Critical components: Legacy and the family office

By Beth Braverman
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How your family office plays a role in your legacy

.As the world has grown more complex and interconnected in recent years, more enterprising families are recognizing they need professional assistance in managing their finances and preserving the family’s wealth across generations. According to CapGemini, the number of family offices in the U.S. has grown to about 3,000 single-family offices, with assets under management between $1 trillion and $1.2 trillion. (There are also about 150 multi-family offices having assets under management between $400 billion to $450 billion).
  “It’s always a footrace for families to stay ahead of generational mathematics and the costs and expenses that erode wealth over time,” says Kirby Rosplock, the chief learning officer and founder of Tamarind Learning. “External factors cannot always be predicted, such as this past year’s unprecedented inflation, but are a good reminder to focus on what we do control. For family offices, the work to build continuity and create a roadmap and a runway for future generations to become good stewards takes intention, alignment, planning and action.”
  That $1 trillion market does not include the de facto family offices within family-held operating companies, a situation that’s fairly common, according to experts. While that structure may have some tax advantages, it also has some disadvantages, including potential resentment by non-family employees and challenges separating the assets of the family from those of the business when necessary. It also becomes  less feasible as the scope of the family office work expands.
  “The job of a family office is not just to pay the bills and do your travel arrangements and make sure your taxes are taken care of properly. The job is to help the family with their legacy,” says Charlie Carr, president of Big Canyon Advisors. 
  The industry has been evolving in recent years to take a more holistic approach to managing wealth across generations — helping families plan not only for investing their money but also for ways to use it to help their children flourish despite the challenges that come with being born into extreme wealth. 
  These challenges might include trouble making meaningful connections, a fear of failure and a pressure to succeed. On the other hand, some children born into extreme wealth have a sense of entitlement that can also lead to future problems.
  “The emotional and psychological elements are critical,” says Jeff Strese, principal of the Jeff Strese Consulting Group, which focuses on multigenerational family enterprises. “Traditionally, that has been a huge oversight for attorneys and financial advisers. But those enterprising families that are adopting those practices now are seeing positive results.” 
  Even as more families decide to spin out or formalize their family office services — either by forming a standalone single-family office or by joining a multi-family office — the structure and function of each of those entities is unique to the specific needs of that family. The old axiom that “If you’ve seen one family office, you’ve seen one family office” may be even more true now, as families have a broader menu of potential services from which to choose.
  That’s particularly important as the baby boomer generation continues to age and starts seriously thinking about the wealth that they’ll transfer to their children and grandchildren.
  “The family office plays a very significant role there,” says Kathryn George, a partner at Brown Brothers Harriman with oversight of its Private Banking Unit’s Multi-Family Office and Center for Family Business. “Once people realize they have more wealth they can spend in their lifetime, or that they’re comfortable giving their children, the family office can help them create a structure around the multigenerational wealth.”
  As the industry matures, some best practices are emerging that families can keep in mind when setting up or re-examining a family office to make sure they’re getting the most out of it.
Family offices often represent a family’s decision to pool their money collectively and invest as one. This allows them to create tailored investment strategies designed to meet the needs of a specific family, often with the ability to make the long-term plays available only to patient capital. As the family grows, new members may forget — or fail to comprehend — the value of keeping assets within the family office.
  “The family office should be a place to support longer-term goals and objectives across generations,” says Christina Wing, founder of Wingspan Legacy Partners. “When you disseminate the money to many people, you lose the purchasing power and the ability to achieve joint goals. Everyone has a less to work with. But if you keep the wealth together, you have more power from an investing perspective and lower costs.”
  The 2023 Global Family Office Report from UBS finds that family offices have increased their allocation to hedge funds in the past year and plan to increase diversification in their private market holdings. A separate report from the One Goldman Sachs Family Office Initiative found that family offices had 44% of their holdings in private equity, real estate and infrastructure, hedge funds and private credit.
That scale also translates to the family’s ability to achieve philanthropic or impact goals, a priority for many younger family members in particular, Wing says. 
  “The rising generation seems to have greater societal concerns, so through the family office they can use their wealth to make a positive impact on the world,” she says. “They can do that not just with giving, but with social impact funds and other things that aren’t as readily available to the average Joe on the street.”
  This area also represents an opportunity for family offices to connect with the younger generation and get them to engage with their family and their wealth.
  “A family office can put structure around family philanthropy and allow different family members to come to the table with different passions,” George says. “We recognize that not everyone wants to give to Dad’s alma mater or Mom’s garden club.”
