Family business leaders need external advice and often engage professionals. This need has created a thriving professional services industry around family businesses. Who gives advice to family firms, what kind of advice is given, and are advisors really effective?
A recent article by Vanessa M. Strike (PDF 486 KB), published in the Family Business Review in June 2012, looks at 30 years of research on these topics and analyzes more than 105 studies. I summarize the article’s insights here.
Many family businesses engage formal advisors who often work as content experts in one of the three key areas: family issues, business dynamics and ownership structures. Other advisors work more as process experts who operate at the intersection of the three areas, in particular during important transition periods. Key advisors are usually able to leverage some content expertise (e.g., law, tax, accounting) with deeper process expertise and ability to leverage other content experts, becoming long-term trusted advisors to the family business leader.
Several studies reveal that accountants are the most common type of trusted advisor and often the most effective. A survey from New Zealand published in 2010 reveals that 94% of family firms use accountants as advisors, 65% use lawyers, and 48% rely on bank advisors. A US study from Massachusetts published in 2007 suggests that 30% of family firms consider their accountants to be their most trusted source of professional advice.
Of key importance are also informal advisors, usually found within the family, namely spouses. Some individuals also provide the role of trust catalysts, bringing together different generations of the family. Family Firm Boards are also a valuable source of advice. Families tend to prefer an informal advisory board to a formal board of directors with fiduciary roles.
According to the New Zealand survey, families choose advisors based on previous experience (75%), reputation (71%), and personal rapport founded on trust (64%). Trust is a critical driver of advisor selection given the importance of privacy.
In addition to the expected characteristics of advisors required to build trust (e.g., technical competence, strong character, empathy, and predictability), effective advisors have a broad understanding of the areas that intersect all professions, so that they know when to bring in the right domain expert. In addition, what truly differentiates trusted advisors is their ability to understand the complex issues at the intersection of family interests and business dynamics.
Those advisors that focus solely on the family or the business will be less effective in their role. In terms of communication skills, trusted advisors should have strong listening and facilitation skills, as well as the ability to keep personal distance from conflicts while integrating emotional and rational issues.
The need for professional advice may decrease from the first to the second generation as family experience and diversity of expertise increases. Yet, the need may increase from the second to the third generation as task and emotional conflict become more prevalent.
Also, the type of advice required may change with the evolution of the family. In the early stages, founders benefit most from having a personal relationship with a trusted advisor, who often remains behind the scenes. In the second generation, key issues center on family interrelationships, succession, and estate planning.
The need to understand business and family interests in an integrated way becomes more important. At the third generation and beyond, a trusted advisor usually manages and team of content experts and is mostly concerned with creating structures and policies.
The studies reviewed in the paper by Vanessa Strike (PDF 486 KB) show positive business and family outcomes from engaging with advisors. These include enhanced business outcomes such as decision quality, increased planning, and improved firm performance, as well as family outcomes such as increased family units and reduction of conflicts.
Yet, there are two key challenges for trusted advisors. One is that family conflicts may prevent following the advice given. Ability to understand and manage conflict is thus a key skill for a trusted advisor. Moreover, often a family is not ready to change, or the family leader does not see the need for change and is reluctant to adopt the advice given.
Reasons for reluctance to heed advice include the requirement for privacy, difficulty in accepting outside views, and lack of desire to change the status quo. Change management and negotiation skills, together with the ability to understand and reconcile multiple perspectives, are key factors for the success of trusted advisors in their important role.
For more information, download Vanessa M. Strike (2012) – Advising the Family Firm: Reviewing the Past to Build the Future, Family Business Review, 25 (2), pages 156-177. (PDF 486 KB)