The Fascination with the Family Bank
This blog by Kirby Rosplock of GenSpring Family Office raises some critical issues for advisors to consider when suggesting a family bank to their clients. An old concept with a renewed interest, the family bank is not without its pitfalls —as well as some decided advantages.
Increasingly the topic of family banks has become top of mind to family business advisors, attorneys, and wealth advisors as a mechanism to promote entrepreneurship to successive generations. The core idea of the family bank is not necessarily new—the idea of creating a structure and/or process to allow intra-family financing from one family member to another, and typically one generation to another.
Rather, the interest in the family bank concept appears to have increased as enterprising families are looking for creative ways to get offspring to be wealth creators in their own right.
Yet, when researching the concept of the family bank more recently, I learned that the number of families and advisors interested in a family bank is fairly high (relatively); however, the number of families actually creating a formal family bank structure is few and far between. Why?
- First, more often than not, advisors are worried for their families about incenting the less ambitious or less talented offspring to propose a business case, for fear of dashing their entrepreneurial zeal when/if their request is denied.
- Second, families are not always clear about how accountable they want to make their offspring should the venture fail.
- Third, there is a pervasive concern that family relationships may be compromised if there is perceived “favoritism” or preference given to one recipient than another.
But let’s think further regarding the consequences of a family bank gone wrong.
- What are the repercussions of failure if the recipient’s venture is a bust?
- Should the family make them repay the investment or intra-family loan?
- Wouldn’t a bank, other lending agency or investor look for repayment if the entrepreneur had other means to do so?
In addition to the pitfalls of the family bank, what are the opportunities that a family bank can afford to its upcoming stakeholders? Which families should be considering starting a family bank and which should take a pass? What happens if the level of entrepreneurial spirit in the next generation is relatively low? Are entrepreneurs born or can they be cultivated? Are family banks a one-stop shop solution to solving for “entitlitis” that often creeps into successor generations of wealth and enterprise?
Warner Babcock, Founder of AM Private Enterprises, Inc. and I will be leading a session entitled “Family Banks, Family Enterprise and Family Entrepreneurship” at the FFI Global Conference this coming October 2013 in San Diego for the session. During this session we will be discussing the concept of the family bank, what it means to develop and direct financing to the next generation, five principles to their success, family bank governance practices and anonymous real life family bank examples.
We hope you’ll be there, but even if you cannot attend, we would very much like your opinion of the family bank. If you have been involved with the design, setup or implementation of a family bank, please share your experience. How did it all work out? If you can send your comment to me at [email protected] before October 1, we’ll try to incorporate them into our presentation.
About the Contributor
Kirby Rosplock, Ph.D., is head of Research & Development in the Innovation and Learning Center at GenSpring Family Offices where her responsibilities have spanned the development of the firm’s Wealth Management Process, directing corporate research efforts and leading the development and delivery of various, tailored learning experiences for families. Kirby is an FFI Fellow, a member of The Practitioner editorial board and a 4th generation member and owner of a 130+-year-old family. Kirby can be reached at [email protected].
Stay tuned next week for another issue of The Practitioner.
Yours in Practice,