THE DIGITAL FAMILY OFFICE

A historic transfer of wealth is underway 

Ever since 2011, when the first baby boomers turned 65, they have been retiring at a reported rate of around 10,000 each day. During the COVID-19 pandemic, however, the pace of boomers leaving the workforce jumped considerably, more than doubling from 2019 to 2020, according to Pew Research Center. As of the third quarter of 2021, nearly 67% of people between 65 and 74 were retired.

Historically, the demographic born between 1946 and 1964 has been a gold mine for financial advisors, as baby boomers were the largest and wealthiest generation in U.S. history. While most boomers will still need help managing their assets to support their golden years, they will not live forever. As a result, according to analyst firm Cerulli Associates, the older generation will transfer an estimated $70 trillion to heirs and charitable organizations by year-end 2042.

As many advisors have spent most of their careers providing financial advice to baby boomers, the aging client base poses a considerable risk to the long-term viability of independent practices. The number one cause of client attrition for HNW financial advisory practices as client death and beneficiaries taking assets elsewhere.  If advisors don’t have strong existing relationships with their clients’ heirs, the chances of retaining assets are low. 

Meanwhile, the rise of interactive technology in virtually every aspect of life coincides with the aging of the baby boomer population. Many adult children of high net worth clients are “digital natives” who have experienced the prevalence of technology most of their lives. Not only do they take to it intuitively, they often prefer it to human interaction for obtaining information or conducting business. Today, these potential clients are completely comfortable making airline reservations, transferring money, or buying concert tickets on their smartphones without talking to a live person. Online reviews, recommendations, and “likes” have replaced word-of-mouth. These characteristics have significant implications for how a client’s heirs will collect information and make decisions around inherited wealth. Indeed, today’s tech-savvy generation of wealth builders and heirs to the baby-boom fortune is one of the key drivers behind the rise of robo-advisor platforms. 

 The convergence of these trends puts many advisors in a predicament where the future of their business could change instantly. Wealth transfer between generations is always a challenge ... studies show as many as 88% of heirs don’t consider their parents’ financial advisor after receiving an inheritance. Still, it also presents an opportunity for a firm to strengthen its foundation and substantiate its market value for succession or acquisition conversations. Strategies for long-term retention of inherited assets should be a key priority for every financial RIA. If financial advisors connect with beneficiaries early, provide relevant advice, and position themselves appropriately, they can significantly increase the likelihood of managing assets for families across multiple generations. Moreover, the strategic use of technology can play a crucial role in helping advisors connect with heirs. It’s not too late to ensure your technology capabilities measure up to the standard to which emerging investors have become accustomed. 

FAMILIES

Families will face numerous challenges as they work to manage their investments and wealth and protect their legacies. In the life cycle of a family office, the role that the rising generation (rising gen) will play is often a challenging question. Defining future roles within the family is one of the primary challenges of the rising gen.  Here are some of the issues they face.

Five Primary Challenges

The Family Office Exchange (FOX) has identified five key challenges, and while they range in degree of prevalence, the primary areas that need addressing are:

1. Defining future roles in the family
2. Leadership and skill development
3. Navigating family dynamics
4. Communicating between generations
5. Investment strategy

Those top two challenges are huge. Whether there’s an operating company or not, having a generational structure with defined roles and communicating expectations about what’s required at each stage of development are key. Sometimes, it’s helpful to view this process through the lens of transition planning and inclusion rather than “succession,” which we know can be a scary word.

Advisors who work with family offices on transitioning should focus on normalizing engagement. From very early ages, families should capitalize on opportunities for age-appropriate education. Think of the idea of a "kids' table" at family holidays—it's the right place to be for certain ages, but sooner or later kids move up and transition to the “big table.”

Defining Future Roles

Defining future roles is the greatest challenge for many families. It involves having positive and engaging conversations with children from a young age. Parents should always emphasize that children should pursue what they’re interested in, but even in the most supportive of environments, families aren't always able to articulate the exact roles of the rising gen. The leadership generation needs to define what family involvement and readiness look like, and the rising gen should understand clearly what it takes to meet those expectations. What special skills exist that may inform the roles they each play? It's never a "one size fits all" approach, which is why it’s such a large challenge.

Poor Communication

Poor communication can harm transition planning, and it can play a part in the other identified challenges, such as defining roles, navigating family dynamics and leadership development. For the rising gen to be engaged in family office matters, they need to feel that they’re heard and that their opinions are valued. Simply being included in conversations, being invited to take part, can significantly help with this challenge. Without addressing this challenge, family offices risk failing with most, if not all, of the others. Only with communication can the rising gen find the space to come into the office and make their own way. It’s these softer, qualitative skills that can lead to breakdown in the family. Communication, trust and shared values are the top success factors that lead to thriving, healthy family systems. 

Capability

Is the rising gen capable of planning for the significant assets involved in the family office? Too frequently, well intentioned families assume that the rising gen aren’t ready to assume any responsibility, and it’s not their time. Well, their time is running out. The rising gen are curious and interested now. If families push them out, they’ll  spend their time somewhere else, and “when their time comes,” families may have missed the window of opportunity to seize their curiosity and eagerness  It’s critically important to engage them if the family office is going to continue to thrive. For the rising gen to be capable of succeeding the active generation, there needs to be a careful and highly deliberate process for involvement, training and development.

No Assumptions

When engaging with the rising gen, family office leaders—including family members, nonfamily member employees and outside advisors—should make no assumptions about particular individuals despite the sweeping generalizations or data we see about different generations. Most people wouldn’t want someone to paint a picture of them and their entire future based on how they acted in their teens to early 20s. Think about that and give the rising gensome grace. Allow them time to grow up while simultaneously making space for them to be involved in the family office.

Inclusion

The goal is incremental inclusion, which is achieved through clear communication around important topics, such as defining future roles. Although the rising gen may be a long way from having a vote, give them a voice by allowing them an opportunity to share opinions. Alternatively, simply extend an invitation to observe certain meetings and discussions. Incremental inclusion really, really matters. Families often collaborate on different group projects, assemble junior boards or appoint the rising gen as board observers. These forms of incremental inclusion promote open lines of communication and information sharing, which, in turn, foster inclusivity and engagement and provide learning and development opportunities, all of which prepare the rising gen for their impending transition.

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