About the decline of family wealth

What are the secrets of maintaining a family dynasty across generations? And why is it so difficult to do so?

In our new paper “Family, wealth, and governance: an agency account”, Thomas Zellweger and I aim to tackle those questions. When families become larger, with more family members involved, interests and goals of those individuals likely diverge: Family members differ in their expectations, time horizons, risk appetites, and commitment to the family firm. And as they differ, family members might start fights about how to run the firm. Such family feuds can easily destroy the firm and also the family wealth. Just think about how conflicts among the members of the U-Haul family not only brought the U.S. family firm into trouble but entirely destroyed the family harmony, ultimately culiminating in accusations of murder.

So what can families do to avoid such battles? Well, they can set up contracts, family guidelines, constitutions, etc. But they come with problems: Either they do not sufficiently cover business-related topics. Or they are not legally binding. So families often chose another solution: They separate the family from its assets by setting up a more or less institutionalized organization that takes care of the family wealth. Typical solutions are:

  • Embedded Family Office: Here, the (non-family) CFO or treasurer takes care of the family wealth, helps family members with private investments, etc.
    • Advantage: efficient and convenient solution.
    • Problems: Brings the fiduciary in a maybe too powerful position. It becomes unclear whether the CEO is the boss of the CFO or vice versa. Family members might start to like the services of the officer too much and keep him or her busy with non-business requests. And, lastly maybe the CFO is a good CFO but a bad investment advisor.
  • Single Family Office: Here, a dedicated organization, lead by a professional family officer takes care of the family wealth.
    • Advantage: everything well organized, rules for investments, not much room for family conflicts disturbing the investments.
    • Problems: Family officer in a *very* powerful position. Might start to collude with the managers of the firms instead of working for the best of the family. Very expensive.
  • Family trust or foundation: Here, wealth and assets are managed by an appointed (family-external) trustee.
    • Advantage: saving taxes; keeps children away from the wealth; no conflict can damage the firms, allows to build legacy.
    • Problems: Trustee might collude with managers (similar to family officer), no entrepreneurship possible, in particular when the person that has set up the trust is ill/dead, the trustee can “re-interpret” the will and shape the trust according to own interest. A trust is wealth without an owner.

The study shows an important dilemma: 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.

So what can families do? First, they need to  evaluate the risk of family conflicts, now and in future. Then they might check whether a “trusted advisor” is available and whether the family can afford installing an institutionalized wealth management system. Depending on those evaluations, one or another organizational solution might be preferrable. In many cases it might be a good idea, to split up the wealth: leave certain assets without coordination, manage the main family firms with a single family office, and install a trust for philantropic reasons. In any case, the families need to make sure that the system is clear and transparent (for them). Opaque, intransparent wealth governance solutions might look tempting at first sight as they often allow for tax savings. However, they also bring the danger of “tunneling” the wealth away from the family and ultimately lead to a decline of family wealth.


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Citation: Zellweger, T. & Kammerlander, N. Family, wealth, and governance: an agency account. Forthcoming. Entrepreneurship Theory and Practice