Families should KISS to preserve their wealth

Last week Family Capital looked at five risks for family offices, with one being the problem of longevity of such organisational structures. Recent research from two academics from University of St Gallen’s Center for Family Business looked at the issue of preserving wealth over generations. It suggested  some interesting conclusions.

The two academics - Thomas Zellweger and Nadine Kammerlander - highlight the difficulties families often have keeping multi-generational family wealth together. As family businesses move from one generation to another complexities evolve that can often lead to family feuds, which can easily destroy the firm and also the family wealth.

A way of possibly defusing these difficulties is to set up family constitutions, councils, and so on. But the authors say these come with problems like failure to adequately cover business topics, or they aren’t legally binding.

So families often decide to separate the family from its assets by setting up an institutional structure like an embedded family office, separate family office, or trust structure.

But these come with problems, too, say the academics. “Whenever families aim to solve conflicts by hiring an external expert, the so called ‘double-agency conflicts’ might arise - the more separation between family and assets, the more leeway the fiduciary has to work according to his or her own benefits.”

The academics reckon that possibly the best way forward is a combination of strategies. “Several solutions probably work best,” says Kammerlander. “But what is probably more important than anything it to ensure institutional structures that have been set up are transparent.”

She adds that too many times such structures are complex and may be only understood by the individual who set it up. This can cause difficulties when the wealth is passed onto the next generation.

Kammerlander thinks that a good example of a structure that works well for the family as well as being relatively transparent has been set up by the Jacobs family in Switzerland, which among other business interests own a big stake in the recruitment group Adecco.

“They have a combination of a family office and trust structure to combine the advantages of the two,” she says. “But the structure is very transparent - for example, they don’t have lots of different layers of holdings owning other holdings, as well as just one family office and one trust.”

As so often, the enemy of wealth is too much complexity. Or as the American Navy's so-called KISS principle states: "Keep it simple, stupid".