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Planning for Succession Success

Set your family office clients up to succeed. Prioritize the succession plan.

In recent years, audiences have been captivated by the saga of the Roy family and their business on HBO’s hit show Succession as they navigate a chain of crises brought on by the head of the family’s very sudden and serious stroke. But the drama that has been playing out on television is now also playing out in real life—with very real consequences—thanks to the unprecedented COVID-19 pandemic.

For family offices, whether single family or multifamily, the pandemic has presented the very real possibility that family members could suddenly fall seriously ill or become incapacitated. As a result, these families may grapple with unwanted and potentially very damaging crises, due to confusion and the intricate complexities behind the transfer of wealth, power and strategic control across generations within the office.

But the good news is that these crises are wholly avoidable. There is a way for family offices to prepare themselves for the worst, whether it be COVID-19 or something else altogether: Prioritize the succession plan.

Avoiding a Succession Crisis

The generational wealth transfer has been fast approaching for several years and, with it upon us, family offices need to think again about the structure of the family business, investments and office. This includes not only well-thought-out legal holding structures, but also involves the younger generation in the governance of such vehicles and ensuring they have enough time to get up to speed with the inner workings of the family office.  

According to Wealth X and IQ-EQ, as much as $15.4 trillion of wealth from individuals with a net worth of $5 million or more will be transferred to the younger generations over the next five years.

However, structuring a family office, and setting it up to thrive once assets and control have been passed to the younger generation, is increasingly becoming more complex. Globalization has meant that families have family members and assets—real estate, digital assets, bank accounts, investment portfolios—spread out across the globe. This cross-border fact pattern, in turn, brings a range of complexities and risks that need to be addressed and mitigated, including succession laws, marital regimes, privacy concerns, tax rules, and other regulatory and compliance obligations. To deal with these complexities, family offices are increasingly turning toward specialized outsourced providers who can provide the family with meaningful and usable reporting and analysis of their assets and their performance regardless of where the family members and/or assets are based.

Adapting to the Future

Although the older generation may not see eye to eye with the newer generation on how to enter new ventures, family offices must adapt to the future and ensure a foundation is established for the next generation to succeed. Members of the younger generation often have different priorities from the older generation, such as impact and ESG investing, digital assets, and co- or direct investing, which their parents may not be as focused on.  

As decision-making power is handed over to the younger generation, money allocated to impact investing will continue to grow. According to UBS’ Global Family Office Report, 56% of family offices are already investing in impact or ESG assets globally, with 62% primarily driven into sustainable investing due to the positive impact it has on society, and roughly half seeing it as the main way to invest in the future. The U.S. has historically lagged other regions like Asia and Europe, but, according to a CNBC poll, one-third of millennials already exclusively or frequently use investments that take ESG factors into account. This suggests that family offices in the U.S. will likely engage in sustainable investing at a higher rate in the coming years.

In addition to sustainable investing, the hype around digital assets—from NFTs such as the Bored Ape Yacht Club, to Bitcoin—is not going away anytime soon. While most family offices are testing the waters with some exposure to the world of crypto, increased regulation in this area will only increase interest. The world of digital assets is still opaque, and family offices need to understand how they verify source of wealth pertaining to digital assets, and how they can be structured within a trust and/or other holding vehicles.

Compared with traditional money managers—asset managers, fund managers and the like—family offices have much more flexibility in what they invest in, how they invest and the investment’s time horizon. Family offices are increasingly becoming more sophisticated and utilizing institutional-like practices that, in practicality, have meant more family offices are either directly investing in assets or co-investing with other family offices, bringing them in direct competition with private equity funds. Driven by an increase of wealth globally, this trend will continue to snowball, as family offices bring the investing decisions in-house but outsource the administration and execution.

Planning Ahead

It is never too early to begin planning. Family offices should begin the generational wealth transfer process now to avoid the risk and pain of internal succession crises. Family office wealth and the types of complexities families face will only continue to increase. So, planning for succession now, far in advance of any unforeseen, sudden or unpredictable events, will help set family offices up for ultimate success.

Darrell King is director, private wealth, Americas, at IQ-EQ.

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