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2024-03-08

This is the second in our four-part series of articles delving into the significant trends influencing family offices, and the decisions that determine who they should hire, retain, or exit from their organizations. In this article, we explore the need for succession planning. We share both challenges and opportunities for families facing change at the executive level. Thank you Carol Hannigan of BanyanGlobal for your valuable insights.

Currently, over two-thirds of family offices are not prepared for a transfer to the next generation and have no strategy in place for succession. As stated in the Campden Wealth NA Family Office 2023 Report, over 45% of family offices expect that the next generation will assume control by the year 2034. This could be problematic for some as there are many first-gen families operating with a level of ambiguity about the family office's future. With a significant transfer of wealth set to take place in the next decade, families are vulnerable to turmoil if they do not have an established and well communicated succession plan.

There are several reasons why family offices have struggled with the concept of succession planning for future generations. To start, this topic is personal and succession discussions are often avoided as conversations on the topic can be uncomfortable. Another common scenario is that the patriarch or matriarch is struggling internally to relinquish control. Some families fail to create a succession plan because there is no obvious choice within the next generation to take the reins or there is no consensus among family members regarding the future of the family office. Those in the next generation could lack the skillset and/or desire needed to guide the family wealth, or they could simply be too young. In many cases, the next-gen is expected to gain relevant outside work experience before joining the family office team so they can contribute in a more substantial way, which can delay integration of the next generation. Lastly, succession planning is no easy feat and developing a well-crafted and thorough plan that is both practical and legally binding can become a complex, time-consuming endeavor and, when implemented, could have ripple effects throughout the family office and family business.

There can be unintended consequences from insufficient succession planning. Without a clear vision and time horizon for the family office, investment opportunities could be limited. One of the biggest investment advantages of family offices is that they have patient capital, allowing for longer-term investments. This can be especially beneficial in PE deals as the family can exercise a buy-and-hold approach. Unknowns about the future of the family office can limit deal opportunities or even worse, dismantle deals, bring about litigation, drive away talent or incite family feuds. If there is no clear plan set with guidance from the CEO or founder, decisions are left to the next-gen, of which only 40% are prepared to take control, according to the 2022 Campden Wealth NA Family Office Report. Such scenarios should give families pause and an incentive to implement a governance structure, including ongoing succession reviews.

Talent Implications

Proactivity is Essential

A proactive approach can open the door for collaboration, unity and agreement for all involved but has the potential to result in difficult conversations if the next generation is leading the charge. One solution could be to involve a third-party succession expert to guide these discussions. This outside counsel can help to ensure everyone is heard and they will act as a liaison between generations and potentially disagreeing family members. A specialist in this area will have a pulse on how other families explore succession topics, conduct family surveys and share strategies and structures that can be useful. They will tactfully engage the principal in a way that gives them say about the direction they want the family office to head, while also allowing the next generation input to develop a roadmap that everyone can agree to. One successful strategy we have seen is the formation of a governance committee within the family office, which will include representation from both generations.

In our experience, these specialists are highly skilled individuals with expertise in group facilitation and mediation. They are likely to have previously worked with family offices, perhaps in a COO, CEO or Chief of Staff role, and understand the sensitive nature of these discussions. It's important to work with a professional that has no sales agenda and can remain objective. Aside from tapping into your family office member network, a good executive recruiter could connect you with the right resources as there are seasoned family office professionals with this type of expertise acting as independent advisors. There are a few boutique firms that can offer succession support, like Banyan Global Family Business Advisors in Boston, MA. These types of firms specialize in family transitions, not managing money or selling legal services. Their priority is to focus on change management within the family office context.

Leverage Non-family Expertise

In instances where the next generation is not the suitable choice to lead the family office, succession planning is still possible. In fact, 87% of family office CEOs are non-family members, according to a survey from Northern Trust. Choosing a trusted partner outside of the family can be a good option, either to lead the family office or on an interim basis until someone from the next generation is ready. This appointment could include someone who has been deeply involved in the formation and execution of the family office structure or an individual who has experience filling this role for other families. Carol Hannigan, Principal at Banyan Global suggests “allowing at least a 12-18 month timeframe for the planning and execution of a CEO transition” is best. She emphasized the importance of taking sufficient time to step back and truly reevaluate what the current and next generation family members want, including family mission and vision, desired services, and goals for the next 10-20 years. This pause allows for a reevaluation of the family values and goals which will then aid in developing the new CEO job description and a search and selection process for future leadership of the family office. It also helps to align a communication protocol to keep the family informed throughout the process. She believes that having an external advisor is a “healthy way to help the family align on what their goals are, with guidance from an objective third party who can put all options on the table and share relevant examples from similar families.” This outside counsel will help facilitate open and honest discussions that will help create a roadmap best for the family's future.

One outcome of such a reevaluation could be to exit an existing CEO, replacing this person with fresh talent, or to create a different structure with greater alignment to the new generation's values. The key points to consider when doing so are understanding the long-term strategy for the family wealth, the vision for the wealth transfer over generations and aligning with the values and principles that guide the family. In certain scenarios, current CEOs are involved in guiding the transition when they are the ones initiating the change. For example, an advisor to Stryde played a key role as a long-term family office CEO and in the end, guided the family in dismantling the current structure for the next-gen. As the CEO of the first-generation family office, this individual advised the next generation in developing a new, modern approach to guide the family wealth into the future. End-to-end this was a process that took years, not months, further highlighting the need for long-term thinking.

An interim plan can also be a good approach if the family is not ready to commit longer-term. Either way, when drafting the job description and agreeing on necessary skills to lead the family office into the future, it is essential that the next generation is involved in this process. When hiring external successors, a consideration is to use an executive search firm specializing in family office for access to their exclusive network. 75% of families used such firms to help with search and selection for these pivotal successor roles, according to a report from Northern Trust.

Avoid Untimely Loss of Talent

The last talent consideration when it comes to succession planning is how the absence of a clear and communicated plan can give family office staff worry about the future of their role and careers. Transitions in leadership, planned or unplanned, can initiate other movements within the team. Such shifts could mean the opportunity for promotions or it could result in the elimination of roles due to a change in the services outsourced. A clearly communicated plan provides team members confidence as they have insight into the future path of their careers. Without such knowledge and foresight, individuals can become nervous and explore other opportunities. In fact, an unclear succession roadmap is one of the top reasons candidates seek out our services at Stryde Search.

Family office talent will proactively build a relationship with our team, joining Stryde’s network in order to be considered for opportunities that arise. These are Presidents, CEOs, CIOs, CFOs of ultra wealthy families who do not have a strategic succession plan in place. While many of these candidates are fulfilled in their current roles, they see the head of the family aging or family turmoil beginning to take shape. The unknown regarding the future of their position drives them to explore other opportunities before their job is eliminated and they are forced to do so. Employees want to feel in-control of their careers and when insecurities arise, great talent can be lost to more stable opportunities.

Conclusion:

Succession planning is incredibly important to the longevity of a family office. At the very least, each family should have an emergency succession plan in place, even if that means the current management will take control on an interim basis. A succession plan could involve replacing the CEO of the family office, or in the event of an unexpected circumstance, the best option might be transitioning assets over to an already selected MFO partner. It is important to remember that plans can always evolve and change, but having no plan in place can have a detrimental effect on the family and team.