For the most part, private wealth management centers on financial capital issues, while family wealth management focuses on all three forms of capital: financial (the money); human (the individuals); and intellectual (the knowledge). Together, these three components form the family wealth.
Successful wealth management incorporates both private wealth and family wealth. We at the Center for Family Legacy believe that in order for a family’s private wealth to have that transformative, generational impact, successful wealth management must extend beyond the money, and the fate of that money cannot be left to chance.
Build the foundation around financial capital
Let’s start by defining private wealth. Private wealth represents the financial capital, whether that is actual dollars and cents or ownership in a family enterprise. This wealth represents all the hard work, time and effort a family leader employed to create the family fortune.
Growing and sustaining the family’s financial capital—the private wealth—requires a focus on investments, tax and estate planning and risk management.
Take a multi-generational perspective
While it is essential to employ the best investment managers, accountants, attorneys and experts to guard the private wealth, from a multi-generational perspective, it is crucial to think beyond the private wealth, and incorporate the family wealth.
As stated earlier, family wealth is comprised of three components: the money; the individuals; and the knowledge. Families who wish to have the wealth transferred to future generations while also having a positive impact on those generations, must widen their focus from solely on private wealth—the financial capital— to include family wealth.
This shift requires building a professional infrastructure to include the necessary advisors, technology, etc. to prepare the human capital for the roles and responsibilities necessary to successfully lead a life with wealth. This will also provide the necessary framework, guidelines and structures to govern the family enterprise.
The result will be well-prepared heirs who are better positioned to govern the enterprise by working cohesively for the common good of the family.
In summary, in order for a family’s private wealth to succeed multiple generations, it is necessary to:
- Prepare the human capital
- Enhance the intellectual capital
- Build the appropriate governance framework
So why is all this important? It is widely known that wealth transfer beyond the third generation is unlikely. Only 10% of families succeed in maintaining wealth beyond the third generation.1 Research uncovers a variety of reasons:
- Poor or no communication between generations
- Lack of trust
- Poorly prepared heirs
- Absence of a defined, agreed upon mission
- Multi-generational mathematics (i.e. exponential growth of the family vs. mathematical growth of the wealth)
This is where family wealth plays a significant role. Families who see beyond their financial capital to the importance of nurturing their human capital and intellectual capital will:
- Foster clearer communication among family members
- Build stronger family cohesiveness
- Create better prepared heirs
The result? An increased success rate of transferring wealth to future generations.
Build a professional infrastructure
The first step is to build a family governance structure, which is especially important for those families with shared assets and common goals. Family governance, at its core, is joint family decision-making. Unless there is an agreed-on principle around how the family will come to consensus about their combined assets/goals, there is the potential for a breakdown in the family. Consider:
- Are you investing together across the family with entities like trusts, limited liability companies or limited partnerships?
- Do you own a family business or manage commercial real estate owned by family members?
- Are you overseeing a family foundation or does your family own a shared vacation home?
- Do you want to keep the family connected and organized around common family traditions or a family retreat?
These are all situations that would greatly benefit from some governance on how to proceed and make decisions. Having an agreed upon process for working together often results in just what we are hoping to achieve: enhanced communication, which, in turn, reduces potential family conflict.
Clear communication provides the heirs with a better understanding of the purpose of the wealth, and gives them a voice in how the wealth is utilized toward the accomplishment of the family legacy. Ultimately, the process will prepare and educate future family leaders.
Over the years, by studying families who have been successful at wealth transfer, we have identified 25 best practices, which focus on the non-financial aspects of living a life with wealth. These best practices center on six areas:
- Family cohesiveness
- Strategic planning
- Trusts & estates
The family members are asked to rate activities that fall under these categories in three areas: the activity’s importance; whether the family is practicing the activity; and the activity’s impact on the family (i.e., from benefit to detriment). The family members and a facilitator discuss the responses and work as a group to create a prioritized action plan for adopting these practices.
One of the key best practices is centered on teamwork and communication. Communication is the platform from which every other facet of successful wealth sustainability is built. Creating a forum for open, honest communication allows each adult member to have a voice. Having regularly scheduled family meetings can provide that forum.
These meetings have formal agendas, take place in a neutral location and, often include a skilled non-family- member facilitator. This allows for all family members to gain an understanding of what they own and how their ownership will impact their lives.
In addition, this process helps clarify the part each member will play in developing and preserving the family legacy. In turn, this prepares the current and next generation for the important decision-making the family must engage in to sustain their wealth.
Shared values and family mission
Another crucial component of family wealth is gaining an understanding of the values family members share and how the family will come together around these shared values. A values and mission exercise provides an opportunity to create a shared vision of the future to clarify what is essential to the family while bringing meaning to the wealth.
Values are the motivation behind everything we do in life; they tie you to your relationships and they influence how you deal with and interact with others and your environment.
They are at play at all times.
Values are the fundamental principles you will stand by and fight for. Understanding the values your family shares is key to helping the family come to consensus on its purpose, vision, goals and objectives. Focusing on the family’s shared values will allow family members to concentrate on their common ground with the goal being a values-based family mission statement, which can be used as a touchstone for current and future generations.
Going through the process of gaining clarity and understanding shared family values will also lead to improved teamwork and communication, a best practice we discussed earlier. In short, a family mission statement:
- Brings meaning to the wealth
- Creates alignment
- Establishes guidelines
- Plans for the future
It is paramount to remember that the mission statement is just words on a piece of paper and requires guidance and a framework to be brought to life. We have found it can be helpful to read the document at the beginning of a family meeting and ask the participants to describe how they are living the vision.
Also, a shared values and mission discussion can be an excellent way to introduce the younger generations to family governance. Having them listen to their grandparents, parents, aunts, uncles and cousins share stories about how they are following their values and living the mission can be a powerful and enriching exercise.
Policy & procedure
After completion of the family mission statement, to reach its multi-generational goals, the focus should shift to the establishment of family structures and policies and procedures that will be employed to oversee the family legacy.
These structures and policies will guide the family on the cadence of family meetings, identify roles and responsibilities each family member will be held to, and how family members will treat each other.
Family policies can provide guidelines to help avoid operating from assumptions and ad-hoc decision making. It is important to remember these policies are morally, not legally, binding.
What might some of these policies cover?
- A decision-making policy would detail how a family would come to consensus around the many choices they will make about joint wealth
- A code conduct policy would deal with how family members will conduct themselves with each other and their communities
- A conflict resolution policy would put in place steps and procedures for dealing with conflict
- A risk management policy would help deflect and/ or better handle the many risks one can encounter along life’s path (e.g., having the proper estate planning documents in place, possibility of prenuptial agreements, having the proper insurance in place)
Of course, there are many other policies families can create. Each would be specific and prioritized by the goals and objectives of the family.