When asked “Why did you establish your family office” most founders would say “to preserve our family wealth for generations to come and to protect the family from any conflict that may arise from managing such wealth”.
Most often single-family offices are set up with the good intention of keeping the family (and wealth) close, but when going through a generational transition, diverging interests may tear the family office and family apart.
This fate can be avoided if the owners of the family office are willing to make a few key decisions together to set it up for long-term success.
There are 5 key areas we believe that the owners of the family office should make to shape the long-term success of both the office and the family.
DESIGN: How will you own your assets together?
One of the most notable reasons to set up a family office is that by staying together, families can achieve scale and efficiencies in investment and services.
This is true, however, to build a sustainable office that lasts for all the generational transitions to come you should consider the level of flexibility built into the family office.
As families grow across generations, their interests will diversify – what investments to own, charities to support, and services to receive.
So this means that perhaps some of the family owners only choose to use certain core services and investments like estate planning and would perhaps want to opt out of the rest of what the office offers.
A common practice for family offices is one where the family owners can choose to use some of the investments and core services like estate planning and opt-out or into the rest of what the office offers.
DECIDE: How will you structure governance?
Once the office is established it is generally one or a few founders who become the decision-makers on all matters.
However as the office grows over generations, having no clear governance other than the founder’s statement of intent can turn into a recipe for disaster.
To avoid this, family owners should decide how decisions are made – what decisions will the family owners reserve for themselves? What decisions will be delegated to a board member? Will they make decisions in-house or hire an external investment team and when and how should the next generation be involved in decision-making?
Decision policies, structures, and processes are key to long-term success and enable families to engage positively in decision-making.
VALUE: How will you define success for your family office?
Family offices that are built to last design both financially sophisticated portfolios and emotionally relevant ones. These offices look for investments that are both meaningful to their family and are leading in investment.
In short, family wealth doesn’t only need to be defined by financial wealth, but also by social and relational.
INFORM: What will and won’t you communicate with your family?
A common dilemma for family owners is deciding what information to share and when.
The power of knowledge of the family wealth can be destructive to the next generation and often families have to find the balance between sharing too much too early or waiting too long and providing their successors with an “overload”.
One way of handling this is to decide on the age to start revealing information – until eventually, the family member reaches the desired age to get a full view of the entire family’s wealth.
TRANSFER: How will you handle the transition to the next generation
The assets of a family overseas should be in service of its purpose and goals and this will change across a generational transition.
A great practice we recommend is for the current generation to ask the next generation (without judgment) how they see the purpose and goals of their generation.
The assets pawned should eventually reflect the engagement of the new generation.
A big question for families with investable wealth is how much to transfer to the next generation. Wealth can be used for several things – spending, giving, investing, and collaborating.
Start by thinking through what you want to achieve or avoid in each of these areas.
Closing thoughts…
Hensley & Cook has structured many family offices across multiple jurisdictions and is poised to assist you with any questions you may have.
If you are looking to migrate your family office or looking for external advice, please reach us on [email protected]. For additional legal advise, reach out to our sister company CRESCO Legal.
