How Family Offices Change Over Time
Date:
Jan 26, 2015
Families change, grow and evolve from one generation to the next. So do family offices.
While family offices are first formed to serve the needs of their founders, they eventually will shift in focus toward serving the founders' offspring and extended family—the next generation. A third-generation or fourth-generation family office, therefore, will look much different than a first- or second-generation family office. This is the true beauty of the family office: it is a flexible format that can change and adapt to best serve a family’s needs, as the family grows and shifts its focus.
This “generational shift” in the state of the family office is evident in the benchmarking data FOX conducts each year. FOX has been conducting family office benchmarking studies since 1991, and the 2014 FOX Family Office Benchmarking Report™ is filled with insightful data on the differences between early- and later-generation family offices, detailing how the needs, roles and priorities of family offices evolve.
First- and second-generation family offices (G1/G2) primarily serve their founders, with 51% of G1/G2 family offices identifying the senior generation as the primary decision makers, while 80% of family offices in their third-generation or later (G3+) say majority rules or that they rule by consensus.
G3+ families are more likely to have established formal governance structures, with 40% of those either having or working on a written family constitution, 40% relying upon a strategic planning process to guide the family, and 53% providing clients with an annual report on the value of the family office. In G1/G2 family offices, there are fewer stakeholders, so there is less of a need for as many formal decision-making structures.
Meanwhile, G1/G2 family office staffs spend nearly a quarter of their time (24%) working on their investment planning process, significantly more time than G3+ families do (13%). Many G1/G2 offices are more investment-centric, but as the family grows and evolves, the focus of the office expands to deal with issues beyond the investments.
With more areas of responsibility and increasing complexity in the family office, the size of the team of external trusted advisors grows in later-generation family offices—increasing complexity in a family office demands a larger advisor team. Whereas the average G1/G2 office staff works with 24 different advisors (accountants, attorneys, investment managers, etc.), the average G3+ office works with 37 different advisors.
G3+ survey participants are also almost twice as likely to have an education program for family members (42%) than G1/G2 participants (24%). And these education efforts in later-generation family offices are happening for a reason. According to the report, keeping family members engaged becomes more of a challenge as the family grows, with G3+ family offices saying just 57% of adult family members are engaged in some way, compared to 73% of G1/G2 adult family members.
What all this data seems to indicate is that not only do family offices change from early-generations to later-generations, but that these generational evolutions are part of the reason why there is so much variation in the structure and activity of family offices. While all family offices are different, recognizing these patterns may hopefully allow for some foresight when it comes to things like succession planning, family office priorities, and organizational structure.
Have you noticed changes in your family office in succeeding generations? Feel free to share your experiences in the comment section below.