Partner - Head of Family Governance & Succession
Family Governance and Succession is central to everything we do. As the leading International Family Office we have a duty to set the benchmark for excellence in this area. As a group with a strong Trustee heritage and a significant Trust business, we have a very real fiduciary responsibility. Just as importantly as a broader Family Office and Investment Management business, it is imperative that we de-risk our clients’ intergenerational handover by focusing on Governance and Succession.
What do we mean by Family Governance and Succession? This goes way beyond the traditional estate and tax planning. It is the process through which families articulate their Purpose, their Vision and their Values (PVV). It is the creation of a framework, with communication at its core, which enables consistent, good decision making on issues from Family Business to Family. It is shaped by, and shapes, all Four Pillars of Capital.
Our broad experience of working with families from around the world has reinforced our passionately held belief that successful intergenerational strategies must recognise all Four Pillars of Capital: Social, Intellectual, Cultural and Financial.
We work closely with the Next Generation to ensure that they too appreciate the Four Pillars of Capital, and encourage open conversations so they can share concerns and aspirations, build their networks and gain a broader perspective.
We understand that one of our primary responsibilities is to help equip future generations with the skills,experience and perspective to manage their responsibilities as well as the challenges and opportunities they will face.
Additionally we appreciate that each generation may require support in communicating
their concerns and aspirations as they wrestle with the responsibilities associated with being custodians of wealth.
We offer a variety of opportunities to our clients as demonstrated below which not only strengthen our relationship with them, but also offers the opportunity to develop new relationships within the family.
Our engagement with the Next Gen is calibrated to the specific challenges they will face at various stages of their lives and in the process of inheritance. Whether we provide training, experience and peer group discussion alone or in conjunction with professional partner firms, feedback from participants and often their parents evidences the tangible benefits that accrue.
“I learned a lot about the business world, the family business world and most unexpectedly about myself. Each lesson was well organised and interesting”
“Thanks so much to you and your team for organising such a stimulating and motivating programme. It has certainly provoked much thought and already created much debate. Absolutely brilliant!”
The growth of the wealth management sector over the last 20 years has been fuelled by the promise to clients of a new, holistic and strategic approach. At the heart of the proposition is more intelligent risk management.
Many new risk management tools have been devised by innovative individuals and institutions, seeking to develop a competitive edge. Useful and ingenious though some of these tools are, the overall result is disappointing, in that most of the innovation has remained narrowly focused on the volatility of investment portfolios, without addressing the broader risks affecting family wealth:
The reality is that today’s families face an increasingly complex world of potential risks. This paper suggests a broader approach to risk management, which includes those less tangible and non-financial exposures. It is not as scientific or academically well founded as established methodologies, but is essentially based on well-structured common sense combined with a simple process, which ensures all risks are addressed in their proper context.
The inevitable follow-on question is how to define risk and to identify and prioritise key risk exposures. There is no single correct approach to this question as it depends on one’s perspective. For a portfolio manager it is legitimate to focus primarily on the risk of the investment portfolio and to manage that risk by diversifying across a range of investments. By contrast, however, the clients are frequently entrepreneurs, who often manage risk by concentrating their investments in a few sectors which they know and understand.
For the wealth manager, with a broad mandate, an analysis of risk requires an understanding of the family’s wealth objectives. If this basic foundation is omitted from the process, the result is that all subsequent considerations and planning are conducted in a vacuum.
Indeed, a recent study by Stonehage Fleming, “Four Pillars of Capital for the Twenty First Century”* found wide agreement among families that defining a clear purpose for their wealth is a crucial step for wealth preservation across generations.
The challenge, of course, is that no two family’s objectives will be the same. However, a potential hierarchy of objectives might be as follows:
Financial risks include the possibility of an absolute loss, a failure to meet objectives or falling below minimum benchmarks. For many ultra-high net worth families, however, an absolute loss of wealth (even if a significant percentage of the whole) may not seriously damage lifestyles, nor even drastically impact on their ability to fulfil their main objectives.
