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Future-Proofing Your Family Dynasty: Series Final

Series Key Discussion Points

What follows are the key discussion points relative to future-proofing your family dynasty. This includes brief overviews of the five previous articles on this topic. To access any particular article at any time, just click on the image accompanying the relevant text. Doing so will open a new tab on your device. 

Future-Proofing Your Family Dynasty: Part 1. Overview

The House of Your Family Dynasty

Your Family Dynasty: Will It Survive?

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Introduction

Why we ask – “Your Family Dynasty: Will It Survive?“ is because it’s a question that, in essence, every dynasty must ask of itself on a regular basis. In today’s rapidly-changing world, socially, economically and geo-politically, it is vital to ensure that all possible appropriate measures are in place to protect the family dynasty.

What is a dynasty?

Whilst dynasties may refer to a line of hereditary rulers of a country, e.g., the Tang Dynasty or Ming Dynasty, within the context of this discussion we shall be dealing with the concept of a Family Dynasty.

A dynasty may also be referred to as a “house”, “family” or “clan”. Generally, the word “dynasty” is often used informally for people who are members of a family with influence and power in other areas, such as a series of successive owners of a major company.

Family Offices

What is a Family Office and what is its purpose?

A family office is a private wealth management firm established by a high-net-worth family or an ultra-high-net-worth family. In brief, it provides that family with a selection of personalised services that include investment management, financial planning, estate and tax planning, business succession planning, philanthropic investing and more.

It might handle lifestyle concerns such as careers, school, travel plans or art acquisition. In many ways, it is a full-service concierge.

We also explore “The Purpose of a Family Office”.

What are the different Family Office Types?

Traditional Family Office

A traditional family office is an entity established by a wealthy individual to manage the family’s wealth. A single-family office conducts the full-time job of managing dynastic wealth.

Multi-Family Office

A multi-family office is a firm that manages the wealth of more than one family.

Outsourced Family Office

An outsourced family office is a network of appropriate service providers—financial adviser, lawyer, accountant, et al — who collaborate on behalf of a client.

Future-Proofing Your Family Dynasty: Part 2. Overview

Do You Need a Family Office? Part 1.

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Introduction

“Do you need a family office?” may be a pertinent question to ask if you don’t already have one but perhaps have heard/read about the possible benefit of a family office for your family, then please read on.

A family office is not for everyone. However, if the level of your family wealth puts you in the category of an HNWI/F* or an UHNWI/F**, then a suitable family office structure becomes a highly desirable vehicle for managing your wealth.

HNWI/F* – High-Net-Worth Individual/Family

UHNWI/F** – Ultra-High-Net-Worth Individual/Family

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Future-Proofing Your Family Dynasty: Do you need a family office? Circular image of manor in background with caption Family OfficeHow do you start up and build a family office?

First up – a business plan is a “must do”.

However, before creating a family office business plan, the family must determine their expectations, priorities and scope to decide what services they need.

Establishing a family office is a major undertaking that may not live up to the family’s expectations. It is important therefore to factor in potential doubts and shared areas of concern. In particular:

◼ COST

The cost of running a family office and carrying out regulatory and compliance reporting is high. Before a family office can viably offset its fixed costs, a higher level of assets under management will be required.

◼ TRUST IN EXTERNAL MANAGERS

To set up a family office, a family must have a certain level of trust in working with non-family asset managers and advisers. As trust is typically built through long-standing relationships, the next generation of family members may need time to develop the same level of trust.

◼ EXPECTATIONS AROUND RETURNS

Ultimately, family offices rely on their longevity to ensure wealth preservation.

◼ MARKET, LEGAL AND TAX INFRASTRUCTURE

Family offices tend to function better when they operate in liquid and sophisticated markets within stable legal and tax systems.

After weighing the potential benefits and drawbacks of setting up a family office, the family can begin preparing the family office’s strategic plan to avoid operating on a deficit basis in the long term, that is, purely as a cost centre.

Future-Proofing Your Family Dynasty: Part 3. Overview

Do You Need a Family Office? Part 2.

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Future-Proofing Your Family Dynasty: Part 3. Do you need a family office? Part 2. Family Office Structure - people silhouettes against sunset backdropIntroduction

In our previous article – “Do you need a family office? Part 1″, we explored the issue of “need” for a family office. In particular, we looked at those individuals and families who are likely to benefit most from having one.

The next step is to examine the intricacies of a family office legal setup and structure and associated jurisdiction criteria.

The Legal Setup and Structure and Associated Jurisdiction Criteria

As with any form of enterprise, family businesses and dynasties have a history of failures as well. The pity of it all is that, almost without exception, such failures could have been readily avoided.

You only have to watch the British TV series “Antiques Roadshow” to learn about the many family dynasties that survived for hundreds of years only to disappear in a comparative heartbeat. Why did that happen? Well, a number of factors contributed to their downfall but the main one was poor governance or a lack of it (more on that later). Which brings us to the topic of a family office legal setup and structure.

