Wealth Management

Our family relationships and our feelings about money bear some interesting similarities. A lifetime of interactions with relatives, especially in a business environment, can create complex relationships with a range of strong emotions. We all have heard siblings talk about their childhood in ways that would make us think they were raised under separate roofs. Each individual is affected in unique ways by their interpretations of childhood events and the inevitable drama of youth.

Our relationship with money can also be influenced by what we witnessed growing up. The risks we saw others take and the impressions our environment left on us can guide the way we make financial decisions. The desire for gains and the fear of losses often emerge under stressful situations. When we combine the emotions of financial success or failure with complicated family relationships, indecision and confusion can be the result.

When making strategic decisions, family business owners need clarity around the overarching goals of the business, the values it represents and the role each person plays in future success. Each decision maker, however, brings a unique set of traits and experiences to the table. Outside their common experience in the business, their family situations, personal priorities and experiences with wealth can be quite different. Those differences can bring added stress when business decisions have very personal implications.

Personal financial planning can help provide clarity and confidence. That confidence can help diffuse some of the emotions that can arise when deciding to innovate, transition or scale. Each family member should be able to understand how the levers pulled within the business affect their personal financial situation.

The family business can provide a sense of identity for individual family members as well as the family collectively. There is a strong sense of belonging to something greater than oneself, sharing values and accomplishments while also pursuing personal goals. However, balancing what is best for the senior members of the business and those who are preparing to take the next step forward can be challenging. Each party will consider, “How does this work manifest as wealth for me and my beneficiaries?” Each generation’s judgment might be influenced by their personal relationship with money.

In one family business we advised, a generational transfer was just about ready to proceed. The next generation was prepared to assume the mantle of leadership, and there was clarity on the strategic goals of the enterprise. Yet the current leader struggled to embrace his personal financial plan. The wealth created by the business was what he knew and trusted most. He believed the business was the safest part of his balance sheet. Because of that perception of safety, the wealth he managed outside the business was invested in risky, illiquid assets.

That approach to risk management worked for him, but it hindered the transfer of the business to the next generation. The majority owner could not bring himself to leave the family business because he did not trust that he would be financially secure if he retired. While the family had sufficient wealth to provide for security, the owner preferred to maintain the current balance of risks because they were what he knew.

Family business and money are both personal and complex. There is no silver-bullet solution that will work for everyone. The best way to manage the process is to begin wealth management conversations early on, so there is understanding well before critical decisions like this.

The goal is to have all business owners come to the table with the highest confidence in how they define financial success and what role the business will play in that success.

Establish priorities
When the source of family wealth is being discussed, uncertainty feeds emotion. If the business has provided a sense of identity over many years, the way each generation responds to change is likely to vary. A member of the business may have a clear sense of who they are as part of the larger organization and in the wealth picture of the family but may have less clarity on the opportunities and challenges that role creates for them. The priorities of the business must be clear to all involved in order to achieve alignment, but each individual would also benefit from identifying priorities for their own family and wealth plan. Income, wealth accumulation and even status within the business community and social circles all must be balanced delicately. 

It helps to create a framework of priorities that recognizes that business goals will be collective, but financial goals are very personal. The common priorities could be broad and typically long-term, like passing on the family values through the business across multiple generations. A more personal priority might be to understand how different sources of income, both active and passive, are supporting a lifestyle. That way, if courses change or timelines are adjusted, the impact on the highest-priority goals would be understood.

Know your individual biases
Behavioral economics is a field that is quickly making its way into advisers’ day-to-day conversations with clients. Insights from the field can help us understand why we think the way we do and under what conditions we might be prone to failure. 

Family business owners are particularly subject to several types of bias. One is the “endowment effect,” the belief that what we already own is more valuable than all alternative options. This phenomenon was at play in the previous example of the business owner who was unwilling to relinquish the reins because he feared the unknown.

By assigning a higher value to our current status, are we creating paralysis for the business? Each member of the business must understand the range of possibilities for their wealth, their profession and their family. Evaluating how each option would affect their unique circumstances will build confidence that they are making an informed decision.

Another behavioral economics concept is the “illusion of control,” the mistaken belief that we can influence the outcomes of situations that are actually not under our influence.

Consider a senior-generation member who owns a stake in the family business but also has real estate holdings, interests in other closely held businesses and brokerage accounts scattered about. The only unifying factor in this complex balance sheet is the hand of the owner coordinating it all. From the outside these holdings look disjointed, but the owner feels the assets are under control.

At some point — perhaps for the benefit of a surviving spouse or to achieve transition of the business to the next generation — the owner must shift focus away from control. Instead, the goal should be creating a unified purpose for all assets. What is the role of each asset in providing income, growth or stability? If the owner were no longer around to manage it all, would the heirs be left with a chaotic situation?

A team that includes a financial adviser, an accountant and an attorney can teach business owners how to understand and master their biases.

Clarity about our circumstances allows us to calmly assess changes and understand their impact. In the dynamic environment of a family business, an understanding of money and wealth can help alleviate the strain and emotions that can emerge when key decisions are on the table. Confidence in business strategy and personal financial clarity make generational transitions more comfortable.

Dennis Morton Jr. is a founder and principal of Morton Brown Family Wealth, a Registered Investment Advisor located in Allentown, Pa. (www.MortonBrownFW.com).                                

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.


There are two aspects to transferring a business to children. Of course, there’s the technical aspect: transferring ownership in a tax-efficient manner and as part of a business continuity plan. There’s also the emotional aspect: preparing your children for the wealth and responsibilities that come with this very special family asset.

I often find families have a harder time preparing for the emotional component, because there’s so much to consider in order to transfer a business successfully. It requires some deep introspection and conversations about your family values and long-term goals.

• How do you do it in a way that’s thoughtful and not a burden on the children?
• How do you match your vision for the business with your children’s identities and ambitions?
• How do you teach them stewardship of the wealth they will inherit?
• How do you ensure you’re being fair to your children, and to your employees?

The best approach is to talk with your children about managing wealth early, often and in an age-appropriate way. Here are five ways to help prepare your children for a successful business transfer.

1. Engage children so they have a positive relationship with money. Children growing up in wealthy families can have broadly varying views about the money and the family business. Some may feel a sense of entitlement and expect to inherit or run the family business. On the other end of the spectrum, some children feel they don’t deserve the assets; they haven’t worked for them and want nothing to do with them. It’s important for parents to address the psychology of money and engage children so they have a positive attitude about wealth and can manage it in a way that works for them.

It really comes down to instilling a strong sense of self-worth and allowing them to have their own identities. They need to be able to express their own vision for their lives and pursue their passions, rather than live in your shadow and fear they will never meet your expectations. When you understand their ambitions, you can better prepare them to maximize the family’s assets for themselves and future generations.