Non-Financial risks, could include damage to the family reputation, a major family dispute, loss of family values and work ethic, or the destruction of a family legacy. In many senses the non-financial risks are the more important. For instance, a family dispute or lack of family leadership is far more likely to lead to a major destruction of financial wealth than any asset allocation mistakes in the investment portfolio, or the failure to insure a tangible asset.
It is also extremely difficult to put a price on the ‘non-financial’ benefits associated with continuing to own a successful family business, when a purely financial risk model may suggest the holding should be diversified. Equally the benefit of a united family with transparent governance is hard to quantify.
However, any analysis of long-term threats to family wealth should take account of the fact that most family fortunes are dissipated within three generations and, according to numerous studies, the principal causes of wealth destruction arise from those unmeasurable risks which are so often overlooked.
Surprisingly, many families continue to identify investment risk as their primary area of exposure, despite the fact that very few have ever lost their wealth purely through poor investment management (Chart A).
* Four Pillars of Capital for the Twenty First Century, Wealth Strategies for Intergenerational Success, 2015
(Source: Family Office Exchange, 2014)
On the other hand studies conducted after the event, on families whose wealth had been severely dissipated, indicate that such wealth destruction was most frequently caused by poor communication and family dynamics and a failure to prepare the next generation (Chart B).
(Source: Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, Williams & Pressier, 2003)
Of course not all risks can be avoided, but a structured and strategic approach will at least help to mitigate the risks and add to the likelihood of wealth being successfully passed from one generation to the next.
The proposed approach to family risk management brings to families a system of analysis and control similar to the risk management processes routinely used by businesses and other commercial organisations. In some respects the discipline of such a process is even more necessary in a family than in a business, precisely because emotional considerations can easily lead to important issues being avoided.
The family risk management strategy should be developed from a hierarchy that takes into account both financial and non-financial risks:
It can be useful to distinguish those risks which are quantifiable and can be isolated, from those which cannot be quantified and are more pervasive. Risks can thus be classified into one of the four quadrants depicted in the risk universe graphic below:
(Source: Stonehage Fleming, 2016)
Assessing the family’s risk universe in this way, may impact quite significantly on the approach to individual risks:
The result is an intelligent assessment of the family’s risk universe to develop a risk mitigation plan which records risks, probabilities, impacts and mitigating actions.
The risk mitigation plan is ideally developed through collaboration with family members to achieve buy-in. The plan should be considered dynamic and reviewed on a regular basis.
Such an approach should lead to refinements in the investment risk appetite, asset allocations and acceptable time horizons.
By focusing primarily on those tangible risks for which there are ready made solutions, we believe too many families, and their advisers, fail to address the more complex, less tangible and less measurable risks which are so often the cause of family wealth destruction.
We believe a process such as this will facilitate a more comprehensive and effective approach, which will help protect family wealth and family wellbeing across the generations. Perhaps above all it will help bridge differences of understanding between family members, thus helping to avoid the biggest risk of all.
Wealthy families are bombarded with offers of advice and service. Private bankers, lawyers, trustees, investment managers, accountants, insurers, art consultants and security advisers scrabble over one another for the role of trusted adviser to the family. To even the most assured navigator of the wealth management world, the profusion of organisations purporting to ‘be on their side’ and offering an ‘alignment of interests’ can be bewildering.
Many families look to the idea of a Family Office for this alignment of interest.
But what sort of Family Office is required?
For some families the principal need is the management of investments. Others require a diverse range of professional and administrative services to meet the complex planning needs of international families, with extensive business interests, property and leisure assets, owned through complex fiduciary structures.
Should families build their own operations from scratch or use the expertise and infrastructure developed by others?
Whilst personal preferences play their part, this choice is best determined by the particular needs and circumstances of the family.
It can be reasonably argued that the simpler the needs of the family, the stronger the case for using a Multi Family Office. Indeed, many organisations describing themselves as Family Offices are essentially asset managers focused on the needs of wealthy families. By contrast, the more complex the needs of the family, the more difficult it is for families to find the right external support.
