In the last couple of weeks, UBS published its 2020 survey of Family Offices. Amid the report and its thought provoking output is a statistic that could be easily glossed over. Namely that 70% of the offices surveyed were founded since the year 2000 – a fact with numerous implications.
At a high level, this tells us that the “family office” industry is still relatively nascent. Over the coming years, individual family offices and the industry writ large will face a maturation process similar to any well-established industry.
Today, we would like to consider one facet of this maturation – namely how the office overlaps with the generations of the family served. Family offices, just like families, have ‘generations’ that raise both new opportunities and challenges to address.
The G1 Office
The G1 office is generally created as the wealth creator’s household financial needs reach a level of complexity where staff support is required. Often time this is coincident with a liquidity event which creates a large pool of capital to be deployed as well. The complexity of a G1 office, while busy dealing with the issues around formation / emergence, is lower simply due to the lower number of constituents to which the office reports. The office and its staff are focused on the needs of the wealth creator and spouse. Customization is the name of the game. Services delivered are tailored to the highly specific requirements and desires of the founder and immediate household.
The G2 Office
As G1 ages and reaches old age, the office begins to shift to focus on the needs of the G2. This transition can be fraught with tension and risk. The scope and depth of services delivered to the “parents” are less likely to be affordable to do so for all siblings. Such ‘sibling partnerships’ begin to engage in a sensitive and tricky discussion of what services are most important and who is going to pay for them?
This discussion is further complicated if any / all of the siblings professional occupation is tied to the family office such as serving as president, chief investment officer, etc. And certainly let’s not forget the issues of sibling rivalry / tension that while formed in childhood and adolescence often continue to rear their ugly heads for decades into the future.
G2 offices are often “caught in the middle” of a still living G1 (who may still retain legal control of the family’s wealth), and a growing G3. How the G2 manages its own wealth, while waiting for a potential inheritance and facing pressure to pass assets down to future generations is highly complicated. One upside to a group of siblings and spouses is generally the manageable levels of numbers. Coordinating meetings and discussions, while not easy, is still not insurmountable with a sibling group.
The G3 Office
One further generation down, the office shifts to serving a large, growing, and likely dispersed constituency. Generally by this stage, wealth is likely held in trust for tax and risk management purposes. The task for a G3 office is to focus on delivering a core set of services that are scalable across a larger group. If G2 had to determine “what” the office was to do for them, the key question for G3 is “why bother?” Convincing the generation of the value of the office requires new skills for the office around communication and marketing. While the task is different for marketing to an external audience, the office must demonstrate its on-going value to the family to drive buy-in and support.
As well, G3 offices face the question of governance. With a large set of diverse stakeholders and viewpoints, helping the family align on the priorities of the office and how to pay for them, requires a governance structure that is robust enough to develop leadership talent within the family and reach consensus about how to proceed.
The G(X) Office
Generations beyond G3 are more to the same with an evolving level of degree. The family continues to grow in number, while the wealth level on a per household basis likely continues to fragment to some degree. Few current offices have reached this level, but if we look back at history we can see examples of how offices addressed these challenges. Because offices are largely fixed costs, as the family and office grows, finding ways to deliver additional compensated services to a growing client base becomes key. Many of the Robber Baron era family offices addressed this scale question by opening to outside families, layering in trust services, service as trustees for mutual funds etc.
All family offices will experience growing pains as they reach organizational maturity. But understanding the ‘generation’ of the office can help the family and team appreciate the commonality of the questions they are working through, as well as identify what are likely to be challenge points coming in the future. A key dynamic for success in navigating each stage’s challenge is to build a network of peer offices (at a similar stage) and other offices that are further down the road. While each family must articulate their own path forward, learning from the experience of others can be an invaluable way to help accelerate the process.