Family offices find new role smoothing succession planning

A flexible and trustworthy family office, serving as the central hub for a family’s legacy, governance and communication, can play a key, strategic role when it comes to the delicate task of transferring wealth to the next generation. 

“Family offices are moving away from their role as pure traditional wealth managers for the family to playing a more active role in multi-generational success,” says Daphne Engelke, head of family advisory, global ultra high net worth at UBS Wealth Management.

The competitive advantage they can provide to ultra-rich families is particular relevant in current times, as the world prepares to witness the largest ever transfer of billionaire wealth. Less than 500 people will hand more than $2.1tn to their heirs over the next 20 years, according to the UBS/PwC Billionaires report 2016.

Around 65 per cent of European billionaires have a family office, compared with 50 per cent of those based in North America and 34 per cent in Asia Pacific, according to UBS analysis, with figures representing different stages of evolution and longevity of wealth across regions. 

“What we have observed is that families need to grow assets well above their consumption rate, in order to be successful over generations, but many are not even aware of their balance sheet,” says Ms Engelke. 

Family offices can provide useful insights into cash outflows and inflows of the family, run long-term balance sheet simulations, while offering a holistic view and provide advice on the family’s overall financial status, she explains.

Also, they can help develop new talent. Increasingly, offspring have their own desires, passions and visions, and are scarcely interested in joining the family business, although often demonstrating a marked entrepreneurial spirit.

“We see a new role for family offices to help develop and support new wealth creators and entrepreneurs in the family, for example administrating and running the family venture capital fund,” says Ms Engelke. 

Getting the kids involved

This is also a way for family offices to strengthen bonds with members of the next generation. And maintaining relevance to them is crucial. More than 40 per cent of family offices expect a generational transition within the next 10 years, and around 70 per cent in the next 15 years. 

Yet less than 40 per cent of next generation members want to be more involved than they presently are in the family office, according to the UBS/Campden Wealth Global Family Office Report 2016.

Maintaining family unity in decision making is also a prerequisite for successful wealth transfer, and family offices can play a significant part in organising family engagement activities, sharing information and coordinating education, development and mentoring. 

Increasingly, technology is used to build central, family communication hubs (see Fig 1). The vast majority of software is externally sourced, according to the report, with few family offices opting to develop their own. 

The rapid adoption of secure information platforms, also accessible through mobile devices, such as Trusted Family – founded by a fifth generation member of the Aliaxis Group – testifies to a rising need for increased unity and transparency, particularly strong in complex structures and multi-generation families. 

“Ideally families should invest more to increase transparency, as well as making sure there is tight communication among family members, not just on business level but also to keep themselves together as a close, neat family,” says Florence Tsai, partner at Cambridge Family Enterprise Group, a US-based international advisory firm. “And investments in technology platforms go into that bucket.” 

Generational gap

The harsh reality is that wealth is generally dissipated after two generations, as reflected in the old proverb, “shirtsleeves to shirtsleeves in three generations.”

The transition of leadership from one generation to the next is a key contributor to preserving wealth, when done effectively, but can accelerate wealth dissipation if it is not, explains Stephen Campbell, chairman of Family Office Group, North America, at Citi Private Bank. 

However, succession should not be focused solely at the top. “You need to be thinking up and down the family hierarchy, because there may be meaningful and important roles that family members can play, in non-management areas or philanthropy.” These may be associated with the business or the family office, or even the formation of new companies. 

“Increasingly today, the next generation are not passionate about the family business, but are very passionate about social impact investing for example, or arts and culture.”

In this very long-term process, the best results are often obtained when the family brings in outside advisers who can provide both a point of reference, having worked with other families, and can be much “more candid” than a family member, says Mr Campbell. The aim is to help them manage and mediate conflicts, because of the “emotional and behavioural aspect” of the journey.

Families that navigate wealth transfer positively are those with an open mind about their long-term goals, and what they would consider a successful outcome. “However, typically, what you hear from the older generation is that they do not see in the younger members the interest, passion and preparation necessary to take on the challenges of the family enterprise, whatever that may be.” 

On the other hand, the second and third generation often complain the older generation are not relinquishing control, are not sharing enough information and are not open-minded enough, with regards to the next generation’s future role.

Bringing together wealthy families from around the world to events or educational programmes, often organised with external consultants, where they are encouraged to talk about their family succession and transition challenges, is certainly very beneficial, explains Mr Campbell, and helps bridge this “generational gap”. 

