Preserve your wealth for future generations

The adage is true: The rich are getting richer. Today’s high-net-worth individuals have more money than previous generations ever thought possible. Today, more than 2 million Americans have at least $1 million in financial assets (excluding the value of their primary residence), according to a July 2003 report in National Geographic News.

Economists at Boston College estimate that Americans will transfer more than $40 trillion in personal assets over the next 50 years, and that $28 trillion of this will be passed directly to children and grandchildren.

Because Americans are living longer and retiring earlier, high-net-worth individuals have more time to enjoy their wealth—and to think about what wealth means for themselves and their families. Many of them realize that an “abundance of riches” generates an overwhelming number of difficult decisions—and responsibilities. They have accumulated more capital than they can (or may want to) spend in a lifetime. They want to share as much as possible with future generations either through gifts and bequests to heirs or via philanthropic initiatives.

This marks a significant paradigm shift: Strategies focused solely on wealth accumulation are giving way to financial plans that emphasize wealth preservation.

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For high-net-worth families who want to expand their wealth management strategies, a family office approach can help. In this scenario, an objective “family CFO” coordinates and oversees the family’s relationships with multiple advisers. This reduces the family’s administrative burden. It also ensures that all components of a comprehensive wealth management plan are addressed and coordinated, and it enables families to establish a lasting legacy via a more meaningful definition of “family wealth.”

How plans go awry

In creating a preservation-focused wealth management plan, clients typically rely on a number of third-party advisers. Attorneys, CPAs, insurance agents, investment brokers and even business psychologists can be involved in shaping a comprehensive, forward-looking plan. The difficulty lies in managing these multiple third-party relationships effectively. Many high-net-worth individuals don’t have the time to oversee a large number of advisers. And they often don’t have the expertise needed to evaluate or implement their advisers’ suggestions. As a result, they can end up with a plan that sits on a shelf or does not suit their changing goals and needs.

While accumulating wealth is a fairly straightforward matter, preserving family wealth is more complicated. In addition to financial security, there are other, equally important dimensions of family wealth that must be developed. These include a shared history, a shared vision of wealth and a shared commitment to creating a lasting legacy. Those individuals who fail to address these non-financial factors will find it difficult to optimize the wealth that is sitting in the family tree.

Making the right wealth management decisions has always been challenging. Today, the challenge is even more daunting. People want to plan wisely for longer retirements. They want to provide for their children and grandchildren, make meaningful contributions to charitable causes and minimize estate taxes. They also want to understand new and complex investment options. Above all, they want peace of mind.

Accomplishing all this can be a daunting proposition for people considering these issues. Where do they start? Whom should they turn to for help? What will be included in the final plan? Will everyone in the family agree? They need guidance in defining wealth in a way that makes sense for their families, and in developing a plan to face today’s wealth management challenges.

Role of the family CFO

To help high-net-worth individuals take advantage of wealth preservation opportunities, some advisers are providing a “family office” approach to wealth management. In this scenario, a single adviser assumes the role of CFO for the family. This person:

•  Assists the family in defining its mission, vision, values and objectives.

•  Manages the creation of a comprehensive financial plan.

•  Coordinates the activities of multiple wealth management advisers.

•  Guides the family to make the right wealth management decisions.

•  Serves as an advocate to help align wealth to a family’s mission.

•  Implements innovative strategies to preserve wealth for future generations.

Family CFOs must have wealth management expertise and be able to oversee a number of third-party service providers, such as attorneys and investment brokers. But those aren’t the only important criteria.

A family office adviser should be an objective advocate and family partner. Given the skepticism investors feel toward the financial management community today, finding a trustworthy family office adviser may seem impossible. The solution lies in selecting a fee-only planning and investment adviser. Fee-only advisers do not represent or sell specific financial products. Neither do they make commissions on the buying and selling of investments, insurance or other products. Investors pay only for objective advice.

In addition, a family office adviser should promote an expansive concept of “family wealth.” This view of wealth should encompass:

•  Human wealth: Human wealth—the relationships that bind family members together—is the primary component of wealth for any family. Taking time to understand the traditions, stories and history that make their families unique can reveal embedded family values that have existed for generations. It also can illustrate how family members have come together in the past to achieve common goals. These insights can help families work together to create a common legacy.

•  Intellectual wealth: Intellectual wealth is more than a collection of formal educational accomplishments. It also includes the knowledge gained by family members through various life experiences. Families should consider how they pass along intellectual wealth to future generations. They should strive to understand how the family unit learns, manifests new knowledge and improves. These exercises will shed light on the family’s capacity to govern, resolve conflict and openly communicate—three critical components for family-focused wealth management.

•  Social wealth: Social wealth is generated every time a family member volunteers for a community organization or donates money to a worthy cause. As with human and intellectual wealth, social wealth is difficult to measure. But it is at the core of true family wealth. Families should examine their investments in social causes. What motivates them to support others? How do they make the biggest difference? Are there common causes that family members can rally behind? By answering these questions, families will be in a much better position to create legacies that extend beyond the family tree.

•  Financial wealth: Financial wealth is what most people consider when they think about wealth. It comprises the family’s tangible assets. It is also a tool that can be used to develop other components of wealth. Naturally, families will review their financial holdings when implementing a wealth management plan. But their returns will be greater when they do so with an eye toward building their human, intellectual and social wealth.

This approach to wealth management enables families to achieve more than asset preservation. They will create a common, more meaningful vision of wealth. They will establish a framework for future decision-making. They will grow stronger, bound by their collective dreams. And they will be able to maximize their family’s true wealth for generations to come.

Don Bouffard, CPA, is the managing executive at Crowe Wealth Management LLC in Columbus, Ohio (dbouffard@crowewealth.com).

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