As with any business, a key to success is having the right talent. The family office industry is a competitive space, and it’s facing the same labor shortage as the broader financial services industry. To find and retain the right talent, today’s family offices need to pay a competitive wage and consider cultural fit along with experience with both wealth management and the unique needs of a specific family. That starts with hiring the right leader.
  “The family office head has many responsibilities,” says Judy Spalthoff, head of UBS’ Family Office Solutions Group. “It’s like being an orchestra director. They make sure all the beautiful instruments are playing when they’re supposed to be playing, and that the music plays beautifully for the family.”
  Another vital skill for the head of a family office is strategic planning, Carr says, adding that it’s important for both the family and the family office leadership to be able to step back and strategically look at where the office is now, where it wants to go and the changes it needs to put in place to get there. 
  For families that don’t want the hassle and expense of hiring and maintaining a staff for the family office, a multi-family office — or a hybrid model using some internal staff and outsourcing other tasks — may make sense at first. 
Family offices are businesses, but it’s for crucial families to remember that they’re also created specifically for the benefit of the family. Sometimes that dual role will create conflict, and it’s essential for families to provide clear direction to family office staff about when family values or goals might take precedence over the bottom-line returns.
  “Oftentimes family offices become really efficient business structures that don’t necessarily reflect the culture of family,” Rosplock says. “They might maximize investment returns and be incredibly tax-efficient and very strong on financial planning and reporting, but to what end? It has to be to the betterment and well-being of the family, and sometimes that context can get muddied when the family office planning and wealth preservation takes priority over who it’s for.”
  For many family offices, this includes helping the family craft their family story — a legacy that they can share with both current family members and future family members who might be benefiting from the wealth but more removed from its origin.
  “The story is at the heart of real legacy work,” says Kristin Keffeler, author of The Myth of the Silver Spoon: Navigating Family Wealth and Creating an Impactful Life. “It’s about capturing the stories of Mom and Dad or Grandma and Grandpa in a way that family members who may have barely known them, or even had a chance to meet them, can understand the philosophy of the family.”
  Over time, the family office can also become a vehicle to maintain connections among family members, Carr says. The family office can serve as a hub for family members who share at least some joint investments that keep them engaged with each other.
As family offices scale and become more sophisticated, it becomes more crucial for them to have a good governance structure in place. That includes agreeing on the mission and vision for the family and having codified rules around how and when family members might work for the family office if they’re interested in doing so. 
  Another governance area that family offices must consider is succession planning. That tends to be more developed in European family offices than in their American counterparts, Spalt?hoff says. That’s partly because American family offices tend to serve families in the second or third generation, compared with European families that might be 10 generations old.
  “The older the family, the more fixed the governance,” she says, noting that there are exceptions on both continents. “It’s more commonplace, because the original wealth holder is long gone, so they’ve thought through that part.”
Many family offices assist families with planning and executing regular family meetings. These meeting are a significant opportunity for the family to get together and discuss a range of topics, including financial objectives, philanthropic goals, and estate and succession plans. Family meetings also are a forum where family members can bring up other issues, challenges or ideas they want to discuss with others — with the assistance of a neutral third party engaged via the family office.  
  “That’s where the communication happens,” George says. “That’s where the conflict mitigation and avoidance happens and how everyone knows who the wealth plan is being carried out. The planning piece is important.”
Aside from the wealth management and estate planning services, the advantage of having a family office is its ability to assist with other needs of high-net-worth families. 
  “We are trying to help family’s with true wealth — not just growing their financial capital, but also their human capital and their social capital,” Spalthoff says. 
  Families should think carefully about the types of support that would benefit them most, and then build the family office with that in mind. Such support might include administrative tasks like travel arrangements and bill paying, the management of real estate and household staff, and cybersecurity. The UBS report found that about half of family offices have specialist cybersecurity controls in place, and that about a third had been the target of cyber attacks.
  Family offices can also help with the education, development and coaching of the next generation.
  “For NextGen family members to grow into being good owners, someone has to pay attention to the coordinated education efforts for them,” Keffeler says. “They also need to really think about those family members as individuals and give them opportunities for growth and development and individuation. They should have the opportunity to figure out who they are, and then they can come back to the family — should they choose to do so — having gone along an appropriate developmental path.”  
Beth Braverman is an award-winning writer and frequent contributor to Family Business magazine.


Audio Sound Duration: 
July/August 2023

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