Because voters know very little about the details of candidates’ ideology and issue positions, they use a candidate’s family affiliation with a popular political leader as an information shortcut. Voters could instead analyze each candidates’ qualifications and ideology in detail (though, as Bhutto noted, that may be impossible for those who are illiterate or poorly educated). However, rational ignorance ensures that most of them have neither the time nor the incentive to do so. Bhutto herself, of course, rose to power in Pakistan in large part because voters associated her with her father, a popular politician who had been executed by a military dictator in 1979.
He also argues that this advantage also means they will be less competent on average then other politicians, presumably because there is a smaller population of politicians with familial name recognition. This also suggests that in elections where the electorate is more uninformed, familial name recognition should be more of an advantage. I would be interested to see a study try to support this empirically.
Update: Discussion in the comments.