Critical position - managing conflict in a family office

Monday, 01 October 2012
Charles Gowlland and Tommy Shillington look at how best to manage conflict in a family office - issues around the role of professional advisors, sources of conflict, individual needs, popularity contents.

Wealthy families often choose to establish a family office to act as custodian of their assets and financial affairs. Many recognise the benefits of having a team of trusted advisors in place to protect and enhance the family’s wealth over the long term. But family relationships can be complex, particularly in wealthy families, where disputes can date back generations and grievances over the fair distribution of wealth are far from uncommon. In such situations, professional advisors can play a crucial role, acting as the all-important glue that binds the family together and preserves their assets for generations to come.

Sources of conflict

Long-running family disputes, or at least simmering tensions, can exist where a family office is established for many people, in some cases as many as 30 individuals in a family. The underlying causes will naturally differ from family to family. Usually there is at least one dominant character: the head of the family, who founded the family’s fortune, the eldest son, or someone else who holds considerable power. But this person may be unable to unite the family. In fact, they may be the source of conflict.

These tensions can be compounded by the intergenerational transfer of assets, often based on primogeniture – the custom of the first-born male child inheriting the entire estate to the exclusion of his younger siblings. This can leave younger sons and daughters feeling aggrieved. While the siblings may be given some financial compensation, they are less likely to receive coveted sentimental items that come with the estate, sometimes resulting in hostility towards the eldest son and his family. Grievances of this sort can leave one side of the family feeling unfairly treated – however long ago it may have been – and this notion of being wronged can carry on through the generations.

Individual needs

A family office is often established to look after a group of sometimes disparate individuals of different ages and with different views, values and priorities. It is therefore unlikely that a single approach to managing the family affairs will suit everyone. For example, the way a family’s investment portfolio and trust funds are structured could be a point of contention depending on individual attitudes to risk and whether they are focused on capital growth or income generation. Some family members may be entirely risk-averse and keen to protect the family’s assets as much as possible. Those who rely on investment income may be prepared to take more risk, perhaps investing in private equity ventures and smaller companies where the risk/return ratio is greater and where they can be actively involved in the companies they have invested in. It is the responsibility of the investment manager to take account of these different mandates and structure the family’s investment portfolios accordingly.

Charitable giving

Charitable giving is another area that can give rise to conflict. Family members may fail to see eye to eye on the types of charities the family supports and how much they donate. For some family members, particularly those with sufficient disposable income, giving to charity may be near the top of their priority list, but others may not share this view.

Resolving conflict

Conflict within a family is therefore not uncommon. In fact, the more money involved the greater the tension is likely to be. With this in mind, the role of the advisor goes far beyond that of ‘family finance director’, coordinating all of the family’s financial needs.

When tensions rise, it is important for financial advisors to be able to identify the root cause of the problem. Seldom will it be solely about financial decisions made in the here and now. Important financial events and decisions more often provide a way for family members to channel their frustration.

Trusted, impartial advisor

For advisors to be able to act as mediators and defuse difficult situations, knowledge of each family member and strong relationships with them are crucial. The family needs to know the advice they receive is in the interests of the entire family and not any one individual. For this reason, where there is a dominant character in the family, it is important that the advisor maintains appropriate distance from this person to ensure impartiality.

Annual or quarterly family meetings, with the advisor acting as mediator, can be a constructive way for family members to communicate their views clearly and openly. This encourages discussion and careful consideration of issues. A preparatory meeting with the advisor gives individuals the opportunity to set out their grievances ahead of time so that the situation can be defused or potential solutions considered.

Starting early

Another way families can be proactive about mitigating conflict is by educating younger family members about the family’s assets, who will receive what and why. Tensions within a family can often be down to a lack of knowledge or concealment. So being open about the family’s wealth and distribution of assets can be beneficial. This type of information may be better received from an external third party who can demystify the process of managing the family’s wealth, for example by inviting the younger generations into the business for work experience.