I suggest talking to them about the importance of being a contributing member of society and how the business furthers that goal — how it creates jobs while providing services or products that improve people’s lives, or perhaps how the company’s philanthropic activities benefit the broader community. Explain to them that the business can add to their lives and give them the tools and resources to accomplish great things.

2. Help them understand the responsibility. You and your family have worked hard to achieve success. It’s vital that your children understand that focused effort and stewardship must continue in order to maintain the business.

While they have watched you build, enhance and evolve the family business throughout their lives, it’s important that they understand what it all means to you in order to create purpose and meaning for them. Start by sharing your family values and making them a common part of everyday conversations and behavior.

Tell the story of the family business. Who came up with the idea? Why? How did it grow? What challenges did you have to overcome? What unexpected rewards came along the way? Why did you make the sacrifices you made? What was worth it, and what wasn’t? Humanizing the company can help build a nurturing sense of responsibility in your children.

As they get older, talk to them about the technical side of estate-planning concerns. Explain to them how you intend to transfer the business (i.e., the entities and transfer techniques that will be used, who will hold voting shares, etc.) and whether you’ve set up trusts for them. When they’re old enough to understand, let them attend wealth planning meetings with your advisers so they can hear directly from professionals about the legal and tax issues and why assets need to be transferred in certain structures.

Once they understand how hard it is to achieve and manage success, they can appreciate the full value of the family’s business.

3. Give them age-appropriate tasks. It’s never too early to start educating children about the value of money and a strong work ethic. When they are young, teach them how to count money and save for important things. You may want to give them a small bank account so they can start learning about cash flow, budgeting and saving. Find age-appropriate opportunities that fit within your family values for them to earn money.

As they get older, you could give them a small pool of assets to invest themselves. Teach them or have your advisers explain how to research companies and determine value metrics, rather than follow news headlines. If you want them to have an altruistic attitude about money, involve them in a donor-advised fund or in your family foundation. If they are interested in taking an active role in the family business, teach them about the business and tell them what qualifications are needed to obtain a job there.

4. Inform them about all the assets they will inherit. I know one woman whose parents transferred a significant portion of the family business to her and her sister through a trust. But the sisters have no idea how much is actually in the trusts — the value of the family business or other assets. Although the woman is involved in running the family business, she knows very little about the assets that have been set aside for her and whether or not she has access to them. She wonders how she should plan for a spouse and family, or any other future endeavors. Will she be able to use the assets for these purposes? Or should she rely solely on her and her spouse’s earnings?

When your children are mature enough, let them know exactly what business interests and other assets they will inherit and your intentions for them. Will your child’s spouse have access to them? Can the assets be used only for the grandchildren? How should your children think about the business compared with other assets they will inherit? Is it OK for them to sell company shares? Can they use the assets now to further their own interests, or must they wait until you pass away?

When possible and appropriate, I recommend you share your overall family estate plan as you discuss this information with your children so they can see how each asset fits into the full picture.

5. Respect their goals. It may be your dream to have your son or daughter follow you as chief executive of your company, but it may not be theirs. Respecting their goals ties back to giving them the space and tools to develop and maintain self-worth so they have a positive relationship with money. If someone joins the family business but thinks the job is a burden and limits their dreams, the individual, the company and the family will all suffer.

Help them figure out how the family can help them fulfill their goals. Maybe it’s best to develop them as knowledgeable owners who don’t work in the company. Perhaps you could start a “family bank” to help finance their independent business ventures.

If they do want an active role, think about what experience and education they will need, and how you can develop their leadership capabilities.

Conversations facilitate planning
There are many family dynamics that play into your plans to pass your family business on to your children and future generations. One size does not fit all.

The most harmonious transitions occur when the entire family is emotionally ready to take the next steps. Having these family dialogues often and throughout your children’s lives will help you with succession and estate planning. The conversations will open up different options to transfer your business and wealth in a manner that satisfies both your and your children’s goals and, ultimately, helps you establish and maintain the legacy and family harmony you desire.         

Nikki Michelini is a director in wealth management and a principal working in the San Francisco office of Aspiriant, a wealth management firm serving affluent clients nationwide (aspiriant.com). Her area of specialty is family office services.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.


The gravest threat preventing a family from passing along its wealth from one generation to the next is poor planning and management.

Creating significant family wealth is no small feat, and serious steps should be taken to ensure that wealth survives not only into the next generation, but also for future generations beyond that. Avoiding the outcome of "shirtsleeves to shirtsleeves in three generations," or the phenomenon whereby inheritors of wealth squander it before it reaches the fourth generation, requires discipline and vigilance.

It is essential that families take a holistic view of their wealth and incorporate a plan that includes investments, taxes, spending, philanthropy, specific methods for communication, and education and development of the next generation. These elements of family wealth are all intertwined, and each is an important part of a successful wealth preservation program.

Below are eight practices we think are essential to sustain and grow family wealth for generations:

1. Diversify wealth to reduce concentration risk. The old adage that "great wealth is best created through concentration and best maintained by diversification" remains as true as ever. The challenge of diversification from a single company (for family business owners), stock (for company executives), hedge or private equity fund (for alternative fund managers) or a particular sector can become difficult given the tax cost of diversification, comfort with that holding and an emotional attachment to the original source of wealth. But there is an abundance of negative examples that must be avoided, including single stock risk (WorldCom, Enron, AIG, etc.), fraud (Madoff, Barings Bank) and hedge fund blow-ups. Slow and steady wins the wealth preservation race.

2. Foster effective family education and communication. From a wealth preservation and legacy perspective, the family members who share in the wealth must be on the same page. Many families have suffered from an inability to develop an agreed-upon mission and governance system for the family's wealth, which can result in disaster, in terms of both the family relationships and the finances. That kind of agreement from the beginning is important in order to avoid litigation and disastrous breakups, occurrences that are all too common within families. The process generally starts with a respected family member understanding the need to engage the next generation in a dialogue. Often third parties can be helpful in organizing and facilitating these discussions. Outside advisers can help bridge differences and work with different types of family dynamics. Successful family communication must also include having fun with the process and bonding with one another.

3. Develop a rational spending policy that accounts for market downturns, taxes and inflation. These are all issues that present clear challenges to maintaining wealth over multiple generations. But excessive spending, while often less dramatic and immediate, can pose the biggest danger to wealth preservation. Lack of adherence to an appropriate spending policy can erode wealth either quickly, or over time in ways that are almost imperceptible. Most advisers would suggest a maximum annual spending rate of 4% to 5% of investable assets, given historic returns, taxes, fees and inflation. Good wealth advisers are proactive in counseling families about reasonable spending practices and help them set the parameters early.

