It's All Relative

But a lot had to happen before they could take their place in the driver's seat. For starters, the neophytes (who were in their 20s at the time) needed to demonstrate to their father they had the right stuff to handle such a lofty position. Further, they had to overcome the reaction of the firm's other employees, who as a group viewed the brothers' entry into the firm as an unwelcome development.

But a lot had to happen before they could take their place in the driver's seat. For starters, the neophytes (who were in their 20s at the time) needed to demonstrate to their father they had the right stuff to handle such a lofty position. Further, they had to overcome the reaction of the firm's other employees, who as a group viewed the brothers' entry into the firm as an unwelcome development. Lastly, the brothers had to iron out their own disagreements over division of labor and how profits from the firm would be split.

It wasn't easy, but they managed to address all the issues well enough to keep the firm a family affair. Today Herz Financial is structured as an equal partnership. It has offices in Farmington, Conn. and Boca Raton, Fla., and its total client net worth under management is $3.5 billion.

Perhaps more significantly, brotherly disagreements over how to manage the business are a thing of the past. “We know how each other thinks, and we know we can trust each other,” says Herz. “And it makes us more productive.”

About 85 percent of all businesses in the United States are family-owned, and that number probably holds true in the financial advisory industry, according to Ernie Doud, partner with DoudHausnerVistar, a Los Angeles firm specializing in family-owned businesses.

But, as the Herz brothers can attest, this doesn't mean that inside handoffs are easy to execute. Indeed, operating a family-owned practice has its own set of peculiar challenges, from a patriarch's reluctance to accept a child's criticism, to sibling rivalries, to uncertainties about the decision-making process.

Still, once the wrinkles are ironed out, a family practice can run incredibly smoothly. A close pair of siblings, like the Herzs, can develop a brand of workplace trust impossible to replicate with a nonfamily member, and a firm's founder can rest easy knowing the practice he or she built up will be in good hands after retirement.

“No matter how much I paid someone outside the family, the business couldn't mean as much to them as it does to us,” says Herz. “No other person cares as much as we do about the reputation of our family.”

Suffer the Children

Perhaps the biggest stumbling block facing family practices involves a founder's reluctance to accept children as full-fledged participants. Such arrangements, after all, typically require a new type of relationship between parent and offspring — one that doesn't come easily to everyone involved.

That's especially true if the kids are relative newcomers to the industry. “The father may have been doing something a certain way for years, and he's not about to listen to criticism from anyone,” says John Reddish, a management consultant with Advent Management International in Philadelphia, who works with family-owned businesses.

He recalls a son who joined his father's 15-year-old firm two years ago. After graduating from college with a business degree, the son was full of ideas about the best way to do a portfolio review. One of the ideas called into question whether his father's style of research and scheduling of client meetings was rigorous enough.

The father, whose three employees had never questioned his methods, didn't take kindly to the son's suggestions. “They were at loggerheads, yelling and screaming,” says Reddish.

Reddish met with them both and convinced the father that his son wasn't trying to “mess with his accounts,” he says. Rather, the son was trying to improve the business, and Reddish suggested that the father, at the very least, take a look at some of his son's recommendations.

In the end, the pair wound up scheduling more portfolio reviews for clients with volatile investment portfolios. The agreement brought an end to their fighting and improved the practice.

Not all familial confrontations end happily, however. Reddish recalls a client who joined his father's firm 10 years ago. At first, he decided to ignore the patriarch's constant criticism, figuring he had a lot of learning to do. But, after several years of steady second-guessing, the dad still refused to give his son more responsibility. The son considered leaving, but “the money was just too good,” says Reddish.

Sadly, the situation has not changed, save for the fact that the father's health has deteriorated. The son figures “the only thing to do is wait for the man to fall over,” says Reddish. “Time is on his side.”

Between Father and Son

Employees often get caught in the crossfire of these disagreements. In fact, Doud's clients first realized their conflict was getting out of hand when two key staffers left the firm.

“The father would lash out at his employees, and they figured they'd had enough,” he says.

In other instances, employees may be pressured into taking sides. Inevitably, that means supporting the founder, since “they know who's going to be calling the shots when the day is done,” says Doud. “The problem is, someday the power will shift — and then they're in trouble.”

Indeed, employees often don't much like it when children enter the practice, especially if they had their sights set on taking over at some point.

“Even if you were with the firm for years, you're not going to be able to override the owner's son,” says Tirrell Paxton, a bankruptcy attorney who has worked with many family-owned businesses.

Other complications arise when siblings are involved. The Herz brothers, for example, spent the first year-and-a-half arguing with each other about such matters as how much money they should take out of the business and whom to hire. In other cases, there are problems when siblings have a highly competitive relationship or when one of them isn't performing up to par. Generally, that's the elephant in the room that no one talks about. But when the time comes to discuss succession, “you get open warfare,” says Doud.

The more family members involved in a business, the harder it may be to keep work and personal life in their proper places. Consider Sean Clark, who joined his father's firm, Clark Capital Management Group in Philadelphia, 10 years ago. His two sisters and brother also work there. He tries not to talk business outside the office, but he says, “It's hard to know when to draw the line.”

One way to address potential problems is to make sure jobs among siblings are clearly differentiated. “You need definite job descriptions,” says Reddish.

In the Clark family, the oldest daughter is chief financial officer, the second-oldest daughter runs new accounts and client services, one son is chief investment officer and the youngest works with computer systems.

“You don't want to have direct competition,” says founder Harry Clark. When he retires, the succession plan is clear: The eldest daughter will run operations, and the oldest son will run investments, “pretty much as they do now,” he says.

You also can't leave things to chance. In fact, it's best to put in writing as much as you can — everything from your investment philosophy to who does what. After a few arguments in their first year, for example, the Herz brothers decided to lay out formal ground rules. Now they have a one-page mission statement that details how decisions will be made (if there's a disagreement, the person running that part of the business decides) and how hiring will be done (if one individual really wants someone the other doesn't, that partner must make a convincing case or the hire doesn't take place).

“We couldn't allow those resentments to continue,” says Herz. “You can leave a business, but you can't leave the family.”

When to Let Go

Of course, founders need to be willing to let their kids make mistakes without stepping on their toes. And once they've given their kids sufficient time to prove themselves, parents also have to be willing to share some of the power or, at the very least, listen to what the kids have to say. Best is a formal system of regular meetings among family members, as well as a clear understanding of how much each person's vote counts. With the Clarks, it's clear that Dad's is the ultimate vote, but usually a consensus is reached before he is forced to play king.

If founders are afraid their kids will take their criticism personally, there's another possibility. When Ted Feight's son, Richard, joined Creative Financial Design, his 24-year-old Lansing, Mich., practice five years ago, Dad also hired another rep. One reason: “So my son would understand that the things I said to him weren't just said because I was the dad,” he says.

Ultimately, if you do it right, the results will be a stronger business.

Five years ago, Kathryn Kittredge teamed up with her father, who had worked with Advest, based in Lancaster, Pa., for 17 years. Since then, she's become a certified college planner and developed a healthy business in 529 college savings plans. In the past year, she's brought in about 100 new clients as result. “It's added an important new element to the practice,” she says. “The younger generation has added a lot.”

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