Business succession

When it comes to transferring the family business to the next generation, there are really three options. The first one is to sell the business and divide the proceeds among the next generation members. This is a way to avoid disputes, but also represents the end of the business dynasty, explains Bernard Rennell, global head of family governance and family enterprise succession at HSBC Private Banking. 

“It is quite an emotional decision to sell, but is often something people in certain regions are more open to thinking about,” he says. Exit planning is the option wealthy families in the UK or North America are most interested in, he reports, as they have a longer history of wealth passing through generations. In Asia, where wealth is more recent and largely tied up in family businesses, people primarily think about passing down the business through generations. This route, in particular, requires careful planning and a robust framework for decision-making.

An alternative is to split assets between children, if the empire is diverse enough and allows allocating separate pools or businesses to different children, and equalising the others through liquidity planning. 

According to research by City University of Hong Kong Business School on 220 family-controlled listed companies in Taiwan, Hong Kong and Singapore, family firms lost on average around 60 per cent of their share value in the eight years surrounding intergenerational wealth transfer. 

“The real tragedy is not so much the destruction of wealth, it is the emotional toll around the disputes in business that often arise,” says Mr Rennell.

There is too much focus on the asset level, on the business or financial investments, he believes. “In order to ensure success, it is essential to bring the same sort of level of energy and strategic rigour to planning for ownership transition, on a continuous basis. A decision-making framework needs to enable the family to adapt to changing circumstances, including changing the nature of the business or selling it altogether.”  

Playing sports

The complexity of the decision-making process, for a family in business together, increases as you go through generations, says Rachel Harrington, director at Coutts Institute at Coutts.

“It is almost like playing different sports. If you are the founding entrepreneur it is much like being a professional golfer. You may have a very supportive caddy and coach, but ultimately you are responsible for the decision-making, you have that autonomy and independency. You are in competition with yourself.”

When siblings work in partnership, having been exposed to the same experiences and probably embraced the same family values, it is similar to playing doubles at tennis. Families start experiencing difficulties when many different cousins or branches of the family work together, as they may have different views on the purpose of the business, or the wealth generated. 

“As more people try and get around the table and make decisions, it is starting to be like playing football. Not everybody can be the star striker, someone may be on the bench and someone has to referee,” explains Ms Harrington. 

In some cases, philanthropy is a way to tie everything back to core values of the family, providing a glue or sense of identity, whatever the differences in world outlook or career experiences. 

“What tends to cause conflict in the family is where there has been perceived unfairness in a decision-making process or where people feel their perspective has not been really taken into account or has not been heard.”

The adviser’s job is to help families understand their vision, values, and objectives for the family and the business, to consider all the options and then, if they wish, to put in place the appropriate governance framework, policies and processes, she explains.

One of the most common for a family business is a family constitution or charter. This is not legally binding, like a shareholders’ agreement, but is designed to document the shared vision and values of the family, as well the agreed policies in terms of the ownership and operation of the family business. 

 “The value is as much in the process, as you go through with the family to get there, as it is in a piece of paper,” says Ms Hartington. “There are too many family charters, sitting in drawers, gathering dust, rather than being a living, breathing part of how the family makes its decision-making on a day to day basis.”   

China’s challenges

China’s policy of allowing couples to have just one child, scrapped in 2015, 35 years after its introduction, has caused a dramatic gender imbalance and rapidly ageing population. It has also made intergenerational transfer more challenging. 

“A unique aspect for Chinese family businesses is the second generation will be made by cousins or one child only, instead of siblings, which complicates the process,” says Florence Tsai, head of Greater China at Cambridge Advisors to Family Enterprise. 

The Chinese economy has grown tremendously in the last three decades, while industry lifecycles have shrunk and are much shorter than in the industrialisation process of any other advanced nation. “As a result, business people in China are much faster-paced, very focused on how to transform. They are asking ‘what is the next thing, where is my next growth driver?’” 

Although this entrepreneurialism and lack of complacency is certainly positive, “the drawback is that the Chinese wealthy get sucked into just creating wealth, so they don’t spend appropriate time, which is really needed, for succession planning and transition”. 

In China, the concept of family offices is still at a very early stage, although a handful are more professionalised in how they support the strategy of the core business, reports Ms Tsai. 

To meet their desire for being more involved in investment activity, rather than running the family business, the senior generation of family businesses may decide to give their children responsibility for creating the family’s investment arm. This can be seen as the beginning of a family office and enables the next generation to have an active role in defining the family wealth strategy and values.