THE LEGAL SETUP

It is vital to understand how the jurisdiction can shape the business environment. Australia has a less contentious and less complex sets of ‘rules’ variances from State to State/Territory. As such, this factor makes it relatively easy for a family business when choosing its location. To begin with, it is helpful to establish if the family office will:

STRUCTURE

The structure refers to the kind of entity that will house the family office and ownership, both in the present and in future generations (assuming
the office intends to support more than the first generation).

CRITERIA

Based on the diverse global interests of the family, the next step would be to investigate and weigh the particular benefits and drawbacks of various structures and jurisdictions.

GOVERNANCE

After setting up a family office, the application of good governance practices is crucial to ensuring competent management of the family’s financial assets and investments.

BOARD OF DIRECTORS

When the wealth is transferred to the next generation, there may be a need to elect a strong and active board that will take all family members, even those with conflicting interests, into account.

ACCOUNTABILITY AND CONFLICT RESOLUTION

If family members take on the responsibility of governance, they also need to understand their accountability to the rest of the family.

In discussing the issue of “justice”, it’s important to recognise that there are several takes on what constitutes “justice”. They can include:

DISTRIBUTIVE JUSTICE

Distributive justice concerns the outcome related to allocation. It is not only about the absolute outcome, but also the ratio between family members’ input and relative output.

PROCEDURAL JUSTICE

Procedural justice refers to how family members feel treated during the process, resulting in a certain outcome.

INTERACTIONAL JUSTICE

Interactional justice reflects the extent to which decision-makers are sensitive to how people feel about a possibly unfavorable outcome.

Family offices can support the family by mediating potential conflicts through different services. Ultimately, family offices can assist the family in developing an effective conflict management style as opposed to avoidance or the domination of a few family members in decision-making.

DILEMMA BETWEEN FAMILY AND NON-FAMILY MEMBERS

Conflicts may go beyond the family and involve non-family members, depending on how the family office is staffed.

To help tackle challenges and conflicts effectively, family offices may call on boards, investment advisory committees, the personal involvement of other family members in select areas, incentive systems for non-family managers, and/or other monitoring systems.

Future-Proofing Your Family Dynasty: Part 4. Overview

Your Family = Your Keys to the Kingdom

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Future-Proofing Your Family Dynasty. Your Family Office = Keys to the KingdomIntroduction

In our previous Family Office-related posts, we have discussed at length the more “technical” issues surrounding the formation and maintenance of Family Offices.

Here, we are going to have a closer look at ways and means to strengthen the family office’s link to the Family.

Your Family Should Hold the Keys to The Kingdom

Multi-generation longevity, is for many, (and should be the goal for all Family Offices), the key objective of a Family Office. Hence, the creation of a long-term family dynasty is more likely to be assured with this in mind – and in practice.

So, the key question then is how best to achieve this?

Use the Family Enterprise approach to construct the Family Office you need.

Family Offices that anticipate the family’s trajectory and increasing complexity, by taking a ‘Family Enterprise view,’ stand a better chance of achieving two outcomes: creating value for the family in excess of its cost and secondly, succeeding over generations (future-proofing your family dynasty, if you will).

The entirety of a family’s meaningful activities and assets is called the Family Enterprise, which includes the core operating businesses, non-core businesses, real estate investments, tangible assets like art collections and family homes, philanthropic activities, governance bodies plus other pursuits that carry the family’s DNA and reputation.

The Activities of a Strategic Family Office

Family Offices are well positioned to centrally manage many of the family’s strategic activities beyond the growth of its financial portfolio. These Family Offices direct and support critical functions including:

  • Implementing the long-term goals and vision of the family
  • Executing the Family Council’s agenda
  • Administering family governance
  • Designing talent development programs to prepare the next generation (with the Family Council), and
  • Other activities to improve the chances that the family, not just its wealth, thrives over generations.

The work of the Family Office being driven by the family’s mission and vision.

The Family Office deserves to have a mission and vision that pursues the family’s multi-generational sustainability and success as a family.

Five Common Challenges of a Family Office

Every Family Office has a unique history and developmental trajectory. Nevertheless, history reveals that there are five common challenges in the evolution of a Family Office. As such, it has been shown that these are often the cause of a weak link between the family and the Family Office.

Future-Proofing Your Family Dynasty: Part 5. Overview

Effective Strategic Planning & Succession Planning Strategies

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Introduction

Desirable Succession Planning outcomes are dependent upon well-executed Strategic Planning.

Once your family office is operating under the initial plan (i.e., family charter), its strategies may require an annual evaluation.

For that reason, your executives may need to take the initiative to ensure continuous planning of the family office strategies.

