Only 25% of Family Offices Survive to the 2nd Generation — Discover How to Beat the Odds!
The first Family Office in the United States was established by John D. Rockefeller in 1882 and still exists today (Source: Deloitte). However, according to Ron Diamond, “only about 25% of Family Offices make it to the 2nd generation, 10% make it to the 3rd, and 5% to the 4th.” (Source: Family Office World) Diamond is the Founder and Chairman of Diamond Wealth and invests alongside 100 Family Offices ranging in size from $250 million to $30 billion.
While the current survival rate is alarmingly low, there’s hope for longevity. The history of Family Offices may go back over 100 years, but there’s been a recent boom in the last decade. Therefore, many of these offices are still in their infancy and learning to build that Rockefeller-style legacy.
The Difference
Technology — advancements today mean wealth can be acquired very quickly. It took Rockefeller decades to develop his dynasty allowing him to foster a long-term vision. Additionally, the digital transformation requires substantial investment in cybersecurity to protect sensitive family data and assets. This can be particularly challenging if you don’t have the resources or expertise.
Even though the world has changed a lot there are still old-school tactics, which are underutilized, that can help set you up for success. Let’s take a look!
The Solution
Robust governance frameworks are critical, without them Family Offices are prone to internal conflicts, mismanagement, and eventual dissolution as they transition from one generation to the next. Many Family Offices operate with informal structures which can lead to unclear roles and responsibilities. Here are key components to have in place:
Communication: Open dialogue and transparency are fundamental building blocks to any kind of relationship. It’s critical in business, but perhaps even more so when it comes to family members. We probably all heard that saying growing up, “You can pick your friends, but you can’t pick your family.” Usually following a disagreement with a parent or sibling. Individuals, even of the same family, have unique personalities and opinions.
A lot of times conflicts will arise due to a lack of clear communication. If something isn’t spelled out, it could lead to assumptions and false conclusions by other family members. Which can then lead to conflict and dissonance. Sure there will inevitably be some disagreements, but communication can mitigate major ones. Consider having regular meetings to align interests and expectations.
Family Constitution or Charter: A formal document outlining the family’s values, mission, vision, and goals, serving as a framework for decision-making and conflict resolution. This builds on the concept of clear communication by having a living document that can be referenced on an ongoing basis. It typically includes guidelines on operations, succession planning, and roles and responsibilities.
Family Council: A governing body composed of family members who meet regularly to discuss and make decisions about the family office’s activities, providing a platform for transparent and inclusive decision-making. Its primary purpose is to guarantee the values of the family are preserved. This will ensure that the family’s interests are taken into account in future business endeavors. After all, there’s more at stake than turning millions into billions. There’s making a real and lasting difference in the world by having a positive impact on it.
Board of Directors: A group of individuals, including family members and independent advisors, responsible for overseeing the family office’s management and ensuring it aligns with the family’s goals by setting strategic direction and evaluating performance. A Board can be important at any stage to help identify blind spots because even the most successful individuals aren’t perfect. However, even if you might be able to get by without one for now, it becomes a vital component after the passing of the founder. Therefore, it is better to consider forming one before the 2nd generation takes over.
The main difference between the Board and the Council is that the Board is more focused on business topics and is often made up of many non-family members. The priority here is expertise to ensure the assets grow and the office lasts for generations to come. EY Consulting reported on a case study where the creation of a Board for a Family Office that transitioned to its 2nd generation significantly improved family unity. Before bringing on the two outside members, meetings lacked focus and turned into heated arguments. (Source: EY)
Advisory Committees: Specialized committees that provide expertise in areas such as investment, philanthropy, and estate planning to ensure well-informed decisions based on professional advice.
It is important to recognize the difference between the expertise involved in building a successful company and running a Family Office that can stand the test of time. Sometimes expertise in a given area can lead to one thinking they have expertise in all areas. However, there’s no guarantee that expertise will transfer over. Instead, you should consider partnering with individuals who have a proven track record in a specific domain.
Networking with other Family Offices: Learning from other established Family Offices can be beneficial. What did they do right? What did they do wrong? Replicate the wins and avoid making the same mistakes. There are many networks in place to facilitate collaboration among different offices. There are also conferences, events, and webinars available. Simple is a great resource that provides access to all of these networking opportunities. Learn more here.
Succession Planning Only 54% of Family Offices have a succession plan and 40% feel they lack a suitable successor. (Source: Campden Wealth) These stats explain why many offices don’t last multiple generations. Without a clear plan for transitioning leadership and ownership to the next generation, family offices are vulnerable to disruptions and conflicts when the current leaders step down or pass away.
Beyond establishing a formal succession plan, proactively educating the next generation is crucial for a smooth leadership transition and boosting confidence in their ability to succeed. Another case study performed by EY Consulting demonstrated how the older generation took proactive steps to prepare the younger generation by creating shadow board positions. This allowed younger members of the family to learn about the business. Then there would be follow-up mentor sessions where they could ask questions. (Source: EY)
The education should encompass more than the technical aspects of managing the Family Office. Just as important are the core values, mission, and vision that define the family.
Conclusion
It’s clear what’s lacking in a lot of Family Offices is a formal structure. According to Ron Diamond, successful offices are the ones that have been institutionalized like Eccles and Pritzker (Source: Family Office World)
With the right strategies in place, the rate of Family Offices surviving to the second generation and beyond can significantly improve, so that their legacies endure for generations to come.
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Let us help you build a family legacy that lasts.
What challenges have you encountered in managing your Family Office?
References:
- Ron Diamond — Family Office World
- Deloitte — Modern history of family offices
- EY Consulting — Demystifying family boards
- Simple — andsimple.co
- Campden Wealth — The North America Family Office Report 2022
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