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Pass the baton: how family offices can survive succession

Pass the baton: how family offices can survive succession

Succession planning is to become one of the greatest risks for family offices as 43% expect a generational transition in the next 10 years, according to a new study.

The Global Family Office Report 2016 by UBS and Campden Wealth found that preparation for succession has become a key area of focus for family offices as a further 69% expect transition within 15 years.

Michael Maslinski, a partner at Stonehage Fleming, said: ‘Intergenerational transfer is a crucial part of what we do. And within that, we see succession from one generation to the next as not only one of the greatest opportunities, but also the biggest risk that families face.’

He argues that what makes succession difficult is the human factor with each individual having different views, interests and capabilities.

A poorly handled succession can even lead to the destruction of the family, he warns.

Jerome Stern, managing director of J Stern & Co, is now the sixth generation at the helm of a Stern company. Through his own experience in succession and dealing with clients at the family office, he says that ultimately it is about being lucky and having the right people in the right place at the right time.

‘We have had the luck of always having in every generation one person within the family who was active and who was extremely entrepreneurial. That is how, despite it being in various branches of the family, the family business has been able to survive or to be revived, because someone took on the same principles, the same culture and tradition and continued,’ he said.

Stern also said that when he meets families who are transitioning the business, he will often share his own experience of it. He admits that because objectives for different family members are not always 100% aligned, there can of course be tensions. But a common basis will allow a successful succession in the end.

He warns that when it is time for succession, if there is no one who has an interest in the family business or the competencies to run it, families need to have the courage to accept this and seek an outside executive.

Stern argues an often overlooked problem is issues within the family office itself. If the family has transitioned from an operational family to a wealth-owning family, they usually need a family office to manage it.

In these cases, he says it is important that as the older generation passes on the baton, the CEO, who is usually a trusted adviser of that generation, also needs to move on.

‘Because within the family, there is a new generation. If no one has an interest in rigid manufacturing, but they are digital natives who want to build the next Uber, then you need to have someone at the family who understands that,’ he said.

‘The objectives don’t change, they just evolve and the family office itself needs to evolve with that,’ he said.

Key factors for successful transition

According to the Global Family Office Report, there are five key requirements. A willing and able next generation, an older generation prepared to give up control, a flexible and trustworthy family office, a family with functioning relationships and a sensible governance structure.

According to Alex Scott, chairman at Sandaire Investment Office, one of the most important qualities for any adviser dealing with succession is empathy.

‘I think that’s the most you can look for. They need to appreciate the sensitivity of the challenges,’ he said.

Another important factor is communication. He stresses that since it is a highly sensitive issue, the capacity to have a high quality dialogue between the successor generation and the generation in power is challenging.

This becomes especially pronounced when the transfer is from the first generation, the wealth creator, to the second generation. 

He believes that a critical role of the family office in the process is to help understand the responsibilities, the risk and opportunities of inheritance and to provide both dialogue and education.

That is why Sandaire has had a number of inheritors undertake internships with the multi-family office. This is supplemented by a series of lectures that are given by prominent people to facilitate a conversation around wealth and money.

For Edward Cain, partner at LJ Partnership, succession should be part of the decision-making framework all of the time and a high level of expertise, trust, confidence and sympathy are crucial in ensuring success.

‘For some of our clients, the succession process has already been in place for a while before any event in time. That’s partly to do with educating the next generation, bringing them in and making them feel a part of it.’ 

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