Families can be dysfunctional at the best of times. Throw untold wealth into the mix and you have the basis for a prime-time reality TV show.
Typically, the first generation of wealth-creators have the view that they know best and their children don't understand business or how they had to struggle to build from nothing.
Family office adviser Bonny Landers, of Bay Street Consultants, noted that professional advisers know this is not a true reflection of the younger generation's business acumen. But this conflict between the generations is one of the key challenges facing family-office advisers in helping to transition a family business from one generation to another.
Landers said she once met a patriarch and two of his children because the father wanted to understand the reasons why he should set up a family office. "While he understood the concept," recalled Landers, "he concluded that his children were too young to be given responsbility. They were in their 40s."
She noted she had been lucky to have worked with families who had the foresight to begin distributing money for other family members to manage early-on, which she suggested was a big help in the succession process.
This is by no means the norm, however, especially when it comes to investing the family's wealth. "It can be hard for parents to see their children as functioning adults," commented Landers.
As someone who has seen many good and bad examples of generational wealth in practice, she stated: "You get a sense of how things can go awry in a family framework, because families are the same the world over. We have all read about children of wealth who are just out partying and acting without any responsibility at all. Family office heads have the chance to remedy this by giving their children exposure to some real-life business. It can also bring them closer to the family philosophy."
In parts of Asia there is family wealth being managed that goes back several generations. At AsianInvestor's recent Family Office Forum in Singapore, Amit Patni, director of Indian single family office Raay Global Investments, spoke about his traditional family journeying from business inception to IPO through three generations. The business grew over years and invovled his grandfather, father, uncles and cousins. "We've seen the entire life cycle," he said.
At times the younger family members, including himself, sought to professionalise the business. They brought in private equity partners and raised the non-family members on the board. "We saw the generational shift in how the company became more professional," he said. "We recognised the need to pass the generational wealth and have that legacy managed, so we had the family office already running when we sold the business."
But Patni admitted the various changes created fiction between the patriarch and the younger generations, born of a reluntance by them to release control. The company IPO'd in 2002. "My grandfather was not happy with the IPO; when we sold the company in 2011, my father and uncles were unhappy," he said.
Terry Farris, head of family governance at Taurus Wealth Advisors, suggested it was important to recognise how different family businesses were, taking their maturity into account. At one end of the scale are third or fourth-generation families with well-established ways of managing their affairs that have been hande down and adapted by successive generations. At the other end, Farris has clients that are still building their businesses and have no need of advice on succession planning.
But many families don't talk about their values. Where the family is being inclusive of younger generations, it often becomes clear there are philosophical differences. That is why a clear statement of principles and values is so important.
Farris noted the way to encourage the next generation to engage was to document the family values in the early stages of setting a family office. "Then try to engage the childlren in these principles and the concept of succession."
Several advisers whom AsianInvestor spoke to suggested giving the next-generation children a chance to show their potential and develop their own niche in the family office set-up.
Soumya Rajan, chief executive of Indian family and corporate advisory firm Waterfield Advisors, observed the next generation wanted to take the family into new areas, embracing technology and social media. "The challenge is to get the generations to cooporate and ensure a smooth succession," she said.
Governance and control
Patricia Woo, legal counsel at Squire Patton Boggs in Hong Kong, stressed that degrees of control were important, since family members would need to manage according to their abilities. "It's probably the first time they have institutionalised anything in the family."
Control, she said, was still exercised by the family, even if they appointed their party managers. Within a family office, they can exercise control via the family council or advisory committees.
One common complaint from family offices is that private bankers don't do enough to understand the philosophy of the family set-up. Landers argued that bankers ha dlost the plot in the context of relationship management. "Families will complain about the service they expect and certain banks are too focused on product promotion and not enough on client service," she said.
"Clients are waking up to this and realising this is not what they want. Those groups who offer a more traditional idea of classic private banking will be the ones to succeed."
But she said flexibility was important too, and that in some cases you had to be firm in getting a message across. For good governance, she looks to families with a clear separation of management and investments. Even with a family council in place to keep everyone in check, it can be difficult if one person has so much power across the board.
The level of control is a key dynamic for ensuring success. Wealth advisers are keen to stress that setting up a family office with independent board members does not mean losing control. Veteran family office adviser Noor Quek said it was important to have independent people on the family office board, to provide a different view.
In practice, governance and control are tough to get right in a family situation and remain a headache for wealth advisers. If anecdotal evidence is a guide, there are many examples of patriarchs refusing to acknowledge independent directors and managing their family offices like a mini-dictatorship.
One adviser at AsianInvestor's forum noted: "We are working with a family right now where the patriarch will discuss matters with the family, but then change strategy and want to keep the new direction a secret."
Quek added that having grown up in a traditional pariarchal structure, the secret of success was to be firm about what you wanted, but to allow others to be part of the process.
In China, too, these issues are coming to the fore as the new generation of entrepreneurs find themselves at the forefront of new social media trends, far removed from the childhood their parents had. "After 30 years of opening up, we have so much still to learn from our foreign counterparts," said Jacky King, chief executive of Shenzhen Qianhai Huisheng Family Office.
Although China has hundreds of single family offices already established, the family office environment in China is still quite immature. The are different dynamics at play, not all of them cultural. For example, King said the average age of a Chinese family office client was 10 years lower than the global average (45 to 55). Of his clients, 90% of whom are business owners, he said: "Many are not well educcated or knowledgable about investment. They are often afraid of being defrauded and anxious about passing wealth to the next generation."
The one-child policy has had an effect, too. King observed people often found it difficult to find a successor, so worked more closely with charity groups to fund education, target poverty reduction or environmental improvements.
But philanthropy is treated differently in China. "Some entrepreneurs and families are giving to charity, but they are not doing it out of goodwill," said King. "They are trying to make amends for something in their past."
Managing the wealth
Woo noted she had never seen a family office managing all the money and the besty approach was to divide the wealth into different portfolios. "Sometimes the family office is only the gatekeeper. Some single family offices don't manage anything except the relationship with external providers," she said.
Managing investments requries a collegiate effort to avoid risk posed by allowing emotion to cloud the decision-making. "They [family heads] will say they understand the principles of long term buy-and-hold, but it's when they feel the pain [of a downturn] that they change their minds," noted consultant Rob Aspin, former head of investment strategy at Standard Chartered.
Consensus thinking is that the family principal needs to understand where the money is invested, to get that buy-in.
Another thing that has been shown to work is teaming up with other families. Anne Kim, director of private equity firm Heritas Capital, suggested that while the idea of families who had known each other for generations clubbing together might not sound like a recipe for success, it worked. "There's a trust that comes from dealing with other families who have gone through the same generational development," she said. "That is why club deals are popular, but they are not to be judged on short-term measures."
Woo observed that family offices didn't exist in a vacuu, and that investment teams had to deal with bankers, custodians and administrators. "We have solved a lot of headaches by limiting the size of the family office initially," she said. "Then, after one or two years, when the children have proved they can manage the operation they can approach the parents to build it out maybe $50 million, which is an optimal size."
While the generation gap has the potential to threaten the future of family office across Asia, families will typically see the value of laying foundations for future and realise the importance of putting the necessary things in place.
In instances where a new family office is being driven by the younger generation, Woo suggested it was best to start small. "Don't alarm your parents by taking on too much at once," she said, "$15 million to $20 million is enough."