The central task is to identify the right practical arrangements to meet a family’s needs. This will often include an assessment of the degree to which responsibilities are allocated internally and externally. This paper seeks to assist families in this deliberation and will focus on the comparative merits of the Single Family Office and the Multi Family Office.
‘Family Office’ is a flag flown by a wide range of organisations. It is taken here to describe a multi-disciplinary platform that enables families to identify and achieve their strategic goals.
A true Family Office will play a key role in determining the ‘family approach’ to a wide range of affairs, including inter alia:
The last item is obviously extremely important. Critically however, it is not the only item and the term ‘Family Office’ should not be taken as synonymous with ‘Family Investment Office’.
The strategic and technical requirements of each family are different. There are no rigid rules as to the right approach. However, several perceived advantages are often associated with the Single Family Office model.
There is clear evidence that many of those choosing to set up a Single Family Office do so in order to increase the level of privacy that they might enjoy.
More work is undertaken by a small, hand-picked group and less information about the family is circulated. Theoretically, data can be tightly managed and access to it monitored.
On the face of it, these are fair points. However, the fact that Single Family Offices have smaller operational teams can cause problems in respect of privacy. There is a greater need for the use of external agencies such as IT providers. It can be tough to properly vet the support teams and impossible in the event of need for external support to restrict access.
The concentration of a great deal of information and responsibility with a few people can also be problematic if the relationship sours. Larger organisations are able to put in place oversight mechanisms and ‘Chinese walls’ to ensure that information is managed on a need to know basis, regardless of seniority.
The physical and electronic security of smaller Single Family Offices can also be harder to protect.
A family with its own Single Family Office need not fear that it will be sold or merged with another organisation. The family is sole master of its destiny.
Ownership and control can occasionally present new issues. Great care needs to be applied to the regulatory and tax issues that pertain in each relevant jurisdiction and the consequences of control being held by residents of each jurisdiction.
A Single Family Office is a dedicated resource, devoted to one family. The personnel involved have no competing demands from other clients. The team should have an understanding of the family’s affairs that is second to none.
There is an important drawback here. Often the Single Family Office team can be seen as essentially tied to one member or sub-group of a family. They can be ‘Dad’s people’. This association can, in pressured circumstances, generate a perception of partisanship. This in turn can mean that the Single Family Office team is not in a position, for example, to navigate through tricky succession issues or other disputes. Professional organisations are able to deploy different personnel and better manage these perceived conflicts as they bring an inherent independence to the table.
The Single Family Office can be designed perfectly to meet the needs of the family in question. The right expertise can be sourced. There are no commercial pressures on the organisation to do anything other than serve the client family.
However, needs change and a smaller organisation can be less well placed to meet them than a larger, better resourced one.
Alignment of interests
The family can in theory, be confident that their own Single Family Office staff is motivated solely by a desire to do the best for the family. They are not, after all, selling any products.
However, great care should be taken to ensure that the employees’ and employers’ agenda do not diverge. Even in a Single Family Office, staff with investment roles can feel just as compelled to chase performance through inappropriate risk taking as their counterparts in the broader market, especially if their remuneration depends upon it.
This concern extends elsewhere across the multi-disciplinary spectrum. Single Family Office teams may instinctively drift towards their comfort zones in terms of expertise or even areas of personal interest. This is particularly true if they are being encouraged to keep external contact and fees to a minimum. They may, for example, be reluctant to engage lawyers on a specific issue and prefer either to avoid the issue altogether or proceed in the absence of advice. A multi-disciplinary Multi Family Office can afford to retain a breadth of in-house expertise available to advise quickly and cost effectively on a day to day basis.
Other families prefer to use a multi-disciplinary Family Office provided through an independent professional services group. Different arguments are available to advance in favour of this model.
