What happens when four bright and capable men love their family business, but none of them really wants to run it?
Deane Kanaly of Houston always was a maverick. After helping to launch the concept of “personal financial planning”in the 1960s, he quit in disgust over the sleazy ethics of his fellow planners, who seemed more interested in earning commissions from peddling insurance policies and mutual funds than in giving clients disinterested advice. “A bunch of salesmen operating under the guise of a profession,” Kanaly calls them.
By the early 1970s, Kanaly was running a bank trust department and feeling equally sour about mixing banking with trust work: “Banking was debit and credit and a situation where you had to be a skeptic of people,” Deane Kanaly says. “On the other hand, the trust business is about building trusting relationships.” One other frustration: His first introduction to his trust clients usually came at someone’s funeral. “There must be a better way,” he reasoned.
In 1975 Kanaly found it: He organized the Kanaly Trust Co., possibly postwar America’s first independent trust organization—a place where affluent families can handle their financial and estate planning needs for a fixed fee, without any pressure to make deposits, take out loans or buy investment products. The gamble paid off: Today, Kanaly Trust Co. has 85 employees and manages about $1.8 billion in assets. Deane Kanaly, now 70, and his three sons—vice chairmen Steven, 47, Jeffrey, 45, and Andrew (“Drew”), 40—advise some 400 families in 28 states and 14 countries, most with assets typically between $2 million and $25 million.
Now that Kanaly Trust’s example has inspired the birth of nearly 100 new stand-alone trust companies nationwide, Deane is widely recognized as a visionary who pioneered the concept of independent, fee-based financial advice. In the process, Kanaly Trust’s family-run model may have inadvertently solved another sticky challenge for today’s financial service providers: How do you build an institution large enough to transcend generations without losing the human touch? Answer: Make your institution a family affair, just like the Rothschilds, Morgans and Barings of old.
The Kanalys routinely cement their relationships to present and future client generations by attending clients’ weddings, birthday celebrations and funerals. “This way,” Steve explains, “when you talk to grandchildren you can tell them what Grandpa wanted when he created the trust and why they’re not going to get a red Corvette.”
So are the contrarian Kanalys content with their winning formula? Of course not. They’re still marching to a different drummer—this time over the question of Deane Kanaly’s impending retirement. Unlike most business families, the Kanalys have spent the past six years assiduously searching for someone to run their company from outside their family. And it hasn’t been easy.
As all four Kanalys see it, their strength lies in their client relationships—not their administrative skills. They’re like doctors who’d rather heal patients than run a hospital. The Kanalys don’t merely manage their clients’ investments and help them plan for retirement. “We’ll pay the maid’s Social Security, walk the dog, help clients shop for a car, make sure the pool is cleaned when they’re out of town,” says Deane’s son Steve. “Our idea is to relieve people of the burdens of wealth—whatever those burdens may be.”
The day I interviewed Steve, for example, a client had phoned to report that his father had died. “A trust was already set up for the son and a 13-year-old granddaughter,” says Steve. But there was one problem: The granddaughter was pregnant.
The family needed to know how to prepare. Should the girl continue with the pregnancy? Could she expect to deliver a healthy child? Would the child be entitled to any trust money?
Turning to Kanaly Trust’s backup team (which includes not only lawyers and CPAs but also family and industrial psychologists) and outside contacts, Steve sprang into action to track down medical and psychological help for the family, “so they don’t get emotionally caught up and make bad decisions.
“In some cases we don’t know what to do,” Steve concedes, “but we know where to get the answers.” The larger point, he contends, is: “Second to your marriage, your relationship with a trust company is the most important relationship in your life.” And unlike a marriage, “it can last generations.”
But the challenge of advising clients may be small potatoes next to the challenge of finding new leadership for Kanaly Trust. “Our best people don’t want to go into management,” Steve explains. “They want to deal with clients just like we do.”
