According to Statista, there are an estimated 323 billionaires worldwide who inherited their wealth, indicating that there are many multi-generational families with sizable assets. Many of these families established a single-family office in the past to oversee various aspects of their wealth, but the leadership of these family offices is aging, and change, as unpleasant as it may seem, is impending. There are several different ways for families to approach the inevitable transition that involves their family offices, but each approach has both long-term and short-term ramifications. In the end, however, there are a host of benefits to such a transition.
Clarifying the Term “Family Office”
The family office, and the “family office industry,” has been rapidly evolving for some time depending on how you define when the concept of a family office was first implemented. For the purposes of this article, the family office industry is divided into three categories: single-family offices (SFOs) that serve only one family, multi-family offices (MFOs) that have banded together and serve a number of different families, and firms that provide family office services as one of the services they provide (e.g., RIAs, banks, accounting and law firms). This article will focus on the development, growth, and transition of the single-family office as its leadership begins to age — and how MFOs and other options could take the place of aging single-family offices.
Advent of the Family Office
As mentioned above, the advent of the family office and related “family office industry” can be traced back many years (some credit the Rockefeller family with establishing the first one); however, it is fair to say that the modern concept of the family office industry came of age around 1990. From that time onward, there was a proliferation of family offices. Since 1990, these family offices have changed significantly as the concept behind them matured.
Demographics of Family Offices
The individuals founding family offices (e.g., patriarchs, matriarchs, principals) during the early years of the family office were typically middle-aged and above, mainly in their 50s or 60s. Adding 20 to 30 years to their age, these same individuals would now be anywhere from 70 to 90 years old. The staff running the family offices when they were first founded were also middle-aged or older, indicating that they, too, would be well past retirement age by this time.
Family Office Succession
Because the staff of the single-family offices are now typically at or beyond retirement age, there is a distinct need for either succession or replacement of the single family office and the services it provides. This is a difficult situation for many reasons. For example, the family office has evolved to meet the needs and preferences of the family that it serves, meaning that many of the services and the form they are provided in have been tailored to that family — and customization to a level that will please multiple generations will be challenging. In fact, finding a new person to head the family office will be problematic because there may be different generations involved in the selection, and they may not see eye-to-eye with the original founding generation and founding staff. In addition, the institutional knowledge of the staff is deep and cannot be easily replaced. Change will simply not be easy. Nevertheless, the effects of time on people and institutions cannot be avoided. Another potential area of concern is that there may be no clear successor to the leader of the family office.
Solutions to Aging Family Office Leadership
There are several potential solutions to aging SFO leadership, including the following:
- Dissolve the SFO and distribute the assets to the next generations;
- Find replacements for the SFO staff;
- Merge with another SFO;
- Or outsource the service to an organization that performs this service.
Ramifications of the Solutions
There are, of course, going to be ramifications and potential complications involved with each of the potential solutions of action just listed.
When it comes to dissolving the SFO, the principals and subsequent generations may not want to lose all of the benefits that a dissolution would entail. A reluctance to give up the benefits of a family office would quickly rule out the possibility of dissolving the SFO, but some branches of the family might prefer to hire their own advisors and handle their own portion of the family wealth. However, the rise in popularity of family offices among the wealthy seems to indicate that this would not be a popular course of action.
Finding replacements for the staff can be problematic for obvious reasons, the least of which is finding qualified persons and attracting them to an organization that is in transition. Furthermore, with the aging of principals and key staff, there is an opportunity to completely reevaluate the SFO and its needs going forward, which could mean that a very different approach to organization and skill sets might be preferable. On the other ha