“The notion of being wronged can carry on through the generations”

Parting ways

If a family cannot overcome its differences, it may be in its best interests to split the family office into two groups. Although this means there will be some duplication of overheads, an amicable split can sometimes be the best way to mitigate future conflict. Where a family’s professional advisors have the depth of resources and breadth of services – tax, financial planning and investment management – it may be possible for the same firm to advise both family offices. Different advisors can be assigned to each family office, while liaising with each other internally to ensure the right financial structures are in place.

Next steps

Managing conflict within a wealthy family will never be easy, but appointing an advisor with deep knowledge and experience of running a family office and all that it entails is a necessary first step. Such advisors can provide a long-term view because they are focused on preserving and enhancing wealth over generations. They need to be adept at building strong, lasting relationships with family members, where their advice is valued and trusted. The most effective advisors are likely to be long-serving employees who work in teams, where each team member is aware of all aspects of the family office. In this way, the family and its individual members can be assured that their interests are being well looked after at all times.

The essentials

In summary, some key tips for managing family conflict:

  • appoint trusted, impartial advisors with knowledge and experience of running a family office
  • match advisors to family members based on age, to effect more meaningful, enduring relationships
  • recognise that the family office model is not a single financial service and will require offering families a range of services
  • be impartial and even-handed when dealing with the requests of individual family members
  • identify the root causes of any family tension
  • be prepared to act as mediator to broker a compromise
  • encourage regular communication, creating a forum in which issues can be openly discussed
  • educate younger family members about the family’s wealth; and
  • consider splitting the family office if it will mitigate conflict.

Finding the right formula

Recruitment Consultant Anicet Tanghe summarises the roles and the skills needed in family offices

The family office is a complex area of private client work. Services range from asset management to fiduciary and trust services, legal and tax advice, family governance, philanthropy, corporate administration, property management, concierge services, succession planning, private equity and real-estate investment, corporate finance, hedge funds, etc. Personnel with each of these specialities could be considered for family-office positions.

Candidate spec

When recruiting for the family office, one word always comes up: chemistry. Personality is one of the most important components. The criteria can vary between, for example, a European family and a Middle Eastern family. Also, the capacity to initiate deals and increase returns on investments is well regarded for investment family-office professionals, especially in the current market. Real-estate professionals are well regarded, too, because most family offices dedicate a large part of their investments to commercial and property development markets.

Valued qualifications

STEP offers the Advanced Certificate in Family Enterprise, which will benefit all family-office professionals, but this is one of only a few professional qualifications dedicated to careers in family offices. In Europe, the IMD Business School in Lausanne and its global family business centre offer a programme called ‘Leading the Family Business’. In Paris, INSEAD and its Wendel International Centre for Family Enterprise offers an MBA and an executive programme related to family business. Bond University in Australia teaches an Executive MBA with a family business specialisation. In the US the Family Firm Institute proposes two certificates: Family Business Advising and Family Wealth Advising. It is not an extensive course list, and most options focus on family businesses, which are different from family offices, as the investments component is not considered.

Popularity contest

Family offices are generally small entities developed by business entrepreneurs looking for staff with broad knowledge and expertise. Working for a family office is a job for professionals with unusual attributes, motivated by an exceptional working environment with excellent financial rewards. It could be appealing to employees who like to mix with influential people. However, the clientele can be more entrepreneurial and have a different work ethic from a corporate environment. Working so closely with the chief can be a 24/7 job, and candidates need to be prepared for this. The pros and cons of working for any type of family office need to be individually analysed, but one thing is obvious: people working in this demanding niche enjoy good financial rewards and benefits.

Anicet Tanghe is a Senior Consultant for AP Executive in Geneva.

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Charles Gowlland, Tommy Shillington

Charles Gowlland is an Investment Director in the London office of Smith & Williamson.
Tommy Shillington is an Investment Director in the London office of Smith & Williamson.

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