Larger organisations may well be more able to attract talented personnel. They can often offer more compelling career paths and remuneration packages as they can include equity ownership in a growing business and the possibility to work with a number of families. This is often seen to make the work more interesting and to mitigate the career risk of an executive who is reluctant to put all his or her eggs in one basket.
A larger organisation is also able to employ more specialists, producing greater breadth and depth of expertise available in-house to clients. This can produce conflict of interest which need to be properly managed.
This should then generate a genuine culture of learning, in which different disciplines are able to interact and produce very advanced intellectual capital.
Inter-disciplinary oversight is invaluable to families. Lawyers, accountants and bankers in reality need to be able to communicate briefly and regularly. A professional Multi Family Office is able to coordinate this in-house.
However at this stage there are very few Multi Family Offices with the infrastructure and expertise to deliver a full service to international families with interests spread across several jurisdictions.
Economies of scale
The economies of scale touched upon above extend to other areas. The grouping of families within one organisation can result in enhanced buying power that reduces costs and improves standards.
This can also stretch to the opportunities to leverage off the group’s knowledge of markets, industries and other issues affecting wealthy families. Many families feel a need to find a forum in which they can exchange ideas with like-minded people who are facing similar issues. The Multi Family Office can provide this platform.
The Multi Family Office can also give the families it serves a voice in public debate. This means that policymakers’ decisions can be informed by more direct contact with groups of those affected, without any loss of privacy or the need for ‘to put heads above the parapet’.
One of the fundamental purposes of a Family Office, whether it serves one or many families, is to make sure that in the event of crisis there is an operational structure in place to ensure the family can function effectively.
Crises happen in Family Offices too. Clients of Multi Family Offices depend on an organisation and not an individual or small group of individuals. Internal control systems and alternates are in place to provide continuity to the client in the event that key advisers are not available. Checks and balances mitigate the risks associated with putting too much responsibility in one person’s hands.
The banking crisis and the subsequent economic conditions have left governments looking for more control of the financial services sector. Heightened regulation seems inevitable. Single Family Offices are not necessarily regulated but may be. It appears likely that an increasing number will fall into the regulatory net.
The effective management of regulatory issues requires considerable resources and a strong corporate discipline. Multi Family Offices do not have a monopoly over either. Nonetheless, it might be reasonable to assume that a larger professional organisation with an established compliance culture would be more adept at dealing with the changing regulatory environment.
Hard data on the typical duration of a Family Office is tough to find. A Multi Family Office with a track record of surviving both economic turbulence and transition through generations of clients is an attractive option.
A family can reverse out of a Multi Family Office with relative ease if their needs change or a better alternative is found. It is extremely hard to disentangle a family from a Single Family Office.
Multi Family Offices have other clients and a reputation to consider. In practice they are likely to end client relationships in a way that is as mutually satisfactory as possible.
Many aspects of a complex family’s life can be improved by the use of the right technology. Accounting, aggregated wealth reporting, treasury functions, investment management and research are all areas in which technological solutions abound. Larger organisations have the resources and expertise to select, set up and maintain systems that are cutting edge and integrated. They are also able to maintain fully vetted teams to manage the inevitable glitches that all IT produces. They do not need to involve outside agencies either in a support function or as service providers, for example to supply server space. This improves security.
Research suggests that the maintenance of a Single Family Office can cost in the region of 65bps of total wealth. It is unlikely that a Multi Family Office would charge fees anywhere near this amount. The economies of scale available to Multi Family Offices mean that in respect of costs the balance tips heavily towards them. This is especially relevant for those families who, in terms of net worth, fall towards the mid to lower range of those likely to require Family Office services. These families may feel that a Multi Family Office can deliver the right services within a proportionate budget.
The importance of these individual considerations will vary from family to family. The scale of family wealth will be a particularly important factor in determining the right approach.
No complex international family can function without a significant in-house function. The question is the extent to which responsibilities should be retained or devolved. In other words, families should not feel they face a choice between the two models. The challenge is to create the right relationship between them.
