Ultimately? The risk grows that accumulated wealth will not be passed on to the next generation in a structured fashion.
Family wealth opens many opportunities, but it also carries complexities that must be carefully addressed in order to achieve a shared purpose. Fears commonly felt among wealthy families include the threat of money as a divisive force capable of creating internal splits and the risk that a family’s wealth might be frittered away if it is poorly managed.
In this article, we therefore explore the family asset governance issue by looking at key elements: how to beat the generational trap of asset dilution and, of course, how to plan efficiently.
Beating the generational risk of asset dilution
“Shirtsleeves to shirtsleeves in three generations” – a saying often attributed to American industrialist Andrew Carnegie – serves to underline the possibility that family wealth can be rapidly diminished in just a few decades.
Factors contributing to this potential scenario include, obviously, a dilution of assets that are shared among heirs, tax payments, inflation and bad investment decisions. Perhaps the biggest threat however is the possibility that young family members are either poorly prepared or unwilling to take responsibility for wealth stewardship.
The difference in perspective between one generation and the next can be substantial and care must therefore be taken to bridge the gap between, on the one hand, the work ethic of a successful entrepreneur and, on the other, a young person who has enjoyed access to money without needing the drive of the family’s company founder.
While motivations and goals may be very different, this doesn’t mean that the younger generation is not motivated to fulfill the role of Asset Management, however, its members may have different interests in terms of philanthropy and social enterprise that need to be taken into account.
Open communication is key
In order to identify the next generation of ‘family champions’, it is important to develop an extensive communication program that includes casual conversations as well as more formal meetings.
Talking about family history while engaging younger members by asking about their own dreams and aspirations can help to enlighten them about the past achievements of their forbears and get them excited about their own future.
In many ways, history foreshadows the future. And the achievements of the past can provide a signpost to the direction of the family’s investment choices moving forward, including a commitment to charitable causes and social enterprises.
By addressing the family’s existing values and working towards the development of a coherent vision, it is possible to solidify family unity around a sense of shared direction and purpose to benefit all members. This approach means that joint objectives become easier to establish and conflict is much less likely as different generations work cohesively together.
Planning today with future generations in mind
With a clear understanding of values and vision in place, the time is right for the family to come together and make a plan that works for future generations. Agreement is necessary on the structure of active and regular cooperation in order to manage current assets both for the benefit of the family as a whole and for each person individually.
Since this process is key to sustaining the family’s wealth for the long term, it must be given sufficient importance – in fact, it is fair to say that, in our opinion, ’planning is everything’ and almost as much time and effort should be spent in preparing family heirs to receive their share of wealth as is spent investing and managing it.
In order to map out the future, a family needs to agree on essential details and key requirements, including:
- Summary of Tax situation and Cross-border Residence
- Outline of Current investment portfolio
- Agreed Family Vision
- Agreed Risk Profile
- Education plan and Family Trust
- Future investment strategy
Activation plan
With an agreed picture summarizing the current situation, important decisions can now be made about managing the future, including:
- How will the family assets be managed?
- Who will be responsible for key decisions?
- Which family members will have voting rights?
- What kind of decisions can be made to preserve the family’s wealth for the next generation?
Is outside assistance helpful?
To finish with comes the question of assistance. The key questions outlined above cannot be constructively answered without truly engaged individuals who are committed to the family cause and prepared to dedicate their time to the family’s continuing long-term success. Given the complexity of bringing together family members, sharing relevant information and developing consensus around the family’s values and vision – there is indeed plenty of scope for conflict.
Managing in-depth interaction with close relatives can be challenging at the best of times and, with the likelihood of emotions being heavily involved in the negotiations, a family may appreciate the value of an objective, outside arbitering who can apply a great deal of experience to finessing the process and ensuring a positive outcome that is satisfactory to all.
In case there is a call for external support, it is worth considering the value of a Family Office to help manage this complex process, and we are obviously here to help.