Wealth managers claim that the subject of what would remain if all investment products, asset allocations, portfolio strategies, and return targets were eliminated is one that is hardly ever brought up during the initial design discussions for a family office. What framework keeps everything together? In many instances, the response is unsettling. An intricate and well-constructed investment architecture is possible. Beneath it, the governance—the procedures for making decisions, the guidelines for settling disputes, and the structures for integrating the next generation—is frequently inadequate or nonexistent.
First-generation wealth creators typically build their family offices with a strong emphasis on growth, just as they built their wealth. They maximize profits. They devote months to choosing asset managers, discussing the distribution of capital between public and private markets, and creating cross-jurisdictional tax-efficient arrangements. Once the money is actually flowing, the governance issue is considered something to be addressed later. The issue is that the cost of building the structure retroactively is significantly higher than it would have been at the beginning by the time it becomes clearly urgent, such as when a sibling dispute over a liquidity event turns destructive or when the second generation shows they have no idea how to read a quarterly report.
There is enough evidence of the pattern to give it a name. The third-generation curse, often known as “shirtsleeves to shirtsleeves in three generations” because it is a multicultural adage, refers to the steady decline in wealth that occurs in subsequent family generations. Up to 90% of a family’s wealth may be lost by the third generation, according to data cited by wealth specialists. Poor investment choices or poor market timing are rarely the root of the problem. It is internal. Heirs who are ill-prepared and lack the knowledge to make important decisions. disputes between siblings that end up in court. Family branches are moving in opposing directions and acquiring incompatible risk tolerances. Because everyone was preoccupied with keeping an eye on the portfolio, governance mechanisms were never developed.
The industry monitors certain, quantifiable deficiencies in the governance component. Formal investing committees and documented decision-making processes are found in less than 56% of family offices worldwide. This means that most family offices, which oversee assets that frequently amount to hundreds of millions or billions of dollars, make important decisions informally, depending on whoever is the most assertive in the room or whoever has control over the relationship with the primary adviser. This is a structural vulnerability that gets worse with time, especially as the founding group gets older and the succession issue becomes more practical than abstract.
In wealth management circles, heir readiness is the topic that is discussed the most seriously, in part because to the delicate nature of the discussions and in part because the solutions are actually challenging. If a twenty-four-year-old beneficiary has never been involved in a significant decision, you cannot make them care about the family office governance structure. Programs for financial literacy are beneficial, but they are most effective when combined with real responsibility, such as attending investment committee meetings, managing a small allocation directly, or participating in the creation of charitable grants where the stakes are high but the repercussions of making a mistake are minimal. Families that do this consistently have prepared heirs. Families who wait until the funds are available typically find out about the gap at the worst possible time.
At the practical end of these concerns is the decision between a single-family office and a multi-family office structure, which is something to think carefully about. Complete privacy and a tailored structure are provided by a single-family office; no information is shared, no governance compromises, and every decision is tailored to the unique circumstances of one family. Additionally, it has considerable fixed expenses, necessitating a whole team of experts whose wages, operating overhead, and compliance requirements are only justified if the assets under management are significant enough to make the economics work. At the expense of some privacy and customization, multi-family offices provide access to institutional-quality facilities at a reduced fixed cost by distributing such expenditures among several client families.
Which structure appears better on paper is not the true question for families making this decision. It’s the structure that they will be disciplined enough to use correctly. Without a governance structure, a single-family office is no better than an unofficial arrangement. A single-family office centered on the personality and power of one individual can be outlived by a multi-family office with well-documented procedures. The discipline that underpins the structure is more important than the structure itself, and it must be planned in from the start rather than added after the family is already struggling and the money is already in jeopardy.