Anne Bucciarelli is a senior vice president and senior national director leading family engagement strategies at Bernstein Private Wealth Management, which helps families explore the transfer of wealth-related values and knowledge. She talked with Crain Currency about the benefits of dividing assets and explained why informal conflict-resolution structures often fail.
What are the benefits of dividing assets at family offices?
Dividing assets is one of the several strategies that family offices can employ. Many families that we work with have a governance structure, operating businesses or a family office structure where shared decision-making, alignment, cooperation and agreement are required. They may have other pursuits or other areas where it is more of a division strategy where each family is really making those decisions within their own household. This is one of many strategies, and it's not an all-or-nothing scenario.
There are four benefits that we've seen with dividing assets and family offices.
The first is really around preserving family harmony. When we think about families, they're trying to maintain, preserve and even grow the family's financial wealth. But that's not the only wealth that they're thinking about preserving. They're also trying to preserve the wealth that comes with their family, their relationships and their love for each other, which is really important. You can preserve family harmony by leaning into the values and vision, which often is very different among family members and family branches. By dividing, you can increase the likelihood of family unity by allowing each family branch to operate according to their own values and vision, which ultimately then reduces the potential for conflict and can lead to greater success for the overall family.
The second benefit is that dividing can allow for customization. Family members can pursue investment and philanthropic strategies that align with their goals and values, which leads to fostering greater cooperation. For example, in a family office structure, each family has their own investment strategy with their own adviser, and the family office oversees that structure. This allows for an individual approach in terms of who that individual family and family branch employs.
The third benefit is conflict resolution. At times, dividing can prevent conflict over wealth and decision-making, empower family members to make independent choices and reduce the pressure of having to be in perfect agreement on all matters. Identifying a few areas where it makes sense to divide can actually reduce the conflict and allow for greater possibility of alignment in areas that require combined decision-making.
The fourth is around succession planning, whether within the family system, a family business or a family foundation. Dividing can facilitate succession planning by allowing each family branch to manage its own assets [and] make decisions based on their unique goals, values and preferences. It can also help families work toward preparing the rising generation for leadership roles within the family office and the greater family system.
Can you provide an example of a family office that benefited from splitting assets?
One family we work with had an operating business, and they were in their seventh or eighth generation with about 400 family members. Some of the family branches were very big, with over a hundred family members, and some were quite small. They had a very formal governance structure, with councils, constitutions and other governance policies in place to deal with all the complexities. Relative to their balance sheet, they had a small family foundation that was making grants in a few areas that were identified as priorities for the broader family. But they wanted each family branch to be able to pursue their own philanthropic ideals and pursuits, so each had their own philanthropic strategy.
They gave where they wanted to based on their values, used different structures and vehicles, and invested those assets differently based on their own goals. This helped relieve potential conflict, empower family members to lean into what was important to them and helped them lean into the combined decision-making structure.
Why do informal conflict resolution structures fail under significant stress?
I’ll highlight three points here, but first it’s worth noting that we recently published research, “Wealth Beyond Measure,” where we asked how families handle conflict. We found that two-thirds of families said they either have a very informal conflict resolution policy or no policy at all. This can be attributed to the first point I’d like to make, which is that there is increased emotional intensity during conflict. When you have less structure surrounding how to approach conflict, this can oftentimes allow emotional intensity to spiral and build in an unproductive way.
The second reason informal structures fail is there is a large potential for the breakdown in communication. If there are no regular family meetings, no formal governance structures or no protocol for decision-making and conflict resolution, this can lead to family members not communicating with each other. This can put the family office and the professionals working within it in a very tough spot, so family governance can really lend itself to establishing a structure and protocol to not only work through conflict but be proactive about it when warning signs arise.
The third reason is that there is a lack of professional support or lack of the right advisers. At Bernstein, we often facilitate family conversations and use governance to help families navigate through conflict. Whether it's a professional in the family office or someone outside of the family office system coming in to facilitate productive conversation, this can help family members address disagreements in a fair and constructive manner. Having an unbiased third party come in can be extremely helpful for families when tensions are high to have someone mediate the conversation and serve as an independent buffer and adviser to the family.
How can families implement formal governance structures as they continue to grow and face more complex issues?
To start, it's important to define a family’s values, mission and goals and create a safe space for all family members to share and have a voice. In our “Wealth Beyond Measure” research, 80% of families started having regular family meetings to maintain cohesive communication. Some meetings were more informal in nature, and some were quite formal; so it differs from family to family, but the idea of a more regular and formal meeting structure helps define those values, mission and goals.
Building a family governance structure for the first time is just what it sounds like — it's the first time. Another step to implementing formal governance structures is bringing in experts and advisers that understand the structures, estate plan, what’s going on in the business and what strategy might be most important for the family. However, this strategy should be reviewed over time as the family continues to grow. Setting up regular reviews also serves as a reminder of why we want our family to stay unified, why we want to maintain wealth and why we want relationships to stay together. Family governance structures are living documents that will need to evolve over time.