4. Encourage an entrepreneurial spirit in younger family members. Sometimes the best defense is a good offense. In other words, creating more wealth can mitigate the issues one might have with preserving wealth. New wealth in later family generations will help overcome Malthus' law (the rate of population growth exceeds resources) and give later generations pride in their own wealth creation skills, as well as a feeling of ownership and responsibility for the wealth itself. Thoughtful senior-generation entrepreneurs need to find ways to develop the next generation's skills by mentoring younger family members, providing financial assistance and projecting a positive attitude about risk taking. Limiting younger family members to stewardship of wealth is not empowering enough.

5. Actively focus on income and estate tax minimization. With maximum income tax rates over 50% and estate tax rates over 40%, mitigating the tax burden over multiple generations is a daunting task. However, there are numerous strategies to reduce one's income tax burden that are well accepted by the IRS. These include tax-advantaged structures (partnerships, insurance, 529 plans, etc.), and specific investments (such as municipal bonds and venture capital). To reduce estate taxes, there are many strategies to shift the ownership of assets to future generations with little or no tax liability. Many opportunities, such as Grantor Retained Annuity Trusts (GRATs), can be used repeatedly and can protect large amounts of wealth from the IRS. Good estate planning is an ongoing process.

6. Select advisers who act as fiduciaries by putting the clients' interest first. Many financial firms still take the view that it is acceptable to sell a client an investment they view as "appropriate" or "suitable" given his or her profile. Generally, however, multigenerational families need trusted advisers (both firms and individuals) who are independent, unconflicted and true fiduciaries. A fiduciary must make every decision based on what is best for the family, not just what is suitable for the family.

7. Make philanthropy a part of the family enterprise. Philanthropy is obviously an important vehicle for a family's tax plan, but for families preserving wealth from one generation to the next, it can be much more essential than that. Families who give back to society more often develop a sense of purpose for their wealth, and this can be a cornerstone of wealth preservation and family unity. Family philanthropy should start with a dialogue about shared values and mission, a search for common ground and causes, and a discussion of how the family envisions its legacy. Each generation may have different causes that they wish to support, and those causes can become part of the overall family philanthropic mission. The most important thing is that the whole family supports the passion of each family member.

8. Nurture the family's human capital. The skills, passions and aspirations of each family member must be recognized and encouraged. Successful family meetings include a discussion of younger family members' goals and pursuits.

A balance of considerations

These best practices focus on a combination of financial, family and personal issues. Merely focusing on how to preserve the family's financial capital misses the point—it's their human capital that matters most.

Families must emphasize family connectedness. This requires great communication skills applied consistently and many opportunities to connect, such as family meetings and celebrations. Successful families remind themselves where they came from, what they value and how each family member is unique.

Rob Elliott is vice chairman of Market Street Trust Co. (www.marketstreettrust.com).

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Studies show that the average American is one paycheck away from being on the streets, but it's not just the average American who can fail financially; wealthy families can fail too. Overspending, too much portfolio risk and lack of communication are among the main reasons families with a net worth of $30 million or more fail.

For wealthy families, the definition of "failure" varies. For some, failing means they can't maintain on a long-term basis the lifestyle they've grown accustomed to. Others may incur no impact during their lifetime but fail to leave what they consider adequate resources to subsequent generations. For those who went from entrepreneur to investor, the absence of liquidity for opportunistic investing might represent failure. And for most wealthy families, the lack of understanding about financial stewardship in concert with the family's values constitutes failure.

If it's hard to fathom someone with $30 million of financial resources overspending, consider that families with far more resources have done just that. A quick online search will reveal several, some whose net worth was in the billions. Wealth can create a false sense of security that one doesn't really need to create a budget, let alone adhere to it. The family business uses forecasting and budgets, but the family members may not. You'd be surprised how many people cannot readily put a number to the expenses they incur yearly, especially when it comes to professional fees (e.g., accounting, legal, investment management and property management). With the average life expectancy growing, risk-free returns around 2% and market recovery periods lengthening, routine gradual overspending can lead to devastating consequences—similar to the power of compounding, but in reverse.

How could someone with $30 million or more incur too much portfolio risk when seasoned investment advisers are overseeing the family's asset management? To answer that, let's begin by noting that wealthy families have multiple investments. Investments separate from the family operating business will often be held with different custodians, e.g., marketable securities with two separate advisers, a variable annuity purchased years ago, and a property management firm overseeing rental units. The family will receive periodic performance reports from each custodian or adviser regarding the marketable securities portfolios and variable annuity. The standard comparison of how the investment fared against its benchmark will be included with a snapshot of holdings by category. The property management firm's reporting is often in the form of an accounting of rental revenues and related expenses, leaving the actual return on investment calculation to the property owner.

So who takes all the data and prepares a comprehensive performance report factoring in all the investments to determine an accurate representation of asset classes and their returns? Often no one does. Each adviser may be doing his or her best to help the family make investment decisions the adviser believes are suitable. But absent one overriding investment policy statement for the family and a comprehensive portfolio summary from which to work, isolated investment decisions can create unnecessary risk.

The investment policy statement

An investment policy statement serves as a guide for all the family's financial decisions. It should include the following:

Investment objectives. What is the objective for the family's financial resources as a whole? For example, is the goal to maximize income for annual spending, or is long-term growth and capital preservation the key focus?

Time horizon. Identify the time frame in which the desired return might reasonably be achieved. If short-term liquidity needs are expected to be minimal or met with cash inflows, then a long-term perspective is possible.

Risk tolerance. Where does the family fall on the risk-return spectrum? Will there be panic at day-to-day fluctuations in the market, or can some level of risk and variance in the market be tolerated to increase the possibility of achieving the investment objective?

Performance expectations. This reduces the investment objectives to a minimum rate of return that is desired.

Duties and responsibilities. Formally state what the investment adviser(s) and custodian(s) are responsible for. The investment adviser(s) should serve as an objective, third-party professional helping to guide the family through a robust, diligent investment process and management. Custodians are responsible for the safekeeping of the investments, settling transactions, collecting income and dividends owed, and detailed reporting.

Asset class guidelines and strategic allocation. These are determined by factoring in the investment objectives, time horizon, risk tolerance and performance expectations identified earlier. Composition of the portfolio is broken down into a strategic allocation. Acceptable ranges for overweight and underweight are also included.

Monitoring and review. Benchmarks to assist in monitoring are established for each investment option. Determine if the investment policy statement should be reviewed annually or more frequently.

Most successful business owners understand the importance of turning over the reins gradually. Key executives and family members are taught over time the culture of the company and the corporate values and mission. Budgets and balance sheets are reviewed in board meetings, and strategy is discussed in open and engaging brainstorming sessions.

