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Succession beats wealth preservation as top priority for families

By James Beech

The world’s business families are making the successful transfer of leadership to the next generation a higher priority than even the safeguarding of wealth in an era of disruption and uncertainty.

New research by Stonehage Fleming said 69% of respondents spotlighted succession planning as one of their top three concerns for future financial organisation, followed by capital preservation (62%) and tax planning (48%).

The shift in focus to quality succession planning meant a more sophisticated, better structured and increasingly democratic approach to family leadership. The shift prompted a greater emphasis on training and development of young people, better communication and renewed importance on long-term planning.

“Perhaps most important of all, families are concerned about having leaders in place who will see the family through the uncertainties of a changing environment,” the multi family office’s report Practical Wisdom and Leadership for Changing Times said, the third publication in its Four Pillars of Capital series.

“There is a growing understanding that it is essential to identify leadership in each pillar to deal with internal and external risks. This often means restructuring, selection on merit and by consultation, and a more visionary approach to training.”

More families were consulting a wider pool of members when selecting potential new leaders and formalising the appointment process. Some 13% used a committee to select the family leader, but at least a third (33%) expected leadership to be selected by such a body in the future.

Respondents said the major risks to long-term family wealth related to family disputes (68%) and lack of planning (67%) as opposed to purely financial or investment risks. Further risks were the failure to appropriately engage or train the next generation and leadership issues.

Matthew Fleming (pictured), partner and head of family governance and succession at Stonehage Fleming, said intergenerational relationships were also transforming, given the rate of technological, social and political change.

“Nearly all respondents agree that the impact of societal change on a family and family wealth must be reflected in the way they prepare for the future.”

Fleming said one of the main concerns from the survey of 150 members of ultra-high net worth families and advisers was ensuring the right leadership was in place, by and for the next generation.

“Our experience tells us that having a clear leadership structure will provide the best chance of managing unforeseen risks—both internal and external—pursuing opportunities and ensuring that the family prospers.”

The Global Family Office Report 2018, by Campden Research with UBS, revealed 70% of the 311 family offices surveyed expected a generational transfer in the next 10 to 15 years. Next-generation family members were taking a more active role within the family office, indicating the handover was beginning to take place. Among the next generation of family members, 29% family offices now held management or executive roles, while 23% sat on the board.

However, Campden Research found half of all family offices did not have a succession plan in place. There had only been a one percentage point increase in succession plans since researchers warned of the problem last year.

The next generation were on course to make “significant changes” to the way family investments were managed once they assumed control, according to Coming of Age: The Investment Behaviours of Ultra-High Net Worth Millennials in North America by Campden Research in 2017.

Only one-fifth (21%) were fully satisfied with the objectives and guidelines of their families’ portfolios, despite 65% having a say in their family’s allocations.

One-third of millennial respondents said that they would incorporate environmental, social and governance (ESG) standards into their family’s benchmarks. Equally, one-third would increase their allocations to impact investments. Another third said they would delve into less liquid investments such as hedge funds and private equity, the research into North American millennials found.

More than 75% of family respondents told Stonehage Fleming they had a preference for responsible investment. However, only 21% were actively incorporating a values-based approach in investment portfolios.

Guy Hudson, partner and head of marketing at Stonehage Fleming, said this indicates “that though there is clearly an appetite for socially responsible investing, there is some confusion over definitions and how best to best achieve it in portfolios.”

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