Ten-year strategic plan

Family offices that have existed for a long time and support multiple generations tend to formulate a five or ten-year strategic plan.

There are three major elements often considered in such a plan:

Succession planning

Preparing family members for leadership takes many years, whether that involves leading the business, governance committees, or the family office itself. 

Business or investment growth

Families may consider starting a new business or a large real estate development plan. 

ESG (Environmental, Social and Corporate Governance), sustainability, and impact investing and philanthropy

Some families set ESG goals that centre on the avoidance of controversial sectors. Others aim for more direct societal impact through, for example, the support of a particular community by providing higher education or solving health issues. 

Future-Proofing Your Family Dynasty - Strategic PlanningStrategic Planning – The Right Way

Annual Strategic Planning

In contrast to the other kinds of planning, annual planning involves the evaluation of the previous year’s activities. It also covers the setting of goals for the coming year and an action plan to achieve them.

Reflection

An honest look at the past year will involve asking certain questions. How have the family and the office performed against the current annual plan? What are the strengths and weaknesses of the family office? 

Feedback for improvement

It is valuable to find out what family members think about the office, staff, and the support provided. The older generation might be satisfied with the office, for example, while the younger generation would prefer to make changes.

Risks

This is an opportunity to reflect on succession planning, risks related to staff or operations, and potential economic, ESG, legal, or tax matters.
How might these business risks impact the family, and how might family risks impact the business?

Family office operations

The annual evaluation is a good time to assess the family office and its current operations. This is because priorities often change over time. 

Technology

Family offices can use the annual evaluation to compare current offerings against the rapidly changing marketplace. Assessing how the various technologies work together to meet their needs may well result in the need to explore various aspects of digital transformation strategies. 

Family initiatives

New initiatives and the potential role of the family office could also be considered. Initiatives might range from business ventures and real estate development to new philanthropic initiatives, an upcoming family meeting, or even the planning of a major family anniversary.

Budgeting

The evaluation of the above will help determine the budget for the coming year and the plan for funding it. If the family agrees with the plan and
future initiatives, they will be much more likely to agree on the required funding.

Succession Planning at its Best

Devote an appropriate amount of time and resources to both financial and non-financial goals of the family.

The Family Office is often the right place to centrally manage and execute important, non-financial activities on behalf of the family and Family Council.

Below are several examples of these non-financial activities:

  • Support family governance by executing the activities of the Family Council
  • Structure talent development programs for the family
  • Organise philanthropic activities in the absence of a family philanthropic foundation

 

The Family Protocol

A family protocol is a document or contract where a set of agreements between family members are set out. Families that own a family business often need to establish the rules that regulate: their relations with the Company, the way to solve conflicts, hiring, how to achieve the continuity of the company over time.

Succession planning with a purpose

Family offices can help prepare and execute succession plans.

Succession planning as an imperative

In the next two decades, it is estimated that an astounding AUD 3.5 trillion of family wealth will be transferred from one generation to another!

Planning for generational change 

Because succession planning is not a one-off event but rather, a process, families often underestimate the potential problems and need for plans and procedures.

Building on shared values

There are three specific areas where family to ensure a smooth transition of wealth and maintain a sense of family unity.

Establishing a governance model

A clear and professional governance structure is the  cornerstone of successful cross-generational families. A solid model will reinforce the transfers strengths of the family business and help the family develop strategies together, based on a common set of values.

Fostering dialogue between family

Effective communication about wealth, relationships, and family business ownership is essential to building and sustaining high-performing family businesses. 

Drafting a family investment philosophy

The purpose of a family’s wealth should be discussed early, often, and across generations. 

Future-Proofing Your Family Dynasty - Governance SchematicA holistic governance structure is necessary in order to have an effective Family Office

As has been discussed in earlier articles, a Family Office tends to oversee a broad range of activities and services. Such complexity necessitates the family to be clear about its direction and goals. Similarly, the Family Office needs to be clear about its responsibilities and authority relative to the successful operations of the entity. 

How A Wealth IQ Adviser Can Help You With Your Family Office

Whilst Wealth IQ advisers are highly qualified professionals who specialise in:

Tony Skinner - Founder and Senior AdviserThe Wealth-IQ Group, led by Tony Skinner, is a professional, holistic financial services company, based in Adelaide, South Australia, with well over 35 years of experience. Therefore, we understand that our relationship with each client will be built on trust, integrity and professionalism.

To learn more about the services we offer, please take a look at our website.

The Wealth-IQ Group is committed to providing you with the best possible service, and we are proud of our reputation for excellence. We shall always act in your best interests as well as endeavouring to exceed your expectations. Our team of dedicated professionals has extensive experience in financial planning and wealth management.

Moreover, we are committed to providing a high level of personal service and expertise, while remaining client focused. Our team of advisers provides a range of financial advice and solutions to help you achieve your financial goals.

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