The fact that those closest to the family will have strong preferences and personal interests in the matter does not make this balancing act any simpler.
As always in the area, excellent advice that is truly independent remains at a premium.
The growing trend for wealthy families to discuss and agree the ‘purpose’ of their wealth has been confirmed in numerous surveys in many countries, including the findings of Stonehage Fleming’s own report on family succession, entitled ‘The Four Pillars of Capital’.
This paper explores the practical benefits such an exercise may bring to a family, in particular to those who are beginning to plan the transition to the next generation.
All wealthy individuals are eventually faced with the decision as to how to leave their wealth, to whom and in what form. They also have to consider whether to leave it unconditionally or to leave guidance on how it should be used and managed. It is difficult to leave guidance without addressing the question ‘what is it for?’
Families have widely differing “purposes” for their wealth. At one extreme, there are some entrepreneurs who have left nearly all their money to charity, and at the other extreme, there is a family trying to create a 200 year trust with guidelines for distributions across eight generations.
Most of those who create large fortunes do so by building substantial businesses. As the business grows, the assets and revenues often exceed their needs, but the motivation to continue growing rarely abates.
Entrepreneurs are driven and ambitious and frequently seem to operate in a bubble of “eternal youth”. Only when they begin to consider succession do they think about the impact of wealth on their heirs.
The issues they need to address include the following:
The answers to these and many other questions are strongly interrelated and difficult to resolve in isolation. Conflicting objectives may need to be prioritised and reconciled around a central philosophy and purpose.
It can be immensely helpful to the next generation if that purpose and philosophy are developed and communicated well before the founder passes on. If not, the decisions made might come as a shock, causing resentment and perhaps dispute in the future with many negative consequences, including wealth destruction.
A family will probably include a number of individuals with differing abilities, personalities, interests and aspirations which are not always easily reconciled.
However, they may also have much in common and most people grow up with values, hopes and expectations which have been influenced by their family and their surroundings. Nearly all have a need to be treated fairly, if not equally, and to understand the difference.
Yet gross inequality and unfairness can be accepted, if they are ingrained in the family culture. For example, the English tradition of primogeniture involves large estates passing from eldest son to eldest son, whilst other children may receive relatively modest inheritances.
Underlying this culture is the tacit understanding that the central purpose of the wealth is to preserve the estate in family hands. In such cases, this fundamental objective takes priority over most other considerations, including the needs of individuals.
Some business-owning families may take a similar view in that they have a strong preference to keep the business in family ownership, which may have to be reconciled with the income needs of individual family members. It is well known that a family business can be the glue which holds a large family together, but it can equally be a divisive force which corrodes family unity, sometimes driving the business to insolvency in the process.
In any family dispute, the alleged intentions of the founder will be used by both sides, so clearly stated guidance can help prevent potentially disastrous consequences. Such guidance is no easy matter, as it must allow future decision makers the flexibility to adapt to changing circumstances.
Many families also have to cope with inheriting specialist investments which rely heavily on the skill and experience of the founder or other family members. Some families want to continue the heritage of investing in new ideas and young companies, in which case a carefully crafted statement of purpose will be of enormous assistance, especially if things go wrong.
Cash, quoted investments and some properties may be easily divisible between family members, but an art collection, for example, may benefit from continuing in collective family ownership, thus requiring an agreed strategy, decision-making framework and governance.
The desire to promote family unity is sometimes a factor in agreeing the purpose of wealth. Unity is usually not driven by fairness through equality, but fairness through common understanding. Understanding is driven by communication and leadership. Leadership without a purpose is almost impossible.
If the aim of a “purpose” is to help a family set clear objectives and make better decisions, with a recognisable strategy for their wealth, then it must be clearly articulated. There are numerous conflicting issues to be addressed and reconciled, so a few bland headlines are unlikely to be sufficient. Purpose is much more detailed than a ‘mission statement’.