On a final note, it's fine for family offices to highlight and pinpoint the biggest pain points and start there first. Family governance doesn’t happen overnight, and it's really important for families to identify what their capacity and willingness is to take this on. Sometimes, by going slow, you can go fast — starting small can give you those early wins and can address some higher-priority issues that then set the groundwork for this to be work that occurs over time.
Families and family offices can feel really overwhelmed, and so it's OK to acknowledge that most families don’t tackle it all at once. It's OK to start with a few priorities, engage those professionals that are going to help you, engage in conversations that will lead to a more desirable outcome, and then start documenting and establishing that family governance system over time.
As family offices become complex, they may need a digital vault
By FRANKLIN TSUNG
In recent years, the family office industry has exploded in growth and complexity, with some large firms becoming true capital-market players with substantial influence.
For example, Michael Dell’s investment firm, MSD Partners, hired Goldman Sachs exec Gregg Lemkau to form a new merchant-banking platform for family business owners, family offices and founders, closing a $14 billion flagship fund. And at the end of last year, the Pulte Family Office, an activist shareholder in Virtu Financial, pushed for the publicly traded firm to sell itself to either a third-party private equity firm or another public entity.
We are officially entering an era in which family offices are becoming increasingly complex and more engaged with various third-party financial institutions and even engaging in club deals for private market activities. Having these multiple touchpoints invites a moment for family offices to step back and consider: “How do we protect our wealth and legacy and yet scale all these external interactions?”
Enter the family vault operating system (FVOS), which is a platform designed to securely organize and share important family information, documents and photos. The FVOS represents the evolution of global electronic content management (ECM) trends that developed in the 1990s. In essence, ECM platforms are becoming vertically integrated solutions that incorporate specialized functionalities, including customer relationship management features, to deliver centralized experiences.
For family offices, the FVOS creates a digital document shield and living archive for the office and its enterprises while remaining deeply connected to its network of third-party financial professionals and institutions. This is critical for family offices, as no single outside party — such as an accountant, wealth manager, financial adviser or banker — has had the responsibility of creating a single source of truth for all family documents.
While family offices have various third-party financial institutions and professionals handling their complex needs, they lack a centralized “single source of truth” for critical documentation across transaction and estate matters.
Sure, CPAs and law firms might have certain look-back capabilities, but they are not legally required to keep all documents indefinitely. CPAs, for instance, are not required as tax preparers to keep their client’s records for longer than three years.
Overall, as family offices become complex — placing greater focus on private market transactions such as club deals or direct co-investments alongside private equity funds — establishing an FVOS has the potential to create transactional scale across all touchpoints with third-party financial institutions and also protect the family.
The FVOS encompasses critical end-user experiences and can protect the family in these various ways:
- Provide advanced third-party sharing and digital tracking capabilities that help family offices monitor third-party financial-professional access, activity and secured document-handling interactions.
- Document key performance indicators that help digitize all family documents and deliver an audit trail on document KPIs, helping family offices digitally track documents by various indicators such as age/vintage and other meaningful data points. Family offices need to understand when critical documents (estate, investment, legal) are aging, to stay aware of the various service providers accessing these sensitive documents and how third-party providers are performing in their service to the family office.
- Integrate document dashboards with embedded customer relationship management capabilities. With the rise of artificial intelligence and lower costs of computing, technology platforms can afford to engage in crossover capabilities. FVOS digital vaults must evolve to include household and contract management system capabilities, thereby empowering families to truly manage their closely held relationships with supporting digital documents.
- AI capabilities embedded into optical character recognition solutions empower all members of the family to adopt new technology standards. OCR enables members to scan hard documents and archive all critical aspects of a transaction, estate planning and miscellaneous assets. All together, this helps family offices centralize and build an internal “single source of truth” that helps subsequent generations manage through periods of turbulence and disruption. For family offices entrusting the next generation to engage in private equity transactions or represent the family in club deals, building an FVOS becomes all the more critical.
- Business-to-business-to-consumer (B2B2C) is a must-have for the FVOS. Companies such as FutureVault.com, an AI-powered digital vault provider, has established corporate vaults for institutional wealth management firms such as CI Financial and Corient but also the consumer (individual family experience) for multifamily offices. The ability to establish multilevel vaults from B2B2C is critical for family offices, as there are often multiple legal entities and potentially a core family enterprise or business where the technical capability to shift from a corporate vault to a family vault is both critical and legally necessary.
One of the greatest risks to family offices stems from their exposure to third-party financial professionals and institutions. When capital and ambitions meet, it's crucial to ensure that institutions, advisers and service providers do not overcharge or complicate transactions unnecessarily.
Overall, establishing a digital document shield around the family office through an FVOS framework helps bring a unified front between the family entity and any third-party constituents and trusted advisers.