But when it comes to the family's legacy beyond the family business, the same sense of openness, communication and guidance is often lacking. The second generation may know a family foundation exists, but do they know why? Was it created simply for the income tax savings, or is the first generation passionate about philanthropy—and, if so, what causes do they support? The second generation might understand that a trust was established for their benefit and that of their heirs, but do they know why? Was it simply for the estate tax savings, or does the first generation feel strongly about providing educational resources or seed money to foster the entrepreneurial spirit? If there aren't family meetings where these types of topics and expectations of stewardship are discussed, family members will be left to make their own assumptions. They might unwittingly make decisions that are inconsistent with the family's legacy and values.

Planning a family meeting

At its simplest, a family meeting is a gathering of family members to discuss values, stewardship and deployment of the family resources.

Prepare a basic agenda for the meeting. Begin by discussing the purpose of the meeting. For example, is the group expected to actively engage in a discussion about how they feel the family's resources can be deployed to benefit society, or are they there to understand what the family leader has already identified as the focus? Either way, communication is key.

Set small goals for each meeting rather than trying to cover it all in one sit-down. Work from big-picture goals down to the details. An example might be collectively determining a focus for the family foundation and estimating the dollar amount of grants each family branch can make. Then, at a subsequent family meeting, family members might discuss the recipients they chose, how they arrived at that decision and the expected impact of the donation.

Preventing adverse outcomes

There is no way to completely eliminate the risk of failure, even for wealthy families. But steps can be taken to mitigate the possibility of failure in its various forms:

• Avoid overspending by first creating a comprehensive financial statement that realistically identifies potential income from each source. Next, track down your actual expenses and compare the two. Make adjustments where appropriate. Sound familiar? It should. This is exactly what you've been doing for years with the family's operating business. Now you are expanding to include all the family resources.

• Manage portfolio risk by creating an overriding investment policy statement that clearly outlines investment objectives, time horizon, risk tolerance, performance expectations, strategic allocation, rebalancing and monitoring benchmarks. Consolidate the individual performance reports so you have an accurate picture of the entire portfolio.

• Determine the family's legacy beyond merely continuation of the family business, and communicate it to all the family members, or work collaboratively with them to identify it. Hold family meetings and be open and clear on expectations for financial stewardship and the reasoning behind them.

These strategies can help multiple generations enjoy both the tangible and intangible benefits of the family's financial resources.

Alicia Giltinan, ChFC is CFO and director of family operations for Chasefield Capital, a Colorado-based multifamily office and wealth management firm providing families with consolidated financial affairs (alicia@chasefield.co).

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The Voice of the Rising Generation: Family Wealth and Wisdom, by James E. Hughes Jr., Susan E. Massenzio and Keith Whitaker • Wiley/Bloomberg Press, 2014 • 146 pp., $40

Many young adults who are members of enterprising families have trouble finding their own voice, contend the authors of The Voice of the Rising Generation, a new book written for these inheritors. The young people fear they will never measure up to the founder's greatness, or "feel that many of the important choices in their lives have been made by their parents or grandparents," the authors write.

James E. Hughes Jr. is a retired attorney and author of Family Wealth: Keeping It in the Family. Susan E. Massenzio and Keith Whitaker are with Wise Counsel Research Associates, a think tank and consulting firm. The authors explain that the book's goal is to keep the founder's dream from becoming a "black hole" that absorbs the dreams of descendants. The gravitational pull of this "black hole" is a recurring theme in the text.

Hughes, Massenzio and Whitaker prefer the term "rising generation" to "next generation," because they believe the latter term puts "all the emphasis on the founder or founding generation." They also assert that a focus on stewardship has its drawbacks. "If you become a steward only of someone else's dream," they caution, "then your own voice will likely fall silent."

A common problem in enterprising families, the book notes, is the emphasis on financial capital rather than human capital—defined as family members' dreams, abilities and relationships.

The authors compare a wealthy family's struggles to those depicted in Homer's epic poem The Odyssey. In the Homerian epic, Telemachus (son of the hero, Odysseus) leaves home to search for his father—and to find himself. Similarly, the book says, members of the rising generation must pursue their own passions within the context of their family history. In The Odyssey the goddess Athena, disguised as a family friend named Mentor, asks Telemachus tough questions and gives him constructive criticism, just as members of wealthy families must find mentors who can help them navigate the process of individuation. And those family members must avoid the dangerous temptations of a life without work, just as Odysseus had to steer clear of the lotus flower (which had a narcotic effect when eaten) on the island of the Lotus-Eaters, the book points out.

Some rising-generation members are afraid to take the risk of striking out on their own to do work they enjoy, the authors write. Others try to "negate" the family wealth through compulsive spending or excessive philanthropy, or by refusing to acknowledge bank statements. Too many succumb to substance abuse.

Hughes, Massenzio and Whitaker counsel readers that wise choices about how they spend their time can help them avoid such pitfalls. The authors assert that work meets a "human" need, even if there is no financial need to obtain a job. They define "work" as a challenging pursuit that "meets the true needs of others" (as opposed to a sinecure obtained through the family).

The book includes a chapter aimed at heirs in "the middle passage" of life, particularly those ensconced in undemanding jobs in the family enterprise or those grappling with loss of identity after the family business is sold. Siblings or cousins can help each other work through a sense of isolation and find their individual voices, the authors suggest.

The author trio also notes that although trust arrangements may be wise from a legal or financial standpoint, in practice they can make members of the rising generation "feel separated from important choices in their lives." Beneficiaries are advised to educate themselves about ownership structures and to develop relationships with trustees or trust officers.

Hughes, Massenzio and Whitaker previously co-authored The Cycle of the Gift: Family Wealth and Wisdom, a book aimed at parents and grandparents of inheritors. That book is referenced in the current volume, and a helpful model from its pages is reproduced: the "Four Cs," representing one's sense of control, commitment, challenge and community.

While The Voice of the Rising Generation eloquently describes inheritors' struggles, it offers few concrete solutions to common relationship problems, other than recommending communication and "self-advocacy." An appendix suggests workshops offered by Wise Counsel, the authors' firm.

Yet for people of wealth who have just begun to recognize uneasy feelings, the book is a good way to spark deeper thinking and, it is hoped, family conversations. In many points in the text, the authors put into words thoughts that readers may have been afraid to express or even acknowledge.

The authors write, for example, that a family's financial wealth "may inform what work family members do, whom they marry, how they raise their children, and how they spend 'their' money." Their book can be a starting point for those who want to honor the founder's success while living a healthy life of their own. 

It's More Than Money: Protect Your Legacy, by Patricia M. Annino • 117 pp., $18.80 (via Amazon.com)

Estate attorney Patricia Annino likens wealth planning to sailing. A family leader, she writes in It's More Than Money, should use "true north" (family values) as the basis for a plan. External forces may dictate a change in course, but true north remains a fixed point on the compass.

