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Change of a lifetime

Family offices are created to manage the assets of wealthy families, whether they are held in a family-controlled business, minority stakes in other investments, passive assets or some combination write Greg Greenleaf and Jennifer Pendergast.

While family offices provide three broad categories of services: wealth management (asset allocation, manager selection, estate planning), administration (investment reporting, tax, legal), and family-related services (education, relationship-management, concierge); the primary
objective of the family office is wealth management.

When families prioritise activities of their family offices, asset allocation, manager selection and monitoring, and information aggregation and reporting receive top rankings, according to Single Family Offices: Private Wealth Management in the Family Context, a report by Wharton Global Family Alliance.

But is wealth management the only key to a successful family office? In our experience, families turn to their family offices as the "go-to" resource to address the major transitions they face. Some of these transitions are expected and can be planned for.

Others are unexpected, possibly arising out of a crisis situation. In either case, family offices, due to the level of trust placed in staff and their access to information, are in a prime position to assist families in dealing with major life transitions.

The challenge for many family offices is in determining how to assist the family as they navigate through these important transitions. This often requires family office staff to reach out to other professionals to aid the family through these major life transitions.

Family office executives do not need to be the expert in all areas of helping families through major life changes, however with the family's trust, they are able to bring in the outside experts that can effectively assist the family to prepare for, and cope with, big life changes.

Family offices focus significant resources on planning for the transition of financial assets. Given the responsibility to safeguard family assets, they must address financial, estate and tax planning over long time horizons. Because these are transitions that family offices are set up to address, we won't spend time talking about them here.

But, there are other implications of transitioning assets. Transition of assets implies they will pass into the hands of next generation family members who must be prepared to use these resources wisely and to make major decisions around how assets will be deployed. Transition of assets requires planning, not just on the assets structuring front, but also on education and governance fronts.

As assets transition to a new generation, next generation family members may inherit trustee roles, investment committee roles, philanthropic roles and others, all of which require preparation and education. With respect specifically to investing, a baseline level of financial knowledge is required to make decisions regarding asset allocation and oversight of internal or outsourced staff responsible for investing assets.

Next generation members also need to be prepared to make decisions together. If family assets pass from a group of siblings to a third-generation cousin group, the decisionmaking body does not have as much first hand experience dealing with the personalities at the table.

How do you develop the level of trust and understanding required to make joint decisions? Creating opportunities for joint experiences in decision-making as well as social opportunities that allow family office clients to get to know each other will work towards building the trust needed to make effective decisions.

Beyond asset transition, other predictable transitions include leadership transitions within family-owned businesses and transition of governance roles and responsibilities (eg, foundation, family office and business boards, trustees, family council). Transitioning the decision-making structure is also an area where the family office can provide support.

Providing guidance on the structure of family office board, investment committee, operating business boards, philanthropic boards and trust oversight is all part of generational transition. This is an area where the trust and sensitivity of family office staff comes into play. Determining how oversight responsibilities will be structured when some family members are more capable than others or where there is unequal ownership of assets across family branches can be a challenging situation.

Some of the more complicated situations family offices often face are helping families deal with the unplanned transitions such as business crises, sale of major assets, cashing out minority owners, and personal issues such as death and divorce. While the office cannot plan for these in advance, it can help the family prepare to deal with the unexpected.

Here are some recommendations for helping families deal with transitions:

1. Engage the family office in a strategic planning process. Taking a five- to 10-year view of the evolution of the family, the entities overseen, and the services provided can allow a family office to ensure they have the programs and resources in place to support transition. Many of the transitions the family will face can be predicted in advance. Even if the exact date of the transition is not clear, the fact that it will take place is obvious.

A strategic plan outlines the approximate timeline of transitions and all the activities that need to be undertaken to ensure a smooth transition. Activities may include education sessions, group meetings, development of junior boards, etc.

2. Develop a sound governance structure and decision-making rules. A governance structure, with clearly defined roles and responsibilities for family members and staff and rules concerning who has decision-making authority, supports planned and unplanned transitions. If roles are clearly defined, it will be easier to determine how to transition them to the next generation. And, in the case of a crisis, everyone will know how to make decisions.

3. Educate current and future generations on roles and responsibilities required to oversee their assets. Make sure family members understand the work the office does and areas where they need to provide input. Educate them so they can provide the appropriate input and oversight. Education sessions for next generation members may occur at planned family retreats or special education sessions specifically for their age groups. Some offices support adult clients in identifying opportunities for their education through conferences and university programs.

4. Practice joint decision-making. Ensure family members have built the trust and understanding required to make decisions as a group before they are faced with a crisis. If possible, create opportunities where family members can work on committees together to make decisions. Encourage family retreats or meetings with social time where family members can get to know each other. And, support communication through websites, newsletters or email distributions that keep family members in touch.

5. Build strong relationships with family office clients and future clients. Building relationships with next generation members even before they are clients can help family office personnel develop the trust required to assist the next generation. Family office leaders can even serve as mentors to next generation members. Creating opportunities for next generation members to participate in planning for family activities and education creates buy-in and ensures programs are relevant.

6. Develop a performance "dashboard" for family health. This dashboard would track key indicators developed by the family that measure the overall health and well-being of the family.
One of the challenges presented to family office staff in planning for transitions is the amount of work required to do it well.

Typically, the vast majority of family office resources are devoted to wealth management. The Wharton Global Family Alliance survey shows that almost half of family office leaders spend 40% of their time or more on wealth management. Of an average six professionals in an office (augmented by two to three support staff), only one is dedicated to an area outside of investment, accounting or legal support.

So, how can family office staff be expected to have the additional time and skills to deal with strategic planning, educational programming, and governance?

Similar to the investment realm, where family offices often rely on outside managers to do much of the investing and even outsource selection and oversight managers, many of these softer issues can be addressed by outside professionals as well.

The key is for the family office to have the global perspective on the issues that need to be addressed and the family's buy-in to commit resources to address these issues.

By incorporating experts in governance, family communication, and strategic planning, the family office executive can further ensure, not just the family's wealth, but also its well being.

Asset Management, Investment
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