In recent years, audiences have been captivated by the Roy family saga and her vocation on HBO’s hit show. succession As they navigate a series of crises brought on by the head of the family, very sudden and severe. But the drama that is playing out on television is now playing out in real life too – with very real consequences – thanks to the unprecedented COVID-19 pandemic.
For family offices, whether nuclear or multi-family, the pandemic has presented the very real possibility that family members may suddenly become seriously ill or become disabled. As a result, due to the confusion and complex complexities behind the transfer of wealth, power, and strategic control across generations within the office, these families may grapple with unwanted and potentially very harmful crises.
But the good news is that these crises are completely avoidable. There’s a way for family offices to prepare themselves for the worst-case scenario, whether it’s COVID-19 or something else entirely: Prioritize succession planning.
Avoiding Succession Crisis
Generational wealth transfer has been fast approaching for several years, and with it, family offices need to re-think about family business, investment, and office structure. This not only involves well thought out legal holding structures, but also engages the younger generation in governance of such vehicles and ensures that they have enough time to expedite the inner workings of the family office.
According to WealthX and IQ-EQ, $15.4 trillion in wealth from individuals with a net worth of $5 million or more will be transferred to younger generations over the next five years.
However, structuring a family office, and setting it up to flourish once property and control are passed on to the younger generation, is becoming more complex. Globalization means that families own family members and assets – real estate, digital assets, bank accounts, investment portfolios – are spread across the globe. This cross-border fact pattern, in turn, brings with it a number of complexities and risks that need to be addressed and mitigated, including inheritance laws, matrimonial arrangements, privacy concerns, tax rules and other regulatory and compliance obligations. To combat these complexities, family offices are increasingly turning to specialized outsourced providers that can provide families with meaningful and useful reporting and analysis of their assets and their performance, regardless of where the family members and/or assets are located. also be located.
adapting to the future
Although the older generation may not see the way with the new generation entering new ventures, family offices must adapt to the future and ensure that a foundation is established for the next generation to succeed. The younger generation often has different preferences than the older generation, such as impact and ESG investing, digital assets, and co- or direct investments, which their parents may not focus on.
As decision-making power is delegated to the younger generation, the funds allocated to effect investments will continue to grow. According to UBS’s Global Family Office report, 56% of family offices are already investing in Impact or ESG assets globally, 62% are driven in sustainable investment primarily because of its positive impact on society, and nearly half Seeing this as the main way. To invest in the future. The US has historically lagged behind other regions such as Asia and Europe, but, according to a CNBC survey, A third of millennials already exclusively or frequently use investments that take ESG factors into account. This suggests that family offices in the US are likely to engage in sustainable investments at a higher rate in the coming years.
Aside from sustainable investing, the hype about digital assets – from boring apps like NFTs to Yacht Club to bitcoin – won’t go away anytime soon. While most family offices are testing the waters with some exposure to the crypto world, 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 the source of funds related to digital assets, and how they can be structured within a trust and/or other holding vehicles. Is.
Asset managers, fund managers and similar family offices have a lot of flexibility in what they invest, how they invest, and the time horizon of investments – compared to traditional money managers. Family offices are becoming increasingly more sophisticated and using institutional-like practices that, in practice, mean that more family offices are either investing directly in property or co-investing with other family offices. This puts them in direct competition with private equity funds. Driven by the growth of wealth globally, this trend will continue to snowball, as family offices bring investment decisions in-house but outsource administration and execution.
It is never too early to start planning. Family offices must now initiate the generational wealth transfer process to avoid the risk and pain of an internal succession crisis. Family office money and the types of complications faced by families will continue to increase. Therefore, planning succession long before any unforeseen, sudden or unforeseen events, will help set up family offices for ultimate success.
Darrell King is the Director of Private Wealth of America at IQ-EQ.