s a good question: How do you pass down the family office?
As part of the enormous intergenerational transfer of wealth that is expected over the next decade, single-family offices are being transferred, too. It’s happening more and more, as more offices emerge amid a flurry of private wealth creation. That means, besides expensive cars, houses, paintings, trusts, etc., there will also be an increasing number of single-family offices going to heirs to take over and manage.
Inheritors of these offices are for all practical purposes inheriting a family business. Yet many of the children or other heirs have limited, if any, preparation to take over operational control. Some try to be proactive—try to master technical competencies such as money management and system infrastructure, for instance. But those people are in the minority.
And in any case, it’s more beneficial to the family (as well as senior management) to instead master behavior—to set viable goals and objectives for the office, and know how and when to outsource duties. It also means being able to skillfully negotiate. Office inheritors who do these things are better able to achieve what they want.
The Family Business
Single-family offices are, again, in many ways a family business, where the day-to-day operations of the office are often the responsibility of hired talent. And just like any family business, they need good, thoughtful succession plans if the next generation is going to take over and keep the business flowing smoothly with some continuity and few disruptions.
In a survey of 124 senior executives in first-generation, single-family offices, 97.6% of them said they intended to pass the single-family office to heirs.
When the single-family office is expected to go to heirs, there are formal financial succession plans in place. The founders of these offices have usually put structures in place in their estate plans that ensure the transfer of ownership of the offices to heirs.
So younger family members are set to take over. But who is actually taking over? And by that we mean, who is taking over operations?
Because only slightly more than half of these single-family offices have formal operational succession plans in place. And gaining ownership of the office is not the same as being able to effectively run it. While 97.6% of executives in the survey said they had financial succession plans in place, only 55.4% said they had an operational plan.
The conundrum is that many inheritors are ill equipped to take over. In a survey of 75 senior executives in second-generation single-family offices, only 13.3% of them said the heirs were prepared when they took control of their single-family offices.
What’s very telling is that the inheritors are more likely to be directly involved in running their single-family offices than founders are (Figure 1). Overall, nearly 20% of ultra-wealthy family members are senior executives in their single-family offices. But when you look at just first-generation family members, it’s only a little more than 10%, while about 30% of family members are senior executives in second-generation offices.
Even if a greater percentage of them are likely to be involved in day-to-day decisions, they still aren’t prepared to take control. And mistakes made by ill-prepared inheritors can prove very costly and extremely problematic. They can easily result in poor investment performance, highly disruptive family conflicts and overpayment for substandard expertise.
These offices offer many opportunities and services, and there are various ways to structure them. Heirs are well served if they understand just what they are inheriting and understand what it is they want to accomplish.
In high-functioning single-family offices, it is all about results. There are clear goals and objectives. This means the executives in them should have high expectations and ensure accountability.
And that means understanding the dynamics of a family business, in which well-reasoned business decisions often get run over by the emotional dynamics of family dealings. Good managers have to take different family members’ priorities into account when making decisions.
Thoughtful decisions, in other words, are a function of both values and economic calculations.
Family members and family office managers must also know what they do well and what they don’t do well. In the latter case, they must be willing to delegate decisions to other people.
Wealthy people often have extensive personal and professional networks. Good managers will turn to those networks for help in getting results for the office. These networks can help them evaluate people and business connections, access external experts and join in attractive business and investment opportunities.
If you are able to capitalize on the wealth, stature and connections of family members, you are also likely a talented strategist with a “winner” mentality.
There are four questions successful people in this area often ask themselves:
• What am I seeking to accomplish?
• Who can help me achieve my desired results?
• Why do they care?
• How am I going to get them to care whether I achieve my results?
Such behaviors are also characteristic of those who create their own fortunes, especially those who create Croesus-level personal wealth.
Ellie Peters is a wealth advisor with LVW Flynn.