One might expect the skills and business acumen that enable a family to operate a successful private company to naturally extend to the management of personal wealth. Experience suggests that this often proves to be untrue, for a number of reasons:
• Although a family may cede management control of its private business to one or more family members, a larger contingent of adult family members with competing priorities may desire a voice in wealth decisions.
• The skills and perspective that work well within a private business may not be readily applicable to the management of family wealth. Well-run private businesses often are typified by a highly focused approach to managing assets, tight control over operational decisions and the ability to achieve objectives within relatively short-term horizons. Effective wealth management, on the other hand, often entails broad asset diversification, longer-term horizons and a willingness to share control with professionals who possess operational skills that don’t exist within the family.
When these obstacles are not overcome, the result can be family dissension; the lack of a long-term, well-thought-out wealth plan; and inconsistent strategic and tactical implementation.
One method that can help a family to effectively achieve the transition between managing a business and overseeing its personal wealth is to overlay a business structure on family wealth stewardship. This can help families recognize the similarities between business and private wealth management and, equally important, discern the important differences. A business perspective can provide the family with a framework to decide how various components of its wealth will be governed and how family members and external advisers can most effectively interact.
We divide “Family Wealth Ltd.” into two essential segments: oversight and operations.
Oversight
Office of the chairman. Families of significant wealth may be well advised to appoint several family members to be responsible for:
• Identifying the family’s current and ongoing wealth needs.
• Directing and monitoring implementation within each operational area.
• Evaluating the results of all wealth initiatives.
In large families, there frequently is a tendency to select leaders who represent various branches of the family or family factions. While this may be well-meaning or politically sensitive, we find that oversight of a family’s multifaceted wealth concerns is often most effective when appointments to the office of the chairman are based upon expertise and sound judgment.
Governance. In addition to the leadership functions listed above, the individuals appointed to the office of the chairman are responsible for family governance. Leaders should be expected to:
• Bring key strategic issues to the family’s attention.
• Explain complex wealth issues and their implications to all adult family members.
• Build a consensus among family members as to who may vote and whether some votes carry a heavier weighting than others.
• Decide which issues should be put to a family vote.
• Consider the formation of a family council that acts as an advisory board.
• Provide family members with timely reports on the status of family assets and wealth initiatives.
Involving family members in wealth management can be an untidy exercise. For the sake of family solidarity, however, it is important for all family members to be assured that they are receiving quality information and that their concerns are addressed.
Management. In addition to the wealth leaders, other family members can help to implement and oversee various wealth operations. Some families perceive assignments of this type as training to prepare for a later appointment to the office of the chairman. To augment internal management, it also may be important for the leadership to form relationships with outside advisers and wealth managers who possess specialized knowledge and capabilities.
In recent years, many families have been unceremoniously reminded how important it can be to select wealth managers that are stable and have a business model that is aligned with a family’s best interests. Families that experience a substantial liquidity event from the sale of all or part of a business may also need to reassess whether longtime legal, tax and investment counselors have the experience to advise on wealth of greater magnitude.
Families with a sufficiently large asset base may choose to create a family office, although the cost/benefit ratio is generally not in a family’s favor if assets are below $300 million.
Operations
Asset management. This encompasses virtually all of a client’s property that (a) is shared in some manner among a number of family members and (b) is capable of capital appreciation. This generally covers investments of all types, common residences and one or more family businesses.
It is common for families to consider these assets as separate entities. This way of thinking can lead to shortsighted decisions. Grouping assets within a single family portfolio helps to encourage families to take into account the risk attributes of each and to estimate the family’s total exposure to financial risk.
The past year was illustrative in this regard, as more than a few families saw the value of their private residences fall, suffered a down year in their private business and experienced declines in their securities portfolios. By failing to appraise all risks in a comprehensive manner, they substantially underestimated how a general downturn could impact cash flow.
Strategic planning. Estate and tax planning are essential forms of strategic planning for wealthy families, especially those who are legacy-minded. As with strategic planning in a business context, the starting point is to identify and consider as many issues as possible:
• Wealth transfer goals in regard to existing or future generations.
• Tax mitigation objectives.
• Current and future income requirements of the grantors and other parties.
• The needs, personalities and proclivities of family member beneficiaries.
• The policies and organizational integrity of charitable or community beneficiaries.
• The need for future flexibility.
• The most favorable trust jurisdictions for addressing particular goals.
• The interest rate environment, as it applies to trusts.
• The nature of the assets to be placed in trust.
• The management of assets that are placed in trust.
• The qualities of trustees.
The annals of business failures are replete with case histories of companies that executed strategies in a tactical, piecemeal fashion. Families, too, can undermine their legacy planning, by failing to execute estate planning and other strategies in a comprehensive and coordinated manner.
Public affairs. The role of public affairs in a family’s life generally touches on three interrelated areas: philanthropy, community involvement and reputation management.
There are many options open to families that seek to engage in philanthropy or community affairs as a family. Just as most successful businesses focus on a well-defined marketplace, families may be best served by focusing on a limited number of especially meaningful philanthropic and community opportunities.
Reputation management is always a sensitive topic. Members of prominent families must be reminded that a good image can be of great worth to them and future generations for decades, but a family name can be stained by a single incident.
Education. Many entrepreneurial families devote considerable time and expense to educating and training employees in their business but neglect to do the same for next-generation family members. In many cases, the issues are the same:
• Which family members have the most potential to benefit from further education and training to become wealth stewards?
• What family wealth roles do we foresee for family members in the future?
• What kind of further education and training will help family members play an active role in managing the family’s wealth?
Decisions regarding which next-generation family members deserve to be “fast-tracked” can be sensitive. However, such sensitivities are no different from those that arise when family businesses decide which family members should be groomed to be top executives.
Risk management. Given that most family businesses keep a tight rein on their insurance costs, it is often surprising that, outside of business, many families are either under- or overinsured. Insurance coverage can be complex when multiple residences, yachts, aircraft, automobiles, horses, art collections and other forms of property are involved.
We propose that families appraise all of their personal insurance coverage and costs every two years at a minimum. The consequence of having excessive insurance, overpaying for insurance or having gaps in coverage can be substantial.
The business of managing wealth
Managing a business and managing personal wealth are not synonymous. However, approaching personal wealth management within a business framework can help to clarify the components of wealth management that require attention, and can help families of wealth to address issues and opportunities in a comprehensive and strategic manner.
Robert C. Elliott is senior managing director of Bessemer Trust, a privately owned firm that manages more than $48 billion in assets for some 1,800 clients (www.bessemer.com).