|Family Offices - Grappling With the Challenge of Later Generations|
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Most family offices focus on the needs of the first three generations of wealthy families, but as families grow - and hopefully prosper - family offices are increasingly grappling with the unique set of challenges posed by working with succeeding generations.
The most critical issues facing family offices working with the fourth, fifth and sixth generations of a wealthy family (G 4, 5 and 6 in industry parlance) revolve around governance, communication, family unity, the family’s business and of course, its level of wealth.
“You need a lot more structure, procedure and policies for G 4, 5, 6 and 7,” said Marianne Young, president of Market Street Trust Company, which began as a family office serving the Houghton family of Corning, New York in 1909.
“Decision-making is not as clear in succeeding generations. In G1 and G2 you tend to have a very strong leader, but in later generations, the process has to be more collaborative. There has to be more buy-in from more people about how decisions are made.”
Leslie Voth, president chief operating officer of, the Jenkintown, Pennsylvania-based multi-family office that has served the Pitcairn family since 1923, agreed.
“After G 1 through G 3, it’s harder to get buy-in, no doubt,” Voth said. “There are more voices, and they are more dispersed.”
“The kind of governance that worked for G 1, 2 and 3 is not necessarily the best for G 4, 5 and 6,” said Natasha Pearl, chief executive and founder of Aston Pearl, a firm that works closely with wealthy families. “Those succeeding generations may have to step back and rethink it.”
As families grow and add succeeding generations, family councils become more important, said family office executives and experts.
“Multi-generation families have found family councils very useful,” Voth said. “They are independent of the family office and the family business and can be used for the family to come together, communicate and train the next generation of leaders,” he said.
But even family councils become more complicated as families expand, cautioned Pearl, who is also a partner of SFO Advisor Select.
“You can’t just keep making the family council bigger,” Pearl said. “But it does have to become more representative, and that takes a lot of thought,” he said.
Later generations of families also have to come to grips with how much wealth remains and how much talent there may be to replenish it.
“There can be a complete disconnect between the hard work and sacrifice that went into creating the wealth in the early generations and G 4, 5 and 6,” said Mark Blumenthal, partner and chairman of the family office service group at Blackman Kallick, a Chicago-based accounting and business advisory firm. “Sometimes the wealth gets so dispersed, you almost have to start over,” he said.
For later generations, according to Blumenthal, the issue becomes as much a matter of creating human capital as it does wealth capital.
“Later generations often try to take a shortcut and tap into the family wealth without entrepreneurial drive and their chance of success is low,” Blumenthal said. “What expanding families need to do is build up human capital through education and training so later generations can contribute something and avoid killing the golden goose,” he said.
Pearl agreed, and said that the more families grow, the more they had to ask themselves hard questions.
“They have to ask if the pie is getting bigger,” she said. “And if it isn’t, they have to cut costs and take a realistic look at how much they can spend and focus on wealth preservation through expense management. If they want to grow the pie, they have to figure out ways family members can get funded for education and entrepreneurial ventures.”
Families also have to decide whether to allow family members and spouses to work in the family business or the family office, said Pitcairn’s Voth.
And while decisions about the family business can be the source of much hand-wringing, an ongoing family business can also be the glue that holds families together as time passes and generations multiply.
“Without the family business, families have to find reasons to stay together and keep the family office, as opposed to going their separate ways,” Young said. “Two major reasons for staying together would be having greater purchasing power collectively and having access to great investment ideas and being much better served as a group than separately.”
Whether the family business is a going concern or not, families that have grown into the fourth generation and beyond are reassessing their family offices, say industry executives.
“I’ll be surprised if we don’t see more collaboration among family offices,” Market Street Trust Company’s Young said, who describes Market Street as a single family office serving multiple families.
Voth agreed. “We’ve definitely seen family offices rethink their structure as the generations multiply,” she said.
“It’s intensified even more as families are trying to determine how they will be affected by the new financial reform legislation. But I think they are looking for partnerships with other single family offices or firms like ours. They want to keep their core staff in place and it will require flexibility, but I see tremendous change coming,” Voth added.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.Published on our website on Aug.18, 2010