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Succession: Plan ahead or end up like the Roy family

Alex Dean, head of private wealth UK, IQ-EQ, 08/02/2023

Logan Roy’s sudden stroke on HBO’s hit show Succession led his business, Waystar Royco, to fall into disarray. With no clear succession plan in place, the struggle for power spilt over into the public domain, denting the image of the company, and bringing its share price spiralling down with it.

Although the show is pure entertainment, it does point to a worrying possibility: that one illness could spell disaster for a family’s wealth. The Covid-19 pandemic pushed this even further into the limelight, as it became a very real concept. But the good news is that family offices, whether they are a single- or multi-family office, can avoid following in the footsteps of the Roy family’s drama and an uncertain future if they get their affairs in order before the crisis happens.

Avoiding a succession crisis  

The great generational wealth transfer has been fast approaching for a number of years, but with it finally upon us, family offices need to think about structuring the family business, investments and office. This not only means well thought-out legal holding structures, but also including the younger generation in the governance of such vehicles, and ensuring 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 findings from Wealth X and IQ-EQ, as much as $15.4 trillion of wealth from individuals with a net worth of $5 million or more will be transferred from the older generations to the younger generations by 2030.

Structuring a family office and setting it up to thrive once assets and control have been passed to the next generation is increasingly more complex. Globalisation has meant that families have both family members and assets (such as real estate, digital assets, bank accounts and high-value luxuries) spread across the globe.

This cross-border complexity in turn brings a range of 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 the performance of those assets, regardless of where the family members and/or assets are based.

 

Adapting to the future 

Although Logan Roy refuses to accept Kendall’s suggestions for new business ventures as the first season progresses, family offices have to adapt to the future, and be in a position to have a foundation in which the next generation may succeed. The younger generation often has different priorities, such as impact and ESG-compliant 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 younger generations, money allocated to impact investing will continue to grow. According to UBS’s Global Family Office Report last year, 56 percent of family offices are already investing in impact or ESG assets. 

This is particularly the case in Western Europe where 72 percent of families are already making sustainable investments, while only 26 percent of families in the United States are. Sustainable investing as an investment tactic is being primarily driven by the positive impact it has on society (62 percent) with roughly half (49 percent) seeing it as the main way to invest in the future.

In addition to sustainable investing, the hype around digital assets is not going away anytime soon. While most family offices are testing the waters with some exposure to the world of crypto, with a quarter having invested or planning to invest in cryptocurrencies according to UBS, increased regulation in this area will only boost interest.

The world of digital assets is still muddled, and family offices need to understand both how they verify source of wealth pertaining to digital assets and how such assets can be structured within a trust or other holding vehicle.

Compared to traditional money managers, family offices have much more flexibility in terms of how they invest, what they invest in and the investment’s horizon. Family offices are becoming increasingly sophisticated and utilising traditionally institutional practices, which in practice 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.

Given the increase in wealth globally, this trend will continue to snowball and family offices will be more likely to bring the investing decisions of a family office in-house while outsourcing the administration and execution.

The story continues 

Looking ahead, family office wealth and the complexities they face will continue to increase, so planning for succession far in advance of any health or other issues will help prevent the crises that some wealthy families, such as the fictional Roy family, have faced. After all, it’s much easier to build a house when the skies are clear than when faced with a storm.

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