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Easing Family Office Leadership Transitions

Easing Family Office Leadership Transitions

Your clients successfully sold their business and established a single family office (SFO) to invest the sales proceeds and support their family’s investment, reporting, tax and other needs. Now, they’re getting ready to retire and ask your advice about succession planning for leadership of the SFO. As it’s common for a substantial portion of the wealth of the family to be tied into the SFO, this matter takes on considerable weight within their family. Here are three important considerations as you advise your clients and prepare them for this all-important transition.

Selecting the Successor

Ideally, the identification of a successor should happen years before the anticipated transition, but this step is often the most emotionally difficult for successful patriarchs and matriarchs, who may not believe that their children are ready or that they possess the right combination of skills necessary to assume a leadership role. Successful entrepreneurs often reach their level of success through hard work and long hours in the extreme, the vision to see what might be and exceptional business acumen, with or without formal education. These traits are not as commonly found in second-generation inheritors, who don’t face the same level of adversity.

As their advisor, you might provide your clients with some perspective and your objective view on the readiness of their children to take on more of a leadership role, and you can suggest interim steps to help them get there. Further, you can help clients come to terms with the fact that, while they may never believe that their children are ready to take over, it’s important for them to plan ahead.

Not only might clients think that their children are unprepared to assume the mantle of leadership, but also, they must overcome a significant hurdle in not being ready to give up that mantle. They’ve gotten accustomed to the financial and psychological trappings of leadership, including the literal and figurative seat at the head of the table, running family meetings and holding ultimate decision-making authority. They might not be comfortable relinquishing this power role to someone else, even as they realize the necessity of doing so. A possible solution might be to develop a governance process whereby aging clients can maintain leadership, though not necessarily day-to-day management of their SFO.

One technique that’s proven effective is establishing a new “emeritus” role for the retiring leader, to smooth the personal emotional difficulties for the founder created by the transition. In this role, the retiring leader still retains a title, a continuing role with defined responsibilities and some defined perks of their position as founder.

Planning for retirement has been compared to planning one’s own funeral and brings up deep-seated fears about mortality. Advisors know too well how clients postpone critical planning out of a reluctance to discuss thoughts of their own mortality. Many of the same techniques that planners bring to those estate-planning discussions may be employed in the planning for an orderly transition in SFO leadership.

If none of the children or grandchildren have any real desire or ability to assume the leadership role, your clients might have to consider a non-family member successor. It might be more appropriate to name a long-time employee as successor. This individual could bring on more professional management of the family’s investment and tax functions, providing a greater level of accountability and service to the family than the founder generation would have. You would need to establish appropriate safeguards, not only for a compensation structure to incentivize the employee to continue on, but also for a structure to groom a successor for this long-time employee who would continue the family’s goals and values.

Grooming the Designated Successor

Once the clients have officially selected their designated successor (whether one of their children or a non-family member), the next step is determining a process to groom and develop that successor to eventually lead the family enterprise. More intensive training about the inner workings of the office and in-depth discussions about overall business vision and investment philosophy should become the priority. Your clients should undertake a detailed discussion about SFO policies and procedures, with particular emphasis paid to the distribution policies for the family members.

The designated successor will have much to learn even as s/he may have already been exposed to the inner workings of the SFO, so the transition process should be a gradual one in order for the new leader to develop the necessary knowledge base. The process can start with a shadow program, so that the successor may watch and learn from the retiring leader, not only the operational management issues, but also the values and the vision that led to the success of the family enterprise. The next step could be an interim power-sharing arrangement between the current leader and the designated successor. This step can be tricky for many reasons. Leaders have been accustomed to sole decision-making authority for many years and won’t be comfortable sharing this power. The designated successor too will struggle with this dual decision-making arrangement. The SFO employees may have conflicts in loyalty, especially if they receive mixed messages from the two sets of leaders.

The final step in the transition is the ultimate transfer of sole decision-making authority. While this is a legal matter, as the family’s trusted advisor, don’t limit this final step to the simple act of signing some legal documents. You might advise your clients to plan a big ceremony for the actual day that the new leader takes over to provide an opportunity to acknowledge and celebrate their leadership over the years, welcome the new leader and serve as a clear demarcation of the date of the transfer in leadership. This may prove critical going forward, especially if your clients overstep their emeritus roles and attempt to veto decisions made by the new family office head.

Communicating the Succession Plan

Another reason that the transition process should be a gradual one is to allow for all stakeholders to acclimate to the new leadership regime.

The non-management family members may have a more passive interest in the management of the SFO, but will undoubtedly care very much about their continued financial interest in the family enterprise. They’ll need to be assured that there’s a formal education program in place to provide for an orderly transition of SFO leadership. Some may wish to opt out of future participation in the shared family economic enterprise if they’re not assured that the designated successor leader will maintain the expected prosperity.

In addition, there may be resentment about the choice of a successor, and family members not chosen or members of their family branch may seek to disrupt the transition. Depending on how extended the family is, there may well be family members who thought they were qualified but were passed over for the top spot.

To overcome these and other objections of family members, you should establish an ongoing program of open communication, providing the opportunity for family members to voice questions and concerns and to allow for new ideas and ways of approaching the overall SFO transparency. You might suggest that special roles be created for these other family members to use their special talents on an ongoing basis.

Similarly, the SFO employees will appreciate honest communication about the planned transition and what’s expected of them during and after. They may have concerns about their continued future employment and should be reassured to the extent appropriate. If staffing changes are expected, the new leader should communicate them all at once, so that morale isn’t compromised by the uncertainty of ongoing terminations.

A carefully orchestrated transition planned well in advance may avoid many pitfalls of family office leadership succession.


This is an adapted an abbreviated version of the author's original article in the August issue of Trusts & Estates.

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