Over the years families in business manage to build family wealth and assets and by the second or third generation we find family shareholders who are working in the business and others not and families who own considerable wealth and are not sure how to manage it. When families have these scenarios they will start facing stressful relations as a result of the different expectations and aspirations in their relation to the family wealth and success they would have inherited or bought, or a combination of both. Over the years families in business would have started to internationalise, with children or other family members studying and/or living in different countries but each having an interest in their joint investments and/or business. At the same time the meaning of a family is drastically changing and has earned a much wider meaning incorporating more people and having to face the reality of the increased occurrence of divorces and separations. All those involved, will have a different understanding of the family wealth and success generated by previous generations. At the same time legislative obligations is making privacy of family wealth more difficult to achieve.
As a result all of the above scenarios, the family wealth and success is being jeopardized due to the increased forms of wealth leakages that exist. With a larger and more dispersed family, threats may also arise as a result of the different legislative obligations found in the diverse jurisdictions. Thus the importance of organising your family wealth in advance of any triggers that could set off conflicts between the various involved parties. Hence developing family governance practices and having regulation compliant family wealth planning structures in place will result in most treats being planned for and mitigated.
Family Wealth Protection
Wealth is generated over generations but it could take only part of one generation to destroy that family wealth and success. Research has shown that families, who have not invested the time and resources into the succession planning process and how wealth will be managed, will end up fragmenting their family wealth if not losing it altogether through litigation costs and other competitors pouncing to acquire the business from the litigating family.
Other potential threats that families face arise as a result to assets being frozen on the death of the owner, matrimonial disputes, separations and divorces which could result in massive family wealth leakage and the devolution of the estate. On the other hand reasons to embark on governance and succession planning relate to such non-financial reasons as the avoidance of family disputes over who controls what and who receives what, protecting your family and business name due to the possible destructive litigation that such conflicts could end up with and focusing your energy on the family’s shared objectives.
The Structures Available for Wealth Planning and Governance
All the potential threats mentioned and others emphasis the need for forward planning through the implementation of various tools depending on the size of the wealth and/or business and the intensions and objectives of the family. Some of the available tools are:
- Proper corporate structures including international corporate structures that could render your business more tax efficient
- Use of Trusts to safe-keep and transfer assets to the next generation but care must be taken as to the objectives of why the trust is being set up
- A Foundation to be used for active philanthropy purposes
- Use of Life insurance policies to plan for the retirement of current generation family members without creating any future burden on the business
- Setting up of the Family Assembly and or Family Council so as to provide for an active forum in which the family could discuss its issues
- Different forms of agreements such as wills, prenuptial agreements, Family Charter and Family Constitution
The Internal–External Conflict
One of the biggest conflicts that can arise within a family office is that between the family or families that own the wealth (the principals), and the Family Office managers and external service providers (the agents). History indicates that family businesses are not new to such conflict between principals and agents, with families typically encountering such problems as their business develops and their interests and expectation diversify with a growing family. But concerns about tension between principals and agents in family offices bring with them issues that are unique to the delegated asset management.
As such there is great importance to clearly establish first of all what the family stands for and what its objectives are and then these are clearly communicated to the Family office managers who have to implement the family’s intensions. In this way the mismatch of expectations can be managed and which will also affect the level of costs incurred as a result of the setting up of the family office.
An increasing common area of conflict is how the investment advisers are compensated for their advice and services and how their performance is to be measured. Another contentious area is that related to the investment horizon since family offices tend to have a longer term investment horizon, whilst investment agents will be very aware on their commissions and other forms of compensation that they will be receiving.
The Importance of Family Governance
Having good governance procedures within the family office is as important as in companies. Family governance is a process where joint decision making, structures and policies are established through the setting up of the family assembly and/or council and by having a legally binding family constitution. This will help the family to govern its relationships between its family wealth and its business. Through such structures the family governance aim will be to ensure rational economic and family decisions that will support both the family well being but also that of the business.
Hence the family office managers will oversee the efficient operations of the family office whilst at the same time liaising with the family to safeguard their interests. By effectively managing the relationships between the family, the business and their wealth, the family office will help to avoid conflicts, support the attainment of financial objectives, protect and promote the family unity in relation to its financial, human and social capital.