Without proper wealth management, most families lose their businesses and money in 3 generations. Let’s see how family offices can help families manage their money for generations to come.
A family-owned business may be defined as a business in which at least two family members are majority owners. This type of business is one of the oldest known forms of business organization.
Nowadays, there are millions of family-operated businesses across the world. Many of which are backbones to their country’s economy. In the US, for example, family-owned businesses are responsible for:
- 62% of employment across the country
- 64% of the country’s gross domestic product
- 78% of all new jobs created in the country
Despite this, the vast majority of family businesses don’t survive more than two generations. Why’s that? Today, we’re talking to Bobby Gill, lawyer and asset management expert, who owes his wealth strategy firm in London, GC Wealth, to try to get to the bottom of this.
Without further ado, let’s start…
Generational Wealth Explained
Before we can discuss family offices, first we need to look at the current state of generational wealth. As Bobby Gill explains, generational wealth is capital meant to be passed down from one generation to another in an effort to ensure that the family remains financially stable for years to come.
In each case, it’s expected the generation that inherits the fortune to manage it properly and even multiply it. You’d think that there are thousands of rich families that had the money for generations.
But that’s not the case.
A study published in 2014 revealed that a vast majority of family businesses collapse after the 3rd generation. Believe it or not, but 97% of family businesses never survive past the 3rd generation. Let’s see how different generations handle their business and wealth.
1. The 1st Generation
The first generation is almost always made out of hard-working individuals that trying to make things better for them and their family members. They slowly build their wealth and by the time they’re ready to retire, they have enough wealth, connections, and assets to give the next generation peace.
2. The 2nd Generation
More often than not, the 2nd generation grew up seeing what their parents needed to do to start and keep a family business afloat. For that reason, they mostly value hard work, tend to make good investments and financial choices. That’s why they’re likely to preserve the family fortune.
3. The 3rd Generation
By the time the 3rd generation takes over the family business, if everything is not on the right path, failure is almost imminent. Members of this generation are often not focused what their family’s doing, not familiar with the industry trends, and don’t have any experience running a business.
What Are Family Offices?
A famous example of this cycle is the Vanderbilt family. At the end of the 19th century, the grandfather, Cornelius founded a successful shipping company and managed to make millions. His son, Billy, expanded the business to railroads. This only increased family wealth.
By the start of the 20th century, the business was worth $13 billion. However, once the 3rd generation took over the family business, things turned sour. They managed to spend $10 of the family fortune in two decades. By the 1960s, they lost almost all of their money.
Three decades of experience have thought Bobby Gill that this is best handled through a family office.
Although they’ve existed in one form or another since ancient times, the modern family office was developed in the late 19th century. Unsurprisingly, the concept was pioneered by the Rockefeller family, with John D. Rockefeller Sr. being the central figure in its creation.
These days, family offices are wealth management companies that aid high-net-worth clients and help them manage their finances and businesses. As Bobby Gill explains, family offices are usually overseen by a board, whose members are in charge of:
- Knowing what a family’s financial needs are
- Calculating ROI needed to grow the financial capital
- Building a long-term financial plan for the family
- Not going against family’s principles when investing
- Monitoring expenses, investments, and benchmark results
When it comes to picking members, you have to be careful. These people will be in charge of your finances. They’ll also work with young family members to educate and train them financially. Some 9 out of 10 successful family businesseshave a supervisory board at their helm.
What to Look for in Family Offices
During his time as a Magic Circle lawyer, Bobby Gill has come across many people looking for family offices. What he noticed from these encounters is that people usually don’t know what exactly they’re looking for. More precisely, what kind of family offices they need.
The biggest choice you need to make is between a single-family or a multi-family office. Both have their strengths and weaknesses and your choice mainly depends on your situation and plans.
1. SFO or Single-Family Office
As its name suggests, an SFO takes care of a single-family. The members of an SFO are usually close to the family they’re managing, which allows for complete privacy when it comes to sensitive matters like taxes and investment criteria. Of course, since you’re the only “client” and all the attention is focused on your business affairs, SFO will cost you a lot more.
2. MFO or Multi-Family Office
Multi-family offices work with several family businesses at the same time. While this may seem like a bad thing at first, it actually has many advantages. Often, SFOs offer more services than MFOs. For instance, an MFO can help you plan your taxes, educate the next generation, and even help you get into philanthropy or special projects. Not to mention, MFOs cost a lot less.
Final Thoughts on Family Offices
As Bobby Gill points out, we live in an age of uncertainty. A huge amount of small businesses has lost millions due to the COVID-19 pandemic and are currently awaiting government help. If you have a family business you need to be extra careful about handling your wealth.
People who want to make sure that the next generation of their family has enough financial security, support and resources to expand their business need wealth management. Contact a family office near you and have a chat about your current state, plans, and ambitions.
The generations that come after you will be grateful.