It’s an all-too-familiar story for wealth managers: as a family business grows and prospers, the family’s personal wealth is increasingly intermingled with the business, and it becomes harder and harder to distinguish between the two.
But while it is commonplace, managing personal wealth inside an operating company is hardly ideal. It may, in fact, be detrimental to the long-term interests of both the family and the business, according to family business experts.
“Without separation, you begin drawing time and energy away from key executives in the business to do personal tasks for the family, and it has a very confusing effect,” said Stephen Salley, senior partner at GenSpring Family Services who heads the firm’s Family Business Center in Orlando. “It raises issues of accountability, conflict of interest and confidentiality. For example, in one family business, the chief financial officer was writing checks to the ex-wife of the founder’s son. That’s not the kind of information that should be available to him and not how he should be spending his time.”
What’s more, keeping family finances tied up in the business can also lead to conflicts between family members who are involved in the business and those who aren’t, Salley added. “If you’re thinking about protecting wealth for future generations and you have all the family’s money tied up in the company, then you’re exposed to liability and risk,” said Andrew Keyt, executive director of the Family Business Center at Loyola University of Chicago.
That said, more families seem to be getting the message. Retiring baby boomers have an increased awareness about these issues and are more likely to take action to separate family wealth from a family business, according to a new study released by the Chicago-based Family Office Exchange, “Taking Care of Business: Case Examples of Separating Personal Wealth Management from the Family Business.”
“We’re seeing more receptivity from families to making the separation,” said Dirk Jungé, the chairman and chief executive of Pitcairn, the Jenkintown-Pa.-based multi-family office who participated in the study. “People are no longer in survival mode, so they’re more willing to look at long-term planning, and they’re being faced with the transition of generations on a regular basis, so the issue is right in front of them. And as families expand, a growing number of family members are dependent on their personal wealth coming from outside the operating company.”
The recent recession and financial crisis have also made families take a harder look at separating their personal wealth from their business, according to Jungé, who himself is a sixth-generation member of the Pitcairn family. “They’re looking at the concentration of wealth in one company that just got clobbered,” he said. “Risk management has now become a much greater concern than just insurance.”
A recovering economy is also likely to be a catalyst for change, said Keyt. “There’s a natural point where separation makes sense,” he said. “And as the economy grows and businesses prosper, more families will reach that threshold.” Actually making the change, however, is easier said than done.
“Families have been doing it [keeping family wealth inside their business] for a long time, and they see change as expensive and time-consuming,” said Lisa Ottum, senior research analyst for FOX and lead author of the study. “The biggest challenge we see [to separating personal and business wealth] is getting past the mindset of cost and convenience.”
“The toughest part of getting families to do it is inerrtia,” added Jungé. “They feel comfortable with what they have, they like the control and don’t want the cost.”
But taking the plunge is well worth the trouble, experts say. “Families are taking a big privacy risk if they don’t do it,” said FOX’s Ottum. “We found that families weren’t aware of how much of their confidential information was available at so many levels of their company.”
Many first-generation business owners “feel as close to key employees as they do to members of their own family” and tend to have their best employees work on family matters, Salley pointed out. The problem, he said, is that GenSpring has found that those employees can spend up to 40 percent of their time working on family business instead of the operating business.
So how should the separation be made? Setting up a family office is one option. The question then becomes whether the family should set up a single-family office or join a multi-family office. Most experts suggest not even thinking about a single family office unless the family has at least $250 or $300 million in liquid assets, and some say the threshold should be $500 million.
Transferring data such as buy/sell agreements and trusts from the family business to a family office can be “staggeringly complex” and needs to be handled carefully, warned Salley. Creating a consensus within the family on governance and the “appropriate level of participation for each level of the family and succeeding generations” is also critical, he said.
Jungé suggested transferring several trusted employees from the operating business to the family office to satisfy the families’ “comfort level” with the new enterprise. “Using resident talent is usually a good way to begin,” he said.
Other good first steps include physically separating offices used for family finances and the operating business, setting up separate tech platforms and having different human resources departments, said Ottum.
According to the case studies in the FOX report, “successful separation does not, and should not, happen overnight. There are intermediate steps, such as creating a virtual family office or devoting one full-time employee to the family’s personal wealth, that make the process more manageable and less overwhelming.”