Annino urges readers to view their various financial and legal documents as parts of a single, integrated plan that is congruent with the family's important values. In too many families, she laments, creation of each document is viewed as an individual exercise to achieve a short-term goal, such as saving on taxes. What's more, some family leaders never get around to creating an important document, or if they do, they never update it.

Annino notes that although every family has values, there is a tendency not to think about them until there is a shock to the system. Such shocks, the author writes, can be negative, such as a divorce, or positive, like a sale of the business that results in significant liquidity. "It would, of course, be much better to think about your family legacy before a shock happens," and to be intentional about transmitting the family values to succeeding generations, Annino writes. "A strong family system with shared beliefs," she contends, "will absorb the shocks from the external world and adapt and become more resilient and sustainable each time a new shock (positive or negative) occurs."

At less than 120 pages, It's More Than Money is a quick read. But the author packs a lot of important, practical information in her slim volume.

For example, Annino urges family leaders to perform a "congruency audit" on legal and financial documents. "The legal structure can enable a plan and allow goals to be implemented," the author states, "but it cannot address the fault lines of emotional issues." She also discusses the advantages of having advisers work as a team whose members communicate with each other—and notes that as the family life cycle progresses, it's often necessary to make replacements on the team roster.

Annino warns readers to think carefully about health care and elder care issues. "As the population ages," she writes, "the most significant threat to family wealth and harmony is no longer estate taxes; it is now the erosion of wealth by the cost of living and an extended lifetime with significant additional custodial and medical care."

Estate plans should be reviewed regularly, the author advises. "What may make sense at the very beginning when the business does not have value or the real estate is heavily mortgaged or the children are very young may not make sense ten years, or fifteen years or twenty years later," Annino notes.

The book also presents advice on risk mitigation, including strategies for protecting the family's reputation on social media, questions to consider when deciding whether to make gifts to heirs, and the advantages of prenuptial agreements. In addition, the book offers information on achieving philanthropic goals.

In It's More Than Money, Annino provides ample motivation to stop procrastinating and get to work on your planning.

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Wealth study reveals need for education

Wealthy people say they want to preserve their money for the long term, but most don't know how much they can afford to spend each year without risking depletion of their assets. So reports Merrill Lynch's Private Banking & Investment Group, which recently released a study of 171 U.S. consumers with $5 million or more in investable assets.

Nearly four of ten (39%) respondents to the survey—entitled "Can You Make the Money Last? The Road to Sustainable Wealth"—said wealth could be preserved forever with annual distribution rates of 6% or higher. According to Merrill Lynch, wealth distribution rates should be held to the 2%-3% range in order to sustain the value of assets in today's dollars.

One-fifth of those queried said they didn't know what would constitute an appropriate distribution rate. According to study co-author Michael Liersch, Ph.D., head of behavioral finance at Merrill Lynch, "'I don't know' could be the right answer." An acknowledgment of ignorance, Liersch points out, can be a motivating factor that drives families to institute educational programs and develop a wealth-preservation strategy. "Asking questions and saying things like 'I don't know' can actually be extremely important to the conversation," Liersch says.

Important family conversations

More than a third (39%) of respondents said it's never too early to begin talking to their children about responsible financial behavior. Eleven percent said these discussions should begin when the kids are ages ten to 13; 18% cited 14-17 as the right age range; 19% said ages 18-24; 10% preferred to wait until their children were 25 or older; and 3% said "never."

Yet the study revealed a discrepancy between when respondents thought they should talk to their kids about fiscal responsibility and when they actually had such conversations. Only 14% reported having conversations about money with children at age nine or younger. Twenty-seven percent said they waited until their children were 18-24, and 21% procrastinated until their kids were 25 or older.

Why are these families procrastinating? Liersch says it might be because of a mistaken belief that transition plans and all the necessary documentation must be in place before a conversation can start. "All that needs to happen is for the family to get together and have an open and vulnerable dialogue," Liersch stresses. Parents could start a dialogue by discussing values and their desire to have the family's wealth last for generations, Liersch suggests.

Senior-generation members might ask each family member for a written answer to the questions, "Do we have just enough, not enough or more than enough?" and "What does 'enough' mean?" Elder family members who started a business from scratch might have one definition of "enough," while their kids who were raised in prosperity might have a different one, he notes.

While the survey respondents believe—at least in theory—that conversations about wealth should take place early, they are not in a hurry to tell their kids exactly how wealthy their families are. Most study participants (61%) said discussions with heirs about the amount of the family's wealth should not be held until children have reached age 18. In this case, respondents are practicing what they preach; 70% said they refrained from discussing dollar amounts until their kids were over 18.

Liersch agrees that waiting to reveal the specifics is wise. "Dollar amounts can be distracting," and discussing specific figures can overshadow key points such as what constitutes good financial decision making and what the family values are, he says. Parents should be cautious about presenting "the right amount of information at the right time," Liersch says.

Families who are prominent in their community face extra challenges because their children's classmates are likely to ask them if their parents are rich or tease them about the family's wealth. "That's a motivation to start the conversation as early as possible, so you're the one framing it," Liersch says. He suggests that parents coach children on questions they might encounter and how to respond.

When to distribute

Opinions about when and under what circumstances heirs should have access to their share of the family fortune varied according to the survey respondents' age. More than eight in ten (83%) participants aged 55 or younger said heirs should receive their wealth as they achieve specific goals (education, career, marriage), compared with 64% of respondents aged 56 and older. And 84% of respondents aged 55 or younger said the heirs' share should be earmarked to help with specific goals (education, first home, etc.), compared with 62% of the older cohort.

Liersch believes these findings are significant and demonstrate that, when it comes to receiving their inheritance, young people are not clamoring for full autonomy and full discretion, contrary to popular belief. "In fact, advice and guidance can actually be extremely empowering to younger generations," Liersch says. "Understanding [senior generations'] intent and having parameters around [when funds are distributed] makes wealth feel less like a burden and more like an opportunity."

Liersch recommends that families create videos starring the patriarch and matriarch, who might discuss the growth of the family business from the first idea, store or widget and emphasize how their values influenced their decisions. It is beneficial for the elders to talk about what they started with as well as what they risked, and why, Liersch notes.

Risk factors

When asked what constituted the greatest threats to their wealth, most participants in the study named factors largely beyond their control. For example, 55% said performance of the markets was a risk to wealth sustainability, 52% cited investment returns and 44% identified government actions as a risk. By contrast, only 9% of respondents said lack of communication among family members posed a risk. Yet the other survey findings show that communication and education are needed to correct spending patterns that can deplete the family fortune.

Liersch speculates that respondents might not have identified communication issues as a risk because they believe their family is already talking about wealth. But too few of these conversations are taking place "on a systematic and explicit level," he cautions.

"Set aside a two- to three-hour period as a family unit and literally get explicit, at least on an annual basis," Liersch advises. 

