Family offices have become the rich person’s strategy du jour for managing wealth on behalf of future generations. By some accounts, there are now over 2,500 family offices in the nation. They take care of family members who are not ready to manage their own finances. Family offices prepare taxes; offer concierge services, such as bill paying and travel planning; handle legal matters, including prenuptial agreements and trusts with added privacy; and provide a forum for the family to work together. The dynamic is simple: Entrepreneurs or corporate executives take the skills that created their wealth and apply them to help their families.
While wealth-creating clients are reading about the benefits of family offices, financial advisors have been reading about how the family office structure can boost their own practices. With a family office, advisors can, in theory, enjoy a steady source of retainer income, streamline their operations, and avoid working with other, potentially uncooperative advisors. They also can enjoy the prestige of working with wealthier clients, and perhaps develop more intimate relationships with fewer clients over the long term.
Unfortunately, the family office bandwagon is having unintended effects on future generations who share in the wealth. Before advisors recommend or create a family office solution, I would recommend that they explore the proposed family office’s long-term objectives and compare that vision to the probable long-term outcome. If you take a hard look before you leap, you may be able to help third- and fourth-generation family members avoid any unintended surprises.
I routinely see these issues with my own clients, who are third-generation inheritors and beyond. Some are members or shareholders of family offices. Their typical experience with the family office is very different from the creator’s original vision; after all, what begins as a good intention can change drastically over time. By the third generation, the family office is probably run largely by non-family members, so a disconnect develops between the family members and their wealth.
Consider the case of one fourth-generation family office member I work with. I’ll call her Mary. In her early 50s, she feels infantilized by the family office. She has never signed her own tax return. She didn’t know it was legal to hire a non-family office attorney and write her will the way she wanted. Her family office planned her prenuptial agreements before both of her marriages. Her weddings were fun and her divorces were nothing more than a little inconvenient. Mary has never, ever worked. Even though her tax return shows several million dollars in adjusted gross income, she is afraid to ask for a raise in her monthly distributions because she doesn’t want to have to explain herself. The family office pays all her bills. She feels like Jim Carrey in The Truman Show: Her life is an open book to others, but the real world is not available to her.
Mary’s family office has close to 50 employees, none of whom are family members. The vast majority of the family office employees are attorneys and accountants; their pay is based on the assets in the office, not on the welfare of the family members. The family office thus has no incentive to help family members in trouble–the fewer family members, the easier their job. All told, Mary is scared of the family office. Its president is trustee of all the trusts for life, and Mary does not know how to find out if anything can be done about it.
This is not the case for families that have not been handcuffed by a family office. The Kennedys are a good example. Family members have had the liberty to thrive and succeed, or to make mistakes and fail–and they have done both. Some members have chosen to capitalize on the family name and others have woven their lives into the mainstream. Others have failed and learned the hard way that the family name will not always protect them. No matter what, however, they are free to choose their own paths.