Families sometimes assume that by bringing up their children properly they will understand the family’s vision through osmosis. This is possible, but not easy, as families are rarely as good at consistent communication as they think. It is not what one generation says that it is important, it is what the other one hears that matters!
Other families therefore opt for a more formal process. It is likely to involve a number of family meetings, possibly assisted by an external facilitator, who will drive the process and make sure all voices are properly heard. The objective will be to arrive at a consensus which is accepted by everyone involved, despite the fact that they may start out with widely differing perspectives.
The need for agreement is greatest when assets such as a family estate, family business or art collection continue to benefit from a degree of common ownership which implies shared decision making. This particularly applies to families who are asset rich, but have insufficient cash flow to support all the needs of a growing number of family members.
Issues to be covered should include the following:
For those with landed estates in the family for centuries, the practice of primogeniture will be clearly understood, but may need to be discussed rather than assumed, in the light of changing values in society.
The issue for business-owning families is even more complex. If there is an agreed preference for the business to remain in family ownership, the reasons for this must be clearly stated, with well-designed caveats to provide for changing circumstances.
Similar considerations may apply to other assets where there is a desire to maintain them intact, and which require active management.
Whilst the main object of investment is usually to preserve and grow the wealth in real terms, changing attitudes and values increasingly emphasise the importance of ‘Socially Responsible Investment’ and ‘Impact Investing’.
Families with a business background may also wish to encourage a continuing culture of entrepreneurialism and participate directly in backing new ideas and talented individuals.
There are numerous issues which need to be discussed in defining the family’s approach, in particular the willingness to adapt investment criteria to meet social and other ‘non-financial’ objectives.
The ongoing income required to support family members will usually be a key factor and the need for income should be debated in some detail, especially where it conflicts with other objectives.
Wealth is only beneficial if it helps family members to lead more fulfilling lives and to explore their potential as human beings. This may lead to certain controls designed to encourage the young to make good use of their own talents, and not rely too heavily on inheritance to make their way in the world.
A strong theme underlying many of the decisions above will be the extent that the family wishes to use its wealth to benefit the wider community. In some cases, the motivation is a balance between genuine altruism and enlightened self-interest.
In many countries, increasingly hostile public attitudes to wealth represent a significant threat, which may be mitigated by demonstrating how that wealth benefits the wider population.
This contribution can be made through the way the family conducts its business and investment activities, creates employment and supports the local community, but many families also dedicate part of their wealth to philanthropy.
There are various ways in which the family can organise charitable giving, often including active involvement by a number of family members, so that it helps to reinforce the unity of the family, working together for the good of the community.
All of the above will benefit from clearly thought out structures and decision-making processes, which can only stem from a detailed and well-articulated statement of purpose. This will often include a set of agreed values which guide individual behaviour and which can be more strongly applied to collective decision making. For some the family ‘brand’ is important.
Purpose cannot be discussed without risk, and risk cannot be addressed in the absence of purpose and objectives.
Management of risk is one of the most complex subjects to be considered as risk takes many forms, from the performance of the family business and the volatility of the share portfolio to the more intangible risks such as family reputation or transferring leadership and control to the next generation.
The discussion needs to take place within a structured process, if meaningful results are to be achieved.
Wealthy families and entrepreneurs have relatively few options when considering succession. They may of course prefer to leave it to the next generation to manage the responsibilities and privileges of wealth without guidance, but they are still faced with practical decisions which cannot be ignored.
Most people want to avoid giving excessively prescriptive guidance which ties the hands of their successors, but may still wish to create some form of legacy which is more than just financial.
Those families and entrepreneurs who want to establish parameters for their legacy have three main alternatives:
Whilst a defined purpose of wealth does not guarantee success, the process of agreeing that purpose can provide families with a clarity and understanding that ensures the plan for the transfer of wealth is understood and not imposed.
There may, however be circumstances in which the differences are unlikely to be bridged by such a process, in which case the terms of the legacy and the parameters for decision making will probably need to be defined in enough detail to avoid ambiguity.