TAB survey of small-business owners finds families share a vision for their companies

A recent study conducted by The Alternative Board (TAB), an organization that provides peer advisory boards and executive coaching services to small businesses, found that family business owners like being in business with their relatives. Of the family business respondents to TAB's Small Business Pulse Survey, a whopping 91% said they support the decision to have family directly involved in their companies.

What's more, the family business respondents said their family members are more likely than their non-family employees to agree with them on their vision for the business (49% vs. 25%).

Allen Fishman, founder and executive chairman of TAB, which has more than 140 franchises in five countries, says the findings show that families are deeply committed to their companies. "That business is feeding the family; it's not just a job," Fishman says. "They're rallying around the same vision."

Fishman notes that to many family business owners, "The value of the family dynamics is actually more important than the pure material success of the business." Family involvement "has its challenges," he says, "but it clearly is a major motivating factor for many of the [TAB] members to grow their businesses."

The challenges of working with family were confirmed in the survey, which was conducted in March. Family business owners who participated in the study reported that they are more likely to have conflicts with family members than with non-family employees over matters affecting the business (32% vs. 27%). Yet the family business owners aren't convinced that an outsider can help them settle family disputes. More than two-thirds (68%) said it would not be valuable to have a third-party arbitrator resolve family conflicts.

TAB received responses from 380 business owners; 232 of them were owners of family businesses. Of the family business respondents, 47% were founders, 39% were second-generation owners and 12% represented the third generation.

Succession planning: A weak spot

Less than half (43%) of the family business owners who participated in the TAB study said they are satisfied with their succession plan. About a quarter (24%) admitted to being dissatisfied with their plan, and 33% said they don't have a succession plan.

Interestingly, only 38% of the family business respondents said it is likely that their business would remain in the family when they exit. Perhaps these business owners plan to sell because they doubt their family members are viable successors. Forty-two percent of the family business owners surveyed by TAB said their non-family employees were the most qualified in their respective positions, while 37% said family members involved in the business were the most qualified. Other groups identified as the most qualified included "my business partners (non-family)" and "my vendors."

Fishman says he's not surprised by the respondents' assessment of their family members' qualifications. "They are very tuned into areas that are not perfect," he says. "They are looking with more attention than maybe an outsider would."

Fishman adds, however, that a frank assessment of family talent may not result in a separation of the wheat from the chaff. "Even if [some family members] weren't the most qualified, they might still have the position, as long as they could do a good enough job," Fishman observes.

He notes that intangible factors, beyond bullet points on a résumé, come into play when families work together. "Family members in business bring a different level of passion and purpose to the business; they don't view it as just a job," Fishman observes. "There's an emotional connection [of the business] to who they are; it's not just what they do."

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Most family businesses and single family offices around the world are still dealing with the aftermath of the financial crisis. Many are confronting an interesting problem: a significant shift in allocation of the family’s total wealth between operating assets (the business or other mostly illiquid investments) and financial assets (the family’s liquid investment portfolio).

Most likely, both the operating assets and the financial assets suffered a major devaluation during the crisis. However, the speed and magnitude of the devaluation were not equal for the two asset categories. A portfolio that was balanced before 2008 may now look very imbalanced, with an over-concentration of wealth in illiquid operating assets.

During down cycles, operating assets tend to hold more value than other investments. The value of financial assets—investments in hedge funds, private equity, bonds or other types of securities—is defined by short-term market factors. In contrast, the value of operating assets is determined by long-term external and internal factors.

It may seem wise to try to rebalance such a portfolio. But when deciding what to hold and what to relinquish, few family business stakeholders consider the different risks and rewards involved for the two types of assets.

The return on financial assets is primarily tangible, and their risk is measured by volatility. The rewards that come with operating assets, on the other hand, are not just financial; they include the emotional connection that many owners feel to their company, their control over management and their desire to perpetuate family values. Operating assets are long-term in nature; they are measured by discounting the present value of long-term future earnings.

Risks associated with operating assets include fluctuations in value as well as business risks, such as product or market obsolescence, availability of working capital to meet cash flow needs and access to funding for future growth. For example, an operating company faces the risk that banks might cut off credit, especially if the company’s customers and suppliers are also under stress.

Patient capital vs. modern portfolio theory

A family business owner whom I’ll call Daniel recently told me, “I plan to sell all my toys—my cars, my boat, everything—and pour the money into my company to keep it afloat.” His company has lost about 20% of its value since the financial crisis began. Although it continues to return about 3% a year, he’s feeling a cash-flow squeeze; his customers have been taking longer to pay and his bank has refused to extend his lines of credit.

It seems as though Daniel is just throwing good money after bad. But Daniel views his company as a family legacy asset. In his decision making, he factors in his emotional connection to the company and his track record of navigating the business through previous economic storms.

Most family business owners react to a downturn in one of two ways:

• The patient capital perspective. People like Daniel who are emotionally attached to their company want to keep it in the family at almost any cost. Because Daniel’s family business retained more value than liquid assets during the downturn, he can rationalize his decision to invest heavily in it.

• The modern portfolio theory perspective. At the opposite pole are those who assess the family company’s risk-and-reward equation as they would calculate risks related to financial assets to which they have no emotional tie. Business owners who take this approach might consider the company’s return too low in relation to the risk involved. They would argue that this is a great time to sell some stake in the company.

Is Daniel so focused on preserving the legacy company that he’s ignoring the short-term threats that may jeopardize the future of his ailing business? Are portfolio managers who recommend against over-concentration in any one asset—even the family business—being shortsighted?

Often, family business owners are well served by their patient capital. While public company investors put pressure on CEOs to produce short-term returns, a family’s patient capital allows family business managers to pursue long-range goals and produce sustainable, long-term returns.

Sometimes, though, patient capital can be a liability. Emotional attachment may overshadow external market risks, such as access to capital, or more fundamental risks, like product obsolescence.

No single perspective fits all situations. The decision to keep or sell an asset depends on family members’ needs for liquidity and their attitude toward long-term stewardship. As the economy improves, there will be new opportunities to create wealth. In order for the family to capitalize on these opportunities, they must agree on why they own a particular asset, where future capital should be invested and how family liquidity will be generated.

Total wealth management

In assessing a business owner’s portfolio, many wealth managers ignore the largest portion of the client’s assets—the family business —because the tools used to evaluate a financial portfolio do not apply to most operating assets.

A total wealth management (TWM) approach, by contrast, measures the risks and rewards of operating and financial assets separately. Along with the financial attributes of those assets, it evaluates the emotional components.

Traditionally, family business owners think of themselves as stewards of the family business. In a TWM approach, they would regard themselves as stewards of all the assets: financial, operating and emotional.

Daniel’s patient capital has turned into a desperate attempt to save his depreciating asset (the company) by selling other assets that are also devalued in today’s market. TWM might help him uncover other opportunities, such as ways to diversify his financial securities as well as his company’s concentration of customers (geographically and by sector).

