Grooming New Leaders

As children mature into adults and show interest in helping oversee their family's wealth, they need to be prepared to participate in family office governance.

There are many roles members of a rising generation may fill in a family office, as board members, investment committee members or trustees. Each role requires an in-depth understanding of the family office's goals, structure and investments. Even if a young family member is a client without any governance responsibilities, he or she should have a clear understanding and appreciation of the family office.

A Case Study

Several years ago, I worked with a client who had not thought through the requirements for governing the family office. After selling his own company, he became an angel investor in a few small businesses and served on their boards of directors. His accountant served as his family office manager and the office's sole employee other than the client.

When his children reached adulthood, he created a family office board so they could serve as members and contribute to investment decisions. He contacted me to help decide who should serve on the various investment boards and who should participate in the family office.

While discussing the plan with his children, I quickly discovered they neither shared their father's risk profile nor his passion for angel investing. They also couldn't give the time required to oversee the investments because they all had outside jobs and young children. There were also concerns that many of the investments had not yielded returns.

As I learned more about the rising generation's interests, we agreed to start by re-evaluating the family office's investment philosophy. Our goal was to reduce the risk profile and define board responsibilities that the children could fit into their busy lives.

The resulting governance structure was a family office board, including the father and two next-generation members representing the interests of the others. The siblings and their spouses all agreed that these two individuals were the most qualified.

The board developed a charter that specified its authority, giving it discretion over any investments made - a responsibility formerly reserved for their father. The board was responsible for evaluating investments and determining whether they should be kept or sold. It also oversaw an investment policy statement that defined the characteristics required in future investment opportunities and the portfolio allocation.

All family members attended educational conferences to understand the workings of family offices and to network with other families. The family office board began participating in investment reviews with investment managers. They also reported annually to the rest of the owners in a formal shareholder meeting.

Through this process, the family members came to appreciate the importance of a clearly defined vision and appropriate oversight for their investments. Their father was pleased that a structure was in place that would ultimately allow the next generation to take over family office oversight.

Getting Started

As this case illustrates, having a clear plan for the family's involvement in family office operations and investments is crucial. It's also important for wealthy families to educate children about general management and investment decisions, estate and trust structures and investment terminology. While not all family members will need to sit on the family office board, those who do serve should understand how to manage internal personnel and advisors, review financial statements and strategically decide how services are provided.

Developing an education plan may seem like a daunting task, but the following steps will help guide family members through the process:

1. Align the family around the need for education.

2. Ensure that members of the family's next generation opt in and understand the requirements of participating in the family office board.

3. Create an education plan and time line.

4. Identify education resources. Many investment advisors and groups offer educational opportunities for young family members. Another option is to enroll family members in an executive education program offered through a university.

5. Take it one step at a time. It's important to set up a process that provides gradual exposure to new concepts. If participants are overwhelmed, it can deter them from participating. Creating opportunities to interact with people in their own family or other families can make the education process more enjoyable.

6. Continue to invest. Investment concepts and board responsibilities will be a new experience for most family members. A one-time program will not be enough to establish comfort in the board role. Family members will need ongoing exposure to family office activities, such as meetings with investment advisors and board meetings, to help to increase their confidence.

When a family office is set up, the primary goal often is to protect and grow family wealth by providing high-quality, dedicated services in a secure, confidential environment. For families with the level of wealth required to support the cost structure, the benefits of a family office are evident. Less evident are the challenges families face when new leaders take on the oversight of the office without the necessary education and experience.

Source: Private Wealth

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