The first signs of trouble appeared in the early 1990s. Around that time Deane gave each of his three sons a 10% ownership stake but no other formal management power. Meanwhile, the company’s management structure wasn’t evolving quickly enough to meet the needs of a growing financial services business.
Deane admits his own responsibility for this. “I hate structure, and I probably let the organization go too long without it,” he says. In particular, Deane thinks he spread himself too thin. “I probably stayed with financial planning, estate planning and management too long. I should have given up something I didn’t like as much”—that is, management.
As early as the early 1980s Deane had toyed with the idea of bringing in an outside chief operating officer. He even hired two prospective COOs. “But they didn’t work out,” he says. One had a personality conflict with employees, and the other ran into some legal problems related to his previous job. So Deane opted to keep running the company himself, with his sons helping out. At various points over the next decade, Steve took on the title of president and Jeff was chief operating officer, with Deane helping to steer the ship.
The problem was that none of the Kanalys’ hearts quickened at the prospect of running the office or seeing, as Drew puts it, “that we used the right font of type in our brochure.”
In 1994, Deane brought in another outside chief operating officer, someone who had worked closely with him in his previous job as a bank trust officer. While not a dynamic public leader for the company, this experienced manager knew how to run a financial services business and stayed until his retirement at the end of 1999. Shortly after his arrival, the family enlisted the help of a business professor from Rice University, who brought in a class of MBA students to conduct a through analysis of Kanaly Trust. The results were distressing.
“We were told the business was in a spiral downward, and that we were poorly equipped to deal with what was going on” because the issue of succession wasn’t being dealt with, recalls Drew.
The process was “an uncomfortable thing to do,” says Jeff Kanaly. The family learned that various Kanaly Trust employees had very different perceptions of what the firm needed to do. “We weren’t all on the same page,” he says.
The company’s problems had little to do with how well they were serving their clients. Instead, they revolved around communication and what Drew calls “our inability to deal with separating personal issues from business issues.”
The next step was to bring in a family business consultant to help the company begin to develop a succession plan and ensure a stronger management structure. This round of corporate and personal soul-searching eventually led to meetings between the Kanalys and a psychologist. These forced the Kanaly men to confront age-old issues of power, mortality and succession. “Everyone needed to be schooled in the dynamics of what makes an owner-founder tick and in identifying all of our different roles” in the succession process, Drew says.
The process also dredged up previously submerged anger among the three strong-willed brothers. “I tried to raise them all to be their own man,” Deane notes in retrospect. “I may have even gone too far.”
But Drew says he and his brothers learned to work around conflict by identifying what they called “swamp issues”—that is, “when an issue came up and passions were so high that we didn’t communicate.”
All the work with consultants and psychologists also taught the family that a more collaborative approach would be needed to help the business thrive. Deane, the family patriarch, took a little while to warm up to this idea. “Like every entrepreneur, at first he felt threatened and challenged,” says Steve.
The meetings taught the Kanalys that their firm was really operating as three different companies: a financial planner, an investment manager and a trust operation. “They were all doing good things for the client,” Steve says, “but not integrated like we should have been, not communicating effectively.” Decisions made in money management, for example, may not have properly taken into account the tax consequences for the same client’s estate.
The Kanalys corrected what Steve calls this “overlap and underlap” by developing a team approach for serving clients in which roughly half a dozen professionals from different parts of the company work with each client. When this team meets, each client is represented by an accountant, investment advisers, estate planners, an attorney and other professionals who can help develop the best overall approach to that client’s needs.
Meanwhile, the three Kanaly brothers each took on the title of vice chairman, ensuring them an equal and important place in the company’s future. A ten-person management team, which includes the brothers plus seven non-family managers, was also created.
“We’ve been experimenting with the right formula,” Jeff says. “Even though in some ways it’s a transition from Deane to the boys, I’d like to think of it as a transition from Deane to a management team. I think that is a component of our future success.” And communicating that idea to employees sends a message that there are opportunities even if your name isn’t Kanaly, Jeff says.
