The Family Office Risk Nobody Talks About (And Why It Usually Has Nothing To Do With Investments)

When people talk about family offices, the discussion is usually centred around investments. Which asset classes should we be allocating to? What is happening in the property market? Should we be looking at private equity? Are we comfortable with our current portfolio spread?

Those are all important questions, but they are not usually the issues that cause the most significant problems.

In our experience, the greatest risks facing family offices are often governance related rather than investment related. The investment portfolio may be performing well, the asset base may continue to grow and the structures may be tax effective, but beneath the surface there can be uncertainty around who is making decisions, how disagreements are resolved, what succession looks like and whether the next generation is genuinely prepared to take on responsibility.

These issues rarely become apparent while everything is running smoothly. They tend to emerge when there is a significant event. A founder retires. A family member wants liquidity. A key decision needs to be made and family members have different views about the future. A business is sold and substantial wealth is suddenly sitting in investment structures that were never designed to hold assets of that scale.

Many family offices are built incrementally over decades. A successful business is established, investments are acquired, trusts are created, companies are added and advisers are engaged. Each decision makes sense at the time it is made. The result can be a sophisticated and highly valuable asset base. What is often overlooked, however, is whether the governance arrangements have evolved at the same pace as the wealth itself.

The reality is that successful wealth transfer is rarely about documents alone. Lawyers can prepare trust deeds, shareholders agreements, constitutions and succession planning documents, but those documents are only part of the equation. Families that successfully preserve wealth across generations generally spend considerable time discussing governance, expectations and decision making. They have difficult conversations early. They identify future leaders. They think carefully about how future generations will participate in ownership and management. Most importantly, they recognise that preserving wealth and preserving family harmony are often closely connected.

This is where family constitutions and governance frameworks can become valuable. Not because they eliminate disagreement, but because they provide a process for dealing with disagreement. They help families articulate why the wealth exists, what objectives the family is seeking to achieve and how important decisions should be made. In many cases, the process of developing these frameworks is more valuable than the final document itself because it forces conversations that otherwise would not occur.

The larger a family office becomes, the more important governance becomes. It is relatively easy to manage decision making when a founder controls a single operating business. It is considerably more difficult when there are multiple businesses, significant property holdings, private investments and several family branches with legitimate interests in the future direction of the family’s affairs.

When we work with family groups, we often find that the most valuable conversations are not about tax, structures or investments. Those issues are important and should not be ignored, but they are generally solvable. The more difficult questions relate to people. Who will lead? How will decisions be made? What happens when family members disagree? How do we prepare the next generation? What does success actually look like for the family over the next 20 years?

The most successful family offices recognise that wealth preservation is about much more than investment returns. It is about creating structures, processes and relationships that allow the family to manage increasing complexity over time. In our experience, that is what separates families that successfully preserve wealth across generations from those that struggle to do so.