A sound family governance system that separates management of the family business from management of the family wealth can help implement TWM. While the board of the operating company focuses on business risks and opportunities, a family office or other family governance structure can evaluate the risks and rewards related to the family wealth, and how best to transmit the family assets and family values to future generations.

François de Visscher is founder and partner at de Visscher & Co., a Green-wich, Conn., financial consulting and investment banking firm for closely held and family companies (francois@devisscher.com).

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From the moment the 2001 tax bill was enacted there was considerable uncertainty about what would happen come 2011, when the ten-year life-span of the 2001 law was scheduled to have run its course. Although it took Congress and the President until the third week of December 2010 to hammer out the rules, the changes to the federal estate tax and gift tax law made by the new 2010 tax bill represent a substantial liberalization of the law. This will give a big assist to many succession plans.

From an estate and succession-planning standpoint, the heart of the new law is this: The lifetime federal gift tax exemption has been increased to $5 million per donor. For a married couple, the combined lifetime gift tax exemption thus is $10 million. These limits are in addition to the gift tax “annual exclusion,” which allows a donor to make gifts of $13,000 per year ($26,000 for a married couple) to any number of recipients.

Until Jan. 1, 2011, the lifetime gift tax exemption was $1 million ($2 million for a married couple). Under the new law, even for a donor who previously made gifts above the limit and thus paid gift tax, there is still an additional $4 million of lifetime gift tax exemption.

For families and their advisers, this presents the opportunity to draw on the proverbial “clean slate.” One consequence of the economic downturn is that values have fallen. For those who own a closely held business, it is a safe bet that, were you to sell, you can expect a lower price than you might have received five or six years ago. Likewise, if you own commercial real estate, values undoubtedly are lower now than they were back then. If you have a desire to transfer part of a business or any other asset to family members, the combination of still-depressed asset values and a huge increase in the gift tax exemption makes this a nearly irresistible time to act.

Gifting or selling

Many business owners are open to some level of gift giving but are not ready to relinquish control. If you own a corporation, consider recapitalizing it so there will be both voting and non-voting stock, and then give away some portion of the non-voting stock. You retain control through the voting stock. Even an S corporation may do this; issuing voting and non-voting stock does not violate the prohibition against two classes of stock, as long as the rights of each share are identical, other than their voting characteristics. For a business that is organized as an LLC, reconfigure the operating agreement so that there are two types of membership units, voting and non-voting, and then give away some of the non-voting units. 

In some instances, an intrafamily sale of assets may be the best solution, either instead of or in addition to giving a portion of the business as a gift. The value of the underlying business or other asset probably is less than it was several years ago. Moreover, if the interest being sold or given is a minority interest, it is appropriate to consider downward valuation adjustments for lack of marketability and lack of control. If the asset to be sold will be paid for entirely or partially by a promissory note, the minimum interest rate that must be charged to meet IRS requirements remains very low by historical standards.

Tax advantages

What are the benefits to a lifetime transfer of assets, as compared with a transfer upon death? Many states impose a state-level estate or inheritance tax but do not levy a state-level gift tax. Simply put, assets given away during one’s lifetime will not be there at death to attract state-level tax. With many state-level estate or inheritance taxes topping out at 16%, the potential savings can be appreciable. Moreover, to the extent that the asset given away thereafter grows in value, that appreciation now will belong to the gift recipient and thus will not be subject to estate tax upon the gift-giver’s eventual passing. 

The newly increased gift tax exemption also offers an opportunity to “even up” prior transfers to children or grandchildren. Many grandparents establish a trust as each grandchild is born. If the grandchildren are far apart in age, the current balance of the eldest grandchild’s trust may far exceed the balance of trusts established for his or her younger siblings or cousins. Now that each grandparent has an additional $4 million of gift tax exemption, in some instances it may be appropriate to make “catch-up” gifts to those grandchildren with smaller trust balances.

Time is of the essence

There is reason to move expeditiously to take advantage of the increased gift tax exemption. On Jan. 1, 2013, the estate and gift tax exemptions are set to return to $1 million. Whether that actually will happen is anyone’s guess, but there is something to be said for striking while the iron is hot. Moreover, on the premise that the economy gradually will recover, it is reasonable to assume that in the near future asset values will increase.

Some commentators have noted a technical “glitch” in the new tax bill, which might conceivably impose eventual estate tax on assets given away this year and next, if the estate tax exemption does indeed drop to $1 million in 2013. There is some reason to think that Congress will repair this oversight in the coming months. In all events, however, with proper planning one will be no worse off for having made gifts in 2011 or 2012, and for the reasons outlined above one may come out far ahead. 

For those in a position to think about wealth transfer, truly there has never been a better time than now.

David A. Ludgin (dludgin@mccarter.com) is a partner in the Private Clients practice of law firm McCarter & English LLP, where he focuses on estate planning and administration, charitable planning and closely held business succession planning.

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Setting up a family office takes time and clear thinking, as many families who have one can tell you. It’s a time-consuming process, so it’s better to start thinking about it before you’re in the throes of selling a business and planning a major lifestyle change.

Just as a new business venture requires—among other things—resources, a business plan, a clear mission statement, organizational structure and staffing, so does a family office. In fact, you should think of it as a new family business, one that can provide investment planning, investment management, lifestyle management, integrated tax and estate planning, oversight of philanthropy and risk management. A family office can also help maintain family continuity and protect the family reputation.

A crucial first step is to determine whether you want to establish a family office, and to begin educating yourself and your family on what a family office can do for you and how you should structure it to achieve your family’s goals.

Wealth preservation

Probably the most obvious reason for establishing a family office is to preserve and transfer your family’s wealth so that it will still be there for your grandchildren and their grandchildren. In the wake of the severe market losses many investors suffered over recent years, we know that preserving the family fortune is by no means a given.

Some investors today may feel particularly whipsawed by stock market volatility that some experts say could persist for years to come. These market conditions will require investment strategies that are nimble and sophisticated enough for the rough currents ahead, including:

• Anticipated changes in the tax code affecting the wealthy.

• Sweeping regulatory changes affecting investment strategies.

• The prospect of high inflation in the coming decade.

• Rising health care costs.

Two of the most discussed challenges to wealth management are the implications of regulatory reform affecting investors and the likelihood of higher tax rates to address a growing federal deficit. It’s still unclear just how the tax rates and regulations will change, further complicating the planning behind a family office and the eventual sale of your family business. Once you sell your company, investment decisions will revolve around not just what you choose to invest in, but also how and where you hold your assets.

In the face of these kinds of challenges, most investors today would agree that the traditional “set it and forget it” portfolio management strategy is no longer prudent. With this in mind, a family office, along with its advisers, can help you and your heirs carefully time the sale of the business, formulate or rethink strategies and adjust portfolios made up of the proceeds of that sale.

