Family office succession takes back seat to investments

While family offices have investment strategies down pat, the state of their succession plans paint another story, which reports suggest could undermine a seamless transfer of a vast amount of wealth.

On the plus side, most family offices have a robust investment focus and operations to support that, according to the new UBS Global Family Office Report.

Among the 307 participants, strategic asset allocation, portfolio risk management and financial reporting are most often handled internally, keeping core decision-making and oversight within the organisation.

Investment professionals remain central to family offices and operate within a broader organisational structure that supports day-to-day functioning, as well as longer-term continuity, the survey found. This is in lockstep with the support of non-investment professionals covering areas such as operations, accounting, legal support and lifestyle services, comprising 40% of total staff numbers.

Many employ formal financial performance measurement and annual budgeting processes. Specialist areas like legal services, tax planning, and cybersecurity are commonly outsourced.

UBS found, however, that activities tied closely to family dynamics show a different pattern. Only a minority have a succession plan for the family office itself or a structured approach to preparing the next generation for future roles and responsibilities.

There is also a lack of organised processes to educate and prepare the next generation for future roles or responsibilities.

Back in 2017, Deloitte surveyed family offices about generational transition. Some 69% said they expected one within the next 10 to 15 years.

Rebecca Gooch, the global head of Insights at Deloitte Private, recently told Financial Standard that this type of momentum is "seismic".

"Trillions of dollars are changing hands, and the next generation brings a different mindset - a different DNA in terms of how they want to manage and grow wealth," she said.

"We're right in the middle of this transition. Around 41% of families are expected to undergo succession in the next 10 years, but at the same time, another 41% still don't have a succession plan in place."

In Australia, Gooch observes the dynamics between many first-generation (G1) families and the emergent second-generation (G2).

"The number one point at which families are typically at risk of losing their wealth is during the wealth transfer from G1 to G2. That's the hardest transfer. The next hardest is G2 to G3," she said.

G1 to G2, however, is where families are "most at risk."

"With G1 being the founders, they're the ones who created all the wealth. And oftentimes, they're so busy running their core operating business that they haven't thought about it," she explained.

"They've never undergone a succession of great wealth before."

This often leads to a lack of succession structures, processes, governance or frameworks set up.

"The further you go down the generational track, the more you realise what you need to do, and they learn from experience," she said.

What's at stake is Deloitte's estimate of global family office assets under management skyrocketing to US$5.5 trillion by 2030.

However, Deloitte's survey found about 30% of families harbour concerns about the next generation not being adequately prepared to take on the baton.

What they are now prioritising is creation of effective succession plans and receiving mentorship and training on how to step up.

"Families that have both long-term succession plans and short-term contingency plans are the ones that succeed," Gooch said.

"They look at the next generation as a process that takes years, decades, even a lifetime, to cultivate them into good stewards of wealth."

The UBS survey suggests family members aged 30 to 39 years old are at the right stage to start engaging in family office decisions.

"Gaps in financial and governance education are cited as the main challenge, yet the vast majority of family offices still lack an organised process to educate and prepare the next generation for a smooth transition," UBS's report said.