A family office is a private wealth management advisory firm established by an ultra-high net-worth family. The concept of a family office was first introduced by John D. Rockefeller who established the first full-service, single-family office in the U.S. in 1882. The purpose of a family office is to be a vehicle that supports the family in the day-to-day administration and management of the family’s affairs, wealth and long-term business strategy. Like any other business, family offices have their own unique challenges to be aware of, such as internal conflicts, lack of an emotional connection between family members, and most importantly, generational change. Of all the estimated 10,000 family offices that are currently active globally, roughly 68% were founded in 2000 or later, with 35% of those starting in 2010, according to a global survey by UBS and Campden Wealth. That means most of these family offices are approaching a critical generational transition for the first time, and since the forces that hold a family business together are not always present in family offices, they may find themselves facing harsh times and a great disharmony if they don’t pay close attention to the challenges present in this transition.

Internal conflicts

Issue. Due to the fact that age groups within a family business may be vast, it is not uncommon for family offices to experience decision and business direction-related issues. The older and more experienced family members may prefer to focus on investment methods that have been shown to have worked for many years. On the other hand, younger generations may find themselves more interested in expanding the business and implementing new investment methods. According to a research project that interviewed over 35 companies, the transition problem affects both family and nonfamily members. Although some transitions are orderly, such is not the case for the majority of them. Management becomes full of indecision, heirs and key employees resign in protest and families are torn with conflict.

Possible solution. Family offices must be equipped and prepared to manage the possible range of demands and expectations from the different generational groups within the organization to ensure a smoother relationship between the members and not increase any tensions among them. An efficient way to manage this would be through the creation of an intelligent business graph and report to be able to effectively make predictions on the outcomes of certain financial ventures.

Lack of an emotional connection between family members

Issue. It is common to see family offices starting in an already damaged emotional-connection state between the members and it is, in fact, quite challenging for family members to keep united when owning shared assets. As an example, for instance, two years after their father died, Paul and Hank took charge of the family office and ran it together, but investing decisions soon became a source of conflict. The discord between the brothers spread amongst the other family members, who tried to steer clear of the family office completely. At last, the family office was disbanded and the brothers and the family drifted apart.

Possible solution. A must-have condition for a family business to stay together is for the owners to have defined a shared purpose beyond just financial performance since pure financial investments are easy to outsource. A family office built to last will create both a financially feasible and polished portfolio while maintaining an emotionally relevant one. They should not only focus their investments on leading funds but also on investments that represent something to their family. Family wealth is not only related to financial terms; it can be openly defined as social, professional, and relational.

Generational change

Issue. The integration of next-generation members often catalyzes a review of the structures that hold the family’s wealth. It is no secret in wealth management that the longer a family has substantial money, the harder it becomes to maintain it alongside family dynamics. It is implied that around 70% of wealthy families will lose their wealth by the second generation, and 90% will lose it in the generation after that. This happens because sustaining substantial wealth requires robust governance and a solid structure that can ensure that the family’s wealth and underlying assets are managed in line with the previous generation’s expectations, needs and guiding principles.

Solution. To be prepared for the transition onto the next generation, it would be best to assess the structural governance for each independent entity as well as the family office as a whole to have a better understanding in terms of decision-making, effectiveness, risks, control and oversight. The next generation is more likely to be successful if its members have a solid understanding of the family office structure, strategy and goals while having the support and guidance of mentors, peers, family members and professional advisors.

Negotiating this transition in a calm and efficient manner is critical to preserve the family’s most valuable intangible assets: its wealth and harmony, as well as its legacy and values. The sooner you implement these key solutions into your family office, the smoother the transition to the next generation will be. 

To learn more about the complex topic of next-gen integration into family offices as well as to hear other effective solutions to these challenges and valuable experiences shared by heads of Family Offices, be sure to register for the 101st PIFW: “Сo-operation of Family Offices as a guarantee of success,” which will take place on November 3rd, 2022. It will be a summit dedicated to helping form a solid strategy for the preservation of wealth and family legacy. 50+ heads of Family Offices from 27 different countries of the world will be attending the summit to find and share solutions on how to better handle the transition to the next generations, share trend projections for the upcoming years, learn what projects are in priority and why in other FOs and much more! The number of participants for this event is limited; go to the “register for events” section of our website and sign up now to guarantee your spot.