Educating the next generation

But planning for the sale of the business involves decisions about more than just what to do with the assets. Financially successful families are often so focused on preparing the money for the children that they overlook the importance of preparing the children for the money. Like structuring a family office, educating your family to work together effectively to manage its wealth is a long-term endeavor—a process that should start years, if not decades, before you sell the business.

Done well, this education helps your family’s next generation, among other things, to build a consensus on investment decisions and philanthropic giving, and to work in concert to protect the family’s reputation and legacy within the community.

The family office can play an important role in this process by being the catalyst for a family discussion about the office structure, mission and function and the family’s role in its day-to-day operations. These conversations can be critical to helping heirs develop a sense of family identity. They also foster the kind of collaborative decision making that will help them manage the family’s assets when their parents are no longer there.

All too often, once the family’s assets pass to the next generation, the heirs move to undo the parents’ wealth management solution, partly because they feel that the parents were trying to control the assets from the grave. If the children are involved in the creation of the family office and understand the terms under which they inherit, they will feel “ownership” in the transition process. That sense of shared ownership may improve the odds that the family’s wealth will endure over generations.

Families that overlook mentorship and discussion are putting themselves at financial risk. Family transition advisers Roy Williams and Vic Preisser, in their 2003 book, Preparing Heirs, wrote that a stunning 90% of families lose their wealth within three generations, a phenomenon widely referred to as “shirtsleeves to shirtsleeves in three generations.” It may surprise you to learn that, according to studies, loss of family wealth is caused by financial mistakes in only about 3% of cases. In about 60% of the cases studied, the cause was lack of communication and trust among family members; in 25% of the cases, the main factor was that the heirs weren’t properly prepared to take over management of the family assets.

Furthermore, when family members have not been adequately educated about wealth preservation, the family is vulnerable to reputational risk. Some years ago a wealthy family—descendants of a multimillionaire who died a century ago—learned that a trusted adviser had siphoned off tens of millions of dollars of assets over the years through embezzlement and a variety of fraudulent real estate schemes. The family’s lack of attention to how their wealth was being managed left them vulnerable to fraud of staggering proportion. They also suffered the humiliation of being the subject of lurid news accounts about their lawsuit against the former chief investment officer.

Helpful networks

When you begin your research about family offices, you will find several formal and informal networks that offer information about family offices and the services wealthy individuals and family office require. Some are professional networks, others are associated with colleges and universities, and some are informal, members-only gatherings of local family offices. There is also a network of select investment advisers, consultants, accountants and attorneys who truly understand the industry and who would be more than willing to share their views on how to successfully build and manage a family office.

If you’re like many entrepreneurs, you may feel that you are far better at creating wealth than you are managing it. Managing a new family office isn’t something you —or your heirs—want to learn on the job. It may be time to call in the professionals.

The key is to start the family conversation as early as possible, seek out resources to educate yourself on the industry and forge a unified family vision of what your life will look like after you sell your business.

Philip Tedeschi is a senior director and Glenn Prichett is a director with BNY Mellon Wealth Management Family Office Services (www.bnymellon.com/wealthmanagement/index.html).

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The recently released Merrill-Capgemini World Wealth Report—conducted by New York-based Merrill Lynch Global Wealth Management, a unit of Bank of America Corporation, in partnership with Capgemini, a Paris-based consulting firm—provides a lot of data and color around the high-net-worth (HNW) and ultra-high-net-worth (UHNW) markets. These insights provide a lens through which the financial community will examine its prior successes and failures and create agendas for future growth.

While the report is making headlines by proclaiming that investor psyche has shifted in the wake of global financial crises, is the lens truly in focus? The masses are simply realizing what a select group of HNW and UHNW individuals have known all along: The most vital and beneficial role of the financial adviser—in any market condition—is to provide perspective, transparency and guidance around a client’s long-term financial strategy.

Market followers: Yesterday’s news

Financial executives and pundits alike have long been opining about plight of “market followers.” Market followers tag along with the pack, adopting strategies and asset classes made popular by positive, negative or even scandalous media coverage. In a good economy, they are overly optimistic, so they buy. And then buy some more. When the economy turns, they don’t panic at first. But eventually they sell, go to cash, maybe dabble in fixed income and, reliably, repeat the cycle all over again.

Rest assured: Market followers follow. These investors are enthusiastic and knowledgeable, but, unfortunately, they are one step behind. While HNW investors’ wealth levels in aggregate are back to 2007 levels, there are a lot of individual investors who, because they are market followers, are not as fortunate.

But let’s face it. Market followers are old news. Right now, the industry is all abuzz about a more deliberate kind of investor. And since a big portion of the financial services community has only recently discovered this group, let’s call them the “new HNW investors.” New HNW investors have what is considered a “new” perspective on wealth. They are more sensitive to different kinds of risk. They want more transparency. They can and will insist on being more involved in their financial decisions.

The big misconception regarding new HNW investors involves how the industry defines them. They are not new. They have been around a long time. The financial services industry just wasn’t paying attention.

Many of you out there can be considered new HNW investors. You are heavily involved in key decisions and have a well-thought-out plan in place. Importantly, you don’t just give lip service to this concept. Your plans truly are carefully considered and deliberate because (1) you already know what might happen to those plans in the event of a variety of “bad” scenarios and are comfortable with those tradeoffs; and (2) you know the old industry adage of “stick to the plan” actually works only because both you and your adviser are able to see the impact of change on your entire financial situation and are able to continually reassess its validity and adapt when necessary. And you recognize the rewards of this discipline not only through traditional metrics such as portfolio growth and risk management but also through more avant-garde measures, such as goal attainment and the confidence that comes with sound decision making.

Investors with a plan

New HNW investors don’t have a crystal ball or special insight into the markets. What they do have is a deliberate plan, a definition of success for themselves and their family, and advisers who provide comprehensive decision support beyond traditional investment analytics.

To them, we say, Don’t worry. You are not alone. To the others, we say, Take stock of what you are getting. Are you regularly armed with current information regarding how you are progressing relative to each of your specific goals? Do you truly have a complete picture of your entire financial situation (balance sheet, cash flows)? Do you really understand the impact that lower returns or higher inflation might have on your ability to do the things you care about?

If the answers to these questions are “no,” then you need to reassess your own approach and look for another adviser. And remain diligent until you find one. Believe it or not, there are advisers out there who “get it.”

And to the industry at large, we say, While you are certainly moving in the right direction, you need to pick up the pace. You’re not moving nearly fast enough or far enough to meet end investor needs. You know it. And investors know it too.

Michael S. Farrell is managing director for SEI Wealth Network, a business unit of SEI that provides private wealth management services.





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