Leadership transitions — particularly generational transitions — in a family office can be a tricky time.
“It’s a big business model risk for a lot of existing family offices when they move to the next generation,” says Jonathan Flack, PwC’s Global and U.S. Family Office and Family Business Leader.
The issues are particularly complex when the generational transition means not only new leadership but also changes in the trust structure.
“For a lot of families in the U.S., their assets are held in trust, and as you move from the current generation to the next generation, oftentimes you have assets that break into different trusts. Ownership of those assets can end up spread out,” Flack says. “So, as you’re transitioning leadership of the family office, understanding what services are being provided to those new trusts or to those transitional trusts, and understanding what needs to change with respect to how those are being governed, is important.”
The role of values
Ensuring a smooth transition requires more than a deep understanding of the mechanics of the family’s trusts, however.
Some family offices may ultimately see some of their clients leave, similar to what happens in a typical client service firm during transitions, Flack says. This may not be a bad outcome.
“Particularly when you get in those latter generations, those next generations may want to do things differently,” Flack says. “They didn’t grow up in the same household as their cousins and so therefore they just naturally want to have more individualism.”
But it’s important that the decision be grounded in an understanding of family members’ individual and collective values.
This is why families approaching a leadership or generational transition should make sure they are all clear about their mission, vision and values, says Betsey Fortlouis, executive director, family business advisor and coach at the InnerWill Leadership Institute.
“Doing that work before succession planning is critical, because the spiritual capital piece really guides operational capital,” Fortlouis says.
In fact, alignment around values during a family office leadership transition may be more important than experience or specific skills.
“It’s imperative that they find somebody who embraces the family’s purpose and mission and vision, and lives and leads around those values,” Fortlouis says. “If the family hasn’t figured out their purpose, their legacy, the shared values that unite the family, and you put in somebody from a succession standpoint who is unaligned, the family is going to fracture.”
Nuts and bolts
Family values and purpose are often more narrowly focused in the first generation. As the family grows and becomes more diverse, however, members will need to reaffirm and perhaps reconsider their common values.
“To obtain alignment around values and purpose, you find what’s common that grounds the family,” Flack says.
Flack encourages families to carve out a portion of an annual family meeting where members are looking at big-picture issues for a discussion of the family’s purpose and values. It’s a good time to see if those values are still relevant and all family members are aligned.
“As you move into second and third and fourth generations, just with the sheer increase in the number of family members, families often revise the values and purpose and they align them where they do have common ground,” Flack says. “Most of the time that is grounded in broad values that the founder or that the family has carried on for years. But the language may need to have more flexibility so that family members can feel as though they’re still uniting around the same common purpose.”