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.
Inheriting The SFO
September 13, 2017
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