As part of the experiment, Drew—who holds a degree in business administration—was named CEO in 1995. The brothers intended to rotate the CEO title—or even give it to a non-family member—while they continued to search for an outsider to replace their existing COO, who was due to retire at the end of 1999. What worked in theory didn’t always work in practice: In 1999 Kanaly Trust hired Katherine Bock, an attorney and CPA, as president and COO, but the match proved unsuitable, and barely a year later she was gone. “It’s like dating,” Steve says in retrospect. “We didn’t spend enough time courting each other.”
After another round of courtship, last summer Kanaly Trust hired Murray Pate away from Union Planter’s Trust and Investment Management in Memphis.
Pate acknowledges that he weighed the pros and cons of leaving a larger corporation for a tightly held family business. The upside, he says, includes “the ability to focus commitment on the mission of the company.” The downside? “Elements of the landscape that are fairly fixed…. You don’t have the freedom to cut down all the trees and cart them off”—because those trees may be family owners.
After looking closely at Kanaly, Pate decided this would not be a problem. “There is a definite commitment to making a transition to leadership that is committed to collaboration.”
In his brief tenure as COO, Pate says he has found a company where the divisions of interest and responsibility work well. Precisely because the Kanalys are “generally less interested in the mechanics of business administration,” he says, “that gives me a pretty good bit of latitude.”
Pate, who describes himself as a “naturally collaborative” personality, says he has come to appreciate the Kanalys for their strength and core business values. “These are guys with strong opinions, and they are articulate at putting forth those opinions,” says Pate.
Founder Deane Kanaly still holds the CEO post but now functions as what he calls “an alert investor and as much as possible a constructive mentor.” These days much of Deane’s time is consumed by his latest brainstorm, the Foundation for Financial Literacy, which seeks to promote financial education in public school curricula. The foundation has created a pilot program that’s being offered in a few Texas high schools to teach personal financial skills, and Deane hopes to convince the state legislature to make such education mandatory throughout Texas. He’s also writing a book about what he calls “bratlash”—what happens when wealthy heirs inherit too much money too soon.
If and when Deane retires from Kanaly Trust, his three sons say they hope to appoint a non-family chief executive. Asked if he can see an outside CEO in ten years, Drew responds, “I think that would be highly desirable.” Adds Steve: “As long as that person is well-entrenched in our company values.”
What about the next generation of Kanalys? They’ll join the company some day, perhaps, but not just yet. Deane’s six grandchildren—ages six to 17—have long received a not-so-subtle financial indoctrination from their doting grandpa. The treatment includes a dollar-for-dollar incentive savings plan, $100 Christmas gifts that the kids must donate elsewhere before receiving their own gifts, and gift shares of Walt Disney stock to get the kids leafing through annual reports and 10-Ks sweetened with pictures of Mickey Mouse and Goofy. “They’ve grown up with personal finance on a daily basis,” says Steve. “My dad’s got ’em thinking about it every way.”
Deane says he knows better than to pressure his grandchildren. “It’s important to let the next generation know they can be their own human beings and still participate in the business” he says. Deane insists he never invited his own sons to join Kanaly Trust: “In fact, my wife and I had the mentality of raising the kids to get rid of them. They just showed up on their own, one by one. That’s probably why it worked.” His mantra for running a successful family business, Deane says, is: “Control your stock—not your kids.” (He and his three sons still own 100% of Kanaly Trust.)
The Kanalys have created a family council, which includes spouses and children, that meets twice a year. And they’ve drafted guidelines that, ironically, would keep family members from joining the company right out of college, as the three Kanaly brothers did. Under the new guidelines, family members need a college degree plus three years’ outside experience before they can work at Kanaly Trust. “It means you don’t get a free pass because your name is Kanaly,” says Jeff. “We did that because the three of us didn’t do that, and wish we had.”
Stephen J. Simurda (ssimurda@journ.umass.edu) contributes regularly to Family Business and Columbia Journalism Review from Williamsburg, Mass.