Why only half of North American family offices have a succession plan

From Succession to Empire, Dallas and Dynasty, television audiences continue to be fascinated by shows featuring strong families and the businesses that define their aspirations. Just as in television dramas, succession planning is a critical process in real-life family offices, representing all of the passions, dreams and aspirations that concern every family.

Should the business be sold when key family members pass away? Who will take ownership? Will control of the enterprise be shared or vested in a single individual? Will your spouse or children play key roles?

These are important questions that require answers before a transfer of wealth, roles and power. However, according to the Campden Wealth North America Family Office Report 2022, only 54% of North American families have a succession plan in place—and only 45% of those plans are formally written.

Many families are unprepared for the road to successful succession

“Many families are unprepared for the road to successful succession and ensuring that the next generation is well qualified to take over,” says Sylvia Rizk, Director of Client Coverage at RBC Investor & Treasury Services. “And to be honest, talking about the eventuality that you will pass away is a difficult subject. Understandably, family business leaders are emotionally attached to their businesses, and succession planning requires them to say ‘this is what the business looks like without me.’ That’s difficult for anyone to contemplate.”

Crafting a formal, written succession plan is a critical undertaking for a family office. But even families who understand the importance of such a plan may be reluctant to take this step.

A succession plan will assign different roles to various family members at some point in the distant future. Perhaps some family members are not yet ready to assume those roles. Perhaps the decision to appoint family members to key roles will inspire hard feelings.

Formalizing the succession plan will bring potential future conflict into the immediate present

“If you believe that one of your children has the makings of a CEO, another could be treasurer, while a third may be unqualified to take on any leading role, those decisions will likely create conflict in the future,” Rizk says. “Formalizing and sharing the succession plan today will bring potential future conflict into the immediate present, and that may be another reason why family offices are reluctant to create and share a succession plan now.”

Families may even be sensitive about disclosing the full extent of their wealth, out of concern that it may affect the relationships of their children with their peers.

Preparing NextGens to take on the roles they appear most qualified for is an important step in succession planning. But concern about tipping one’s hand and taking too long to engage the next generation may kneecap an effective succession plan. A particular individual’s emerging interest in assuming family roles may need to be nurtured in order to become fully realized. Even family members with an interest in taking on key roles may feel unqualified and incapable, and that will affect their morale, Rizk says.

Preparing NextGens to take on the roles they appear most qualified for is an important step in succession planning

The Campden Wealth Report notes that 40% of survey respondents expressed concern that members of the next generation weren’t qualified enough to take on a leadership role in the family office. That’s why training and engaging NextGens is so important. But it requires ample time to develop their interests and skills.

So how can family offices increase NextGen engagement early on?

“They can slowly integrate them into the day-to-day workings of the family office in limited roles so that they can begin to understand the complexities,” Rizk says. “This engagement not only builds experience, it also builds credibility and trust with the family and the entire team.”

Engaging NextGens may also require the family office to expand the definition of what it does. This could involve exploring new avenues and opportunities for investing, such as cryptocurrency, cannabis or artificial intelligence—developing their interests and talents, but also maintaining the relevance of the enterprise. It may mean allowing them to further explore philanthropy or ESG, for example.

Engaging NextGens may require the family office to expand the definition of what it does

Rizk says the extent of a family’s wealth can be shared with family members in stages as they mature. This can progress from discussing the family office values and beliefs, and the story of the family’s success, to need-to-know information, from the general to the specific.

“Ultimately a succession plan is not so much about what the family office currently is, but about what it hopes to be,” Rizk says. “It’s about people, purpose, values and creating a lasting family legacy for the future.”

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