Family offices: nine ‘fatal’ pitfalls and strategic challenges
Family Office Compass
UBS Family Office Compass, which launched earlier this week, offered a strategic toolkit for family offices to flourish in a brave new world.
‘Like any other organisation, the family office faces pitfalls and strategic challenges that owners need to watch for. Some of these can be fatal - whether in the second generation or in the tenth,’ UBS noted.
‘It is well known that conflicts in the ownership group are among the worst pitfalls to avoid. Succession crises and failed leadership transitions are equally destructive. Losing relevance to the next generation is another existential threat. A strategic family office can take timely action to avert disaster.
UBS highlighted nine pitfalls and strategic challenges facing family offices to help them avert 'disaster'.
1: Conflict in ownership
In this scenario, the family office becomes a battleground, where suspicion and lack of trust reigns supreme.
‘Conflict arises among owners with differing interests, views, or goals; when these become entrenched in the family office, it quickly becomes a battleground. Suspicion and erosion of trust among the owners must be avoided at all costs,' UBS comments.
‘With this in mind, the family office can insist on its primary role to enable family unity. It achieves this by remaining a neutral steward of the vision, values, forums, policies, and plans on record. When these conflicts flare up, the family office asserts its neutrality and insists that unifying the family owners is first priority and refuses to be distracted by side issues.’
2: Staying relevant to the next generation
This is arguably one of the biggest challenges facing family offices and UBS believes it is important for family offices to remember different generations communication in different ways,
‘Investment management is also key. When it comes to managing investments, the senior generation may initially want [its] family office to oversee investments in all asset classes,’ UBS notes. ‘Some next-generation members may want to oversee alternative or direct investments themselves.’
The wealth manager adds: ‘In tricky family transitions, particularly when an outgoing leader is making way for an incoming leader, the family office risks losing relevance to the next generation. To ward against this, it is critical to prepare well in advance by planning possible transition options.
‘A specific strategy for remaining relevant to the next generation is an absolute requirement. We are always surprised how few family offices accomplish this work. It is easy to get sidetracked or distracted by the demands placed on the family office by the investment activities.'
3: Leadership transition
Succession in a family office refers to one leader replacing another.
UBS says in an ideal world succession should be coordinated with other parts of the family enterprise. ‘Doing this helps the next generation members feel they fully control the family enterprise and can shape it to their vision. Succession usually takes a few years to accomplish. It is helpful for your family office to understand two different timelines.’
‘The family office can support the succession by helping the two generations agree on the timing and plan. To do this, the family office must cultivate authentic relationships with the next generation, so that they understand their missions and goals.’
4: Misaligned strategy
Here the danger is if the family office is not properly managed, there is a risk that it loses focus on organic growth and pays more attention to the strategic development of the office and its staff.
‘Failing to deliver on the fundamental purpose the family envisioned is clearly grounds for existential
questions to arise,’ UBS warns.
‘A regular review can evaluate the family office on how well it is serving the driving purpose of the family and address alignment needs.’
5: Mission creep
Linked to a misaligned strategy is mission creep, where the family office develops opportunistically
into new activities and tends not to eliminate or scale back activities that are not useful for the family.
‘Ultimately, families and their family office can become very misaligned, which can be a fatal flaw for both,’ UBS says
6: Lack of governance
UBS notes many family offices have either poor, or no governance controls.
It points that as a consequence investment activities, among other things, can suffer greatly.
‘Authorities are poorly defined and activities are poorly controlled. There is also a tendency to build lean structures and focus on minimising costs, which at times creates under-performance, allows poor governance, and encourages over-reliance on particular people (key man risk),' UBS says.
7: Lack of control
A by-product of poor governance is a loss of control within the family office.
‘A poorly controlled or governed family office can lead to the family having less oversight, less control, and greater exposure to excessive, unforeseen risks,’ UBS says.
‘In addition to poor paper governance, many family offices lack control as they are primarily manual and have low automation. As a result there is slow, error prone information gathering and consolidation. There is also no use of technological support for governance (e.g. automated alerts based on investment guideline parameters.)’
8: Too high risk exposure
In turn, this loss of control leaves client exposed to greater risks.
‘The need to protect long-term family capital makes this exposure unacceptable - something that is only heightened for financial families who no longer have the support of a regular cash flow out of an operating business.’
9: Stagnation in talent development
Attracting and retaining talent can be difficult, as some believe career opportunities are limited in family offices, according to UBS.
‘This can lead to the family office team stagnating over time, due to its members working outside the professional mainstream and becoming accustomed to “the way things have always been done for this family.”
'Therefore, ongoing professional training and development is crucial to keep up the expertise in the respective field. Management needs to proactively build this into the development plans of all family office staff.'
In conclusion, UBS sees proper governance as essential to help the family office overcome pitfalls and maintain control.
It also believes longer-term strategic planning can help family office meet challenges, and make sure the office is prepared for succession and leadership changes, and stays on track for meeting the family’s needs.
'It is good practice to review your family office’s overall design every three years, and redefine the vision and set concrete goals,' the wealth manager summarises.
’Built to last, the strategic family office does more than stay viable to meet the financial needs of family
members. It also helps a family to refine its driving purpose (what is it really trying to accomplish or be) and achieve the big goals that family members are collectively passionate about.