January 21, 2011

Business Owners Start to Separate Personal Wealth Management From Their Operating Companies

FOX study identifies demographic and risk factors that are driving the shift

Most business-owning families manage their personal wealth within their operating business, but environmental factors are prompting business owners to separate personal asset management from the operating company, according to a study released Thursday by Family Office Exchange (FOX).

“Business-owning families are aware of the risks of trying to manage personal wealth inside their companies but have not acted because they believe change would be difficult, they do not have family support or they are too busy operating the business,” Lisa Ottum, FOX senior research analyst and lead author of the study, said in a statement. “Without a specific catalyst forcing families to make a change, it is easy to put this issue on the back burner.”

The FOX study identified three factors that will prompt business owners to start the separation process:

  • Demographic trends. Baby boomers are reaching retirement age, and business owners in this segment have to find wealth management solutions that can meet the needs of their family’s changing situation. Just the act of removing themselves from family business management will force them to separate their personal financial affairs from the operating company.
  • Global economic crisis. Although a family’s business may have survived the recent market downturn, the crisis taught wealth owners the importance of income diversification and risk management. It increased their desire for independent and objective investment advice.
  • Non-investment risks. Managing family financial and administrative affairs inside the company makes both parties vulnerable to considerable personal, privacy and legal risks—with potentially profound general consequences.

According to the statement, the FOX study details the steps involved in making a transition from managing family wealth inside the family business to setting up a family office or selecting an outside wealth advisor. It identifies techniques and strategies that families have applied with success. And it provides the insights of advisors and family office executives who have been through the separation process.

Ottum said the paper shows that successful separation does not, and should not, happen overnight. “There are intermediate steps, such as creating a virtual family office or devoting one full-time employee to the family's personal wealth, that make the process more manageable and less overwhelming.”

Family Office Exchange, founded in 1989, provides industry knowledge and wealth owner education to more than 500 members in 22 countries from offices in Chicago and London.

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