The Inevitable Shift

By Whittier Trust

Family businesses and family offices will see an inevitable shift, seeking independent advice, as G1/G2 becomes G3/G4.

Family businesses and family offices will see an inevitable shift, seeking independent advice, as G1/G2 becomes G3/G4.

Our company has been fortunate to sponsor the Transitions West Conference over the past few years. The conference always includes someone saying, “If you’ve seen one family office, then you have seen one family office.”  That’s a testament to how varied each unique family business and succession plan can be. After listening to stories of families going through succession planning and directly managing over 450 such plans, there are some lessons to be applied. Perhaps the moral of this piece is “If you’ve seen 450 family offices, you’ve seen enough to draw some parallels.” In this article, we will focus on one recurring theme: as families transition from G1 and G2 to G3 and G4, the desire for independence will change. 

The Transitions West Conference is filled with G1 and G2 families that are seeking advice on how to keep the business within the family. A legacy has been built by G1 and G2 families to perpetuate and grow for generations to come. This is in stark contrast to the G3 and G4 families that have successfully perpetuated the wealth, but are finding other challenges in managing the family office. As the number of family members multiplies with each generation, a desire for objectivity arises. Independent advice, judgment, and decision making becomes not only desirable, but paramount to keep the family business from tearing the family apart.  Why is this so consistent at the conference?  Is it true of family businesses across the country and the world?

The pyramid shape of a family tree is a natural occurrence and is one of the driving forces behind this need for independent third party involvement in the management of the family business. G3 and G4 usually represent anywhere from 10-25 individual households. Families multiply, and fairness concerns follow.  Think about the more prolific family trees: the Kennedys, Rockefellers, and Hiltons. The challenge in operating a family business harmoniously and effectively with the increase in family members becomes more challenging than the family business itself. 

Equality of opportunity or equality of outcome?

Between 25 individual descendants, there will always be a wide range of talents, abilities, education levels, interests, and passions. It would be wishful thinking that all 25 descendants in G3 and G4 would not only want to be involved in the family business, but would also be qualified with relevant experience or knowledge. Inevitably, some family members become involved in the family office/family business, and some choose other paths. Without independent third party involvement, this can drive a wedge in the family dynamic. Family members inside the business view the outside family members as freeloaders, enjoying the spoils of the business without putting in the same effort.

On the flip side, family members that don’t get involved grow suspicious of the family members inside the business and fear that business decisions are being made that are not in their best interests. A common scenario leads to cousins and second cousins in litigation and family resources depleted with legal battles.

Some of the wealthiest families and largest family businesses experience these challenges. A prime example being the Vanderbilt family. One of the nation’s most affluent families, the Vanderbilts, lost their family business, the New York Central Railroad, by the 4th generation. It is also well known that their family wealth was vastly depleted by G5, as evidenced by G6 Vanderbilt descendent, CNN’s Anderson Cooper, “My mom’s made clear to me, there’s no trust fund.” – Forbes.

Given our experience with families on their 6th generation of family business and wealth management, it is certainly not a one size fits all fix. The design needs to be custom-tailored to fit the business and the family. An independent third party entity like a multifamily office can offer a great way to diffuse this strain on the family. A multifamily office with experience in operating family businesses knows to act as an independent and unbiased party, and a referee, if necessary, to be the voice of reason on the board of directors.  It can also act as an effective facilitator, connector, and communicator for the family members on the inside and the outside.  An institution doesn’t age the same way as an individual. The presence of this non-family member or institution can provide continuity and help perpetuate the values, goals, objectives, hopes, and dreams of the founding generations. As the newer generations are brought into the fold, they can rely on their multifamily office advisor for guidance and mentoring.

Summary: If you are in the first or second generation, make sure that you plan for the inevitable shift and consider adding clauses for independent advice as time passes. The first and second generations of a family business typically focus on growing the wealth and keeping the family office within the family. By the time G3 arrives, the focus of the family office inevitably shifts to governance and fairness. The right advisory team needs to understand the values and culture of the family, while providing the independence to perpetuate the wealth through successive generations. If you are in the third or fourth generation, know that it is entirely natural to seek independent advice and that family strife and disagreements about fairness are also more the norm than the exception.

Whittier Trust Company and The Whittier Trust Company of Nevada, Inc. are state-chartered trust companies, which are wholly owned by Whittier Holdings, Inc., a closely held holding company. All of said companies are referred to herein, individually and collectively, as “Whittier”. This document is provided for informational purposes only and is not intended, and should not be construed, as investment, tax or legal advice. Please consult your own investment, legal and/or tax advisors in connection with financial decisions and before engaging in any financial transactions. This document does not purport to be a complete statement of approaches, which may vary due to individual factors and circumstances.  Although the information provided is carefully reviewed, Whittier makes no representations or warranties regarding the information provided and cannot be held responsible for any direct or incidental loss or damage resulting from applying any of the information provided. Past performance is no guarantee of future results and no investment or financial planning strategy can guarantee profit or protection against losses. These materials may not be reproduced or distributed without Whittier’s prior written consent.  For additional information about Whittier, please visit our website at www.whittiertrust.com.

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