When Logan Roy, head of the Roy family and CEO of Waystar Royco, collapsed from a sudden and serious stroke on HBO’s hit show, Succession, his family and business followed into disarray. Thanks to Covid-19, this sort of drama is playing out in real life as family offices face the very real possibility that family members could suddenly become incapacitated, creating complications around the transfer of wealth and control. The solution? Prioritising the succession plan.
Without any clear succession plan, the Roy family's power struggle boiled over into the public realm and both the share price and reputation of Waystar Royco spiralled downwards.
Since the onset of the Covid-19 pandemic, more and more heads of families are realising the risks of falling seriously ill. However, family offices, whether single- or multi-family, don’t need to follow in the Roys' footsteps or face an uncertain future if they get their affairs in order before the crisis happens.
Avoiding a succession crisis
The generational wealth transfer has been fast approaching for a number of years, but with it finally upon us, family offices need to think about suitably structuring the family business, investments and office. This applies not only in terms of well thought-out legal holding structures, but also to include the younger generation in the governance of such vehicles and ensure they have enough time to get up to speed with the inner workings of the family office.
Perhaps the biggest mistake that Logan Roy made wasn’t necessarily the legal holding structure, but rather failing to agree upon a succession plan with his family. According to the findings of our Great Global Wealth Transfer white paper, as much as $15.4 trillion of wealth from individuals with a net worth of $5 million or more will be transferred between generations over the next five years.
However, structuring a family office, and setting it up to thrive once assets and control have been passed to the younger generation, is increasingly complex. Globalisation has meant that families have family members and assets (such as real estate, digital assets and bank accounts) spread across the globe. Such a cross-border fact pattern brings complexities and risks that need to be addressed and mitigated, including succession laws, marital regimes, privacy concerns, tax rules and other regulatory and compliance obligations. To deal with these complexities, family offices are turning towards specialised outsourced providers who can provide the family with a succinct overview of their assets and its performance regardless of where the family members or assets are based.
Adapting to the future
Although Logan Roy refuses to accept Kendall’s suggestions for new business ventures as the season progresses, family offices have to adapt to the future, and establish a foundation upon which the next generation may succeed. The younger generation also often has different priorities such as impact and ESG investing, digital assets and co- or direct investing, which their parents may not be as focused on.
As decision-making power is handed over to the next generation, money allocated to impact investing will continue to grow. According to UBS’s Global Family Office Report, 56% of family offices are already investing in impact or ESG assets. This is trend is most marked in Western Europe, where 72% of families are already investing in sustainable investments, while only 26% of families in the US are. Sustainability as an investment tactic is being primarily driven by the positive impact it has on society (62%), with roughly half (49%) of respondents seeing it as the main way to invest in the future.
In addition to sustainable investing, the hype around digital assets – from NFTs such as the Bored Ape Yacht Club to Bitcoin – is not going away anytime soon. While most family offices are testing the waters with some exposure to the world of crypto, increased regulation in this area will only increase interest. The world of digital assets is still muddled, and family offices need to understand how to verify source of wealth pertaining to digital assets, as well as how they can be structured within a trust and/or other holding vehicles.
Compared to traditional money managers such as asset managers or fund managers, family offices have much more flexibility in what they invest in, how they invest, and the investment’s horizon. Family offices are becoming increasingly sophisticated and utilising institutional-like practices, which in practicality has meant that more family offices are either directly investing in assets or co-investing with other family offices, bringing them in direct competition with private equity funds. Driven by an increase in wealth globally, this trend will continue to snowball, as family offices are more likely to bring the investing decisions of a family office in-house, but outsource the administration and execution.
The story continues
Besides watching Succession for entertainment purposes, family offices should take warning from the show to begin the generational wealth transfer process sooner rather than later. Looking ahead, family office wealth and the complexities they face will continue to rise, so planning for succession far in advance of any potential health issues will help prevent the succession-related crises that the Roy family is facing. After all, it’s much easier to build a house when the skies are clear than when faced with a storm.
This article was originally published by PWM, a Financial Times publication.