by Cynthia Harrington
One of most challenging aspects of family office work is the transition of the advisory relationship from the first to the second and third generations within a client family. Some financial advisors are solving the problem by encouraging families to formalize governance structures.
Advisors with Frye-Louis Capital Management Inc., in Chicago, do just that. Most of the 30 clients at the multi-family office have formed executive committees. These committees include the first-generation family members, and two members of the second generation. The second-generation members usually are chosen for a particular expertise, as well as their sound business judgment. Assistant vice president Jason G. Raymond, CPA, JD, said that the structure pays dividends for the second generation: “Governance issues are really relevant in dealing with multiple generations in wealthy families.”
The executive committee structure succeeds by improving communication and decision-making. Advisors meet quarterly with the committee to review investment performance and financial and estate planning issues. The entire family then meets annually to cover the same topics and also to decide on bigger issues. The transfer of a significant piece of real estate or changing distributions from trusts would be discussed at the annual meetings, for instance.
“The executive committee helps us when making recommendations to the entire family,” said Raymond. “While the final decision still rests with the elder generation, they make it based on a consensus established at the annual meetings.”
The transfer of control is at the heart of the governance discussion. Advisors struggle with the client about sharing decision-making power, as well as how and when to do that.
“Too many float along until someone dies and then there are huge changes,” said Suzette Loh, CFP, principal of personal financial planning at Eisner LLP, in New York. Loh is the partner responsible for Eisner client relationships with the TAG Eisner joint venture. These clients benefit from the family office expertise granted TAG Associates’ 80 family clients. “But often the transition comes as the result of a scary event. And in that moment, the hard-charging entrepreneur feels their mortality.”
Sophisticated governance structures can help ensure the future. According to Beth G. Silver, an independent advisory board adds great value to the more complex family-owned enterprises. “Clients generally come to us for succession planning on how to bring in the next generation,” said Silver, who is managing director of Entrepreneurial Strategies Group, in Manhasset, N.Y. “But not as many look at the advisory board as we would like because they worry about the perception of losing control.”
Bringing in the next generation in a family-controlled enterprise clearly involves succession of the top executive. Silver advises clients on how to create mentoring roles throughout the company for incoming family, as well as on what is fair compensation. “While 10 to 15 years ago the family might be scrambling for a successor, today there’s more opportunity,” said Silver. “With more family members participating, we help them create ways to integrate all the personalities, as well as how to expand the pie.”
Silver both lives and works with family-owned enterprise issues. In addition to her advisory role at Entrepreneurial Strategies Group, she is active in managing the dozen or so enterprises owned by her family. She works with her father, CPA Leonard C. Green, who heads the New Jersey-based accounting firm of Green, Holman, Frenia and Co. LLP.
Green also teaches the family business course at Babson College, in Wellesley, Mass. Some students have decided that the family business is the place for them; others are still exploring. “Families should establish objective criteria for members wanting to come into the business,” Green said. “And if there is no one with a passion and level of expertise ready to step into the company, it’s better to let an experienced trustee manage the affairs until the family is ready.”
Their children’s children
While most of the focus in multi-generation planning is on the immediate successor generation, advisors can’t lose focus on the grandchildren or great-grandchildren.
Frye Louis solves the problem by creating a sub-entity that owns a smaller portion of the family limited partnership. Younger family members then go through the same process of information flow about investments and asset allocation. “The challenge of the third generation is how much to tell them and when,” said Raymond. “Too much too soon, and the motivation to achieve on their own is often lost.”
Families without the family business asset often develop philanthropic organizations to accomplish similar objectives. A foundation or trust can be a vehicle to impart family values and history, as well as to communicate the expectations of previous generations.
“We see these families bringing in business consultants to help educate the family involved with the philanthropy,” said Eisner’s Loh. “These families see education of the next generation as an important part of their family heritage.”
These educational efforts and objective governance structures ease the families’ transition of wealth and control. But the inclusion of future generations in all aspects of the planning process assists advisors too.
The wealth creator gets to learn how to deal with attorneys, accountants and financial advisors, and knows to show up for meetings on time, how to accomplish the items on the agenda, and the boundaries of what to expect from which expert.
“Sometimes dealing with the next generations is tricky,” said Loh. “They sometimes don’t know the appropriate level of service and expect that we might go walk the dog.”
Said Loh, “Sometimes, if the children have not been involved with the planning process, they show an amazing lack of clarity about how and why it’s done, as well as what it really costs.”
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