Family Office Governance

The way a family governs itself formally and informally is vital to the success of multigenerational wealth and family office success. Formal governance documents present rules, rights and restrictions around the wealth and investment goals. By incorporating such documents, you create a set agreement in the form of bylaws, mission statements and operating agreements. It also helps prevent litigation and wealth debauchery in future generations.

Informal governance (IG) centers on team building, communication and establishing values within a family structure. In the article Intergenerational Wealth Transfer, it explains that many families have difficulty implementing their goals because they don’t develop strong informal governance. “When a family is facing its toughest challenges, it is important to come back to a core set of guiding principles, which often get perpetuated through informal rules of conduct and communication.” Think of IG as a means to achieving solidity within your family, especially after major life events, like death in the family or graduation from college. “Living” the family’s values and establishing strong work ethic within your family are equally important factors in developing informal governance.

Family Communication Is Critical

An integral piece to successful informal governance is family communication. It is critical to communicate the effects of poor decision-making and spending habits to the next generation. Effective communication not only focuses on wealth creation and preservation, but also formulates strategies aimed to educate future members of your family.

An effective strategy is to encourage clients to treat their family’s finances and practices as if it were a business.  By relying on financial documents, such as balance sheet and profit and loss statements, fiscal discipline is maintained.

First and second generations that are educated early on about the family’s wealth, philosophies and values generate a greater respect for the previous generation’s hard work, and in turn, may exhibit more fiscal discipline.

Perhaps the most important topic to consider during the early stages of family office is family values. Older generations have to determine the best ways to instill values to subsequent generations. Often times, family dynamics can act as a barrier when establishing shared goals and values. However, it is a necessary step when defining a family mission statement. By working cohesively with your advisers along with multigenerational family members, everyone gains a deeper understanding of the estate plan, all while improving family communication skills.