What is in this article?:
- Risk Management for Wealthy Families
- Why Scenario Planning Fits
Don Kozusko & Paul McKibbin discuss how scenario planning can benefit your high-net-worth clients.
Why Scenario Planning Fits
Several characteristics of scenario planning make it highly appealing for use by families in the risk management process we’re describing. Scenario planning is well suited to managing collaboration by multi-disciplinary groups of advisors and interactive participation by family members and executive leaders. It’s naturally collaborative, manageable and accessible because it’s built around story lines.
1. Our minds are attuned to absorbing and understanding complex interrelationships and developing insights through stories, much more so than through changing multiple variables or creating complex graphics on a computer screen. This fundamental principle is recognized by cognitive psychologists and by other professionals from multiple fields.12 As an illustration, the events that transpired in the example of Troublesome Charitable Bequest13 involve the interaction of multiple consequences, but they could have been revealed in advance and understood through a scenario process, and couldn’t have been uncovered by a quantitative or mechanical tool or forecast. (See “Case Examples,” p. 37.)
2. Stories embody forces and people moving across time, and our appreciation for these “shapes in time” is an essential aptitude for planning for a future with multiple variables.14 Troublesome Charitable Bequest illustrates the point, but A Daughter’s Premature Death further shows that multiple complex interactions are not the only way in which a plan is derailed; the passage of time can bring forth a threatening combination of just a few “ordinary” risks (death and divorce) that can undermine what appeared to be a well-conceived plan. Neglected Beneficiary reminds us further that even the simplest of cases, from a legal point of view, can become much more problematic if the natural progression of events in time isn’t considered. (See “Case Examples,” p. 37.)
3. A process built around story lines is a great equalizer because it facilitates collaboration from contributors with different kinds of knowledge, experience and thinking/learning styles. Developing insights through story lines requires relevant knowledge, of course, and collaborations can flounder not only over an unmanaged divergence of opinions, but also over distinct and uneven levels of experience and knowledge within the group and the different thinking styles of creative and analytical problem solvers. Story line thinking and organization, however, allows family members and executive leaders to participate more naturally in the same group as do the expert outside advisors, blending specific knowledge of the family with insights and expertise on the issues. Unlike in a traditional analytical process run by top-down thinking, some people can be thinking from the outside in, and others from the inside out, in the same group at much the same time.15
4. Just as in business environments, the scenario process for wealthy families can be used in a range of plans, from comprehensive strategic planning to dealing with tactical issues of more limited impact. Scenarios, like stories, come in all shapes and sizes and with different settings. The time frame is determined by the goals of the effort, although it’s typically mid-term.16 The scenario story lines can be epic in scale, reaching for a long view of major questions, or pithy, dealing with discreet operational adjustments or only a subset of the family’s activities. You can start out with low profile, emotionally neutral questions and progress from there. Scenario planning is a method of thinking; it’s not content-specific or embedded with value judgments or substantive solutions. This allows scenario planning to be useful to families with different objectives, values and priorities. It enables families to then enlist new or existing advisors to help address in a substantive way the priority issues highlighted by the scenarios, which may involve, for example, family leadership succession or participation in decisionmaking or, at an operational level, something as concrete as the services that the family office will offer after the next transition. The process doesn’t displace those advisors, but helps the family identify the need.
5. Creating and moving through scenarios allow questions to arise in context, which encourages the participants to reach out and understand why the questions warrant attention and to appreciate how the mindset of other participants perceive the question and value its importance differently. Families often address questions that are emotionally charged and on which family members will have different perspectives. These are questions or issues that even the same person will see differently at different stages in life. Typical examples are: what are the personal goals and family roles of those next generation family members who won’t be joining the business, or how will those who join the family through marriage come to understand what the family shares in common, and what it does not? The scenarios provide a virtual role playing dimension and, thus, tend to encourage empathy, or more accurately, to appreciate what psychologists call “theory of the mind” or just “TOM.”17 Put another way, the stories encourage us to imagine being one of the other actors in the next acts in the family’s plans:
• In the example of The Founder’s Team (see “Case Examples,” p. 37), nothing unusual happens in the future, but the trust fails to fulfill its purpose nonetheless, due to failures of empathy and lack of good advice and prior informative experience. No one imagined how it would be to walk in the shoes of the beneficiaries during the life of the trust, nor how the trustees would and should play their role. As the mindset of these elderly former business associates hardened with time and retirement, the mindset of the beneficiaries was being energized by the independence and eagerness of emerging adulthood. This potential disconnect began by miscasting the grandparent’s business associates as trustees for grandchildren. This was then reinforced by 15 years of omission, that is, by a failure to anticipate the growing gaps in mindsets of the players and the failure to respond by orienting the trustees to their role of understanding the beneficiaries and the beneficiaries to understanding the founder’s team and the trust’s business investments and their own role as beneficiaries.18 No great calamity ensued, but opportunities were missed.
• Just as scenario planning could have been used to visualize how the actors in The Founder’s Team would walk through their scenes several years after the trust’s inception, scenario planning can be used to bring other legal structures to life, uncovering what trust or corporate documents mean—not just what they say. It’s been shown elsewhere, for example, that the proper functioning of a modern trust that has multiple decisionmakers (such as protectors, investment advisors and distribution committees) requires coordination among these positions, consistent with a clear functional definition of each role.19 Scenario planning can help. The various roles can be understood and articulated more readily if the structure is examined through scenarios projected out into the future using a story line in which illustrative events occur as players in these positions come and go.
• Developing a capacity to understand the mindset of other participants includes understanding the external influences that will influence them in future interactions.20 In Troublesome Charitable Bequest, the family, and the widow in particular, need to anticipate the mindset of the charity as it later receives the bequest of real estate. Though the charity’s board members and executives will always try to cooperate with the donor community, these actors must be attentive to their fiduciary obligation to the charity’s mission. Other actors with different mindsets are waiting in the wings. State regulators have the authority to supervise local charities, but may fear criticism in the press if they can be accused of favoring powerful families over deserving charitable causes. Other converging forces could magnify the risk, such as the unpredictable timing of the widow’s death, a spike in value for a unique parcel of land, the implementation risk inherent in any development project and volatility in the availability of financing. Working through some scenarios would have prompted the family to foresee the importance of an option to use a pre-packaged plan with seller financing to buy out the charity after the widow’s death.
6. Because story lines cause questions to arise in context, the scenario process facilitates sorting out and prioritizing the issues, which is a critically important contribution to planning for wealthy families. These families are surrounded by a stream of solicitations from providers of products and services and, of course, have many other demands on their time and attention. Scenario learning ideally positions the family to sense the priorities because the questions arise out of a plot of the future. The action items that follow have acquired concrete meaning from the scenarios, such that the steps in designing a governance structure or undertaking a family sustainability assessment21 are appreciated by a wider group of participants, beyond the family’s activist leadership. Similarly the family’s leaders can more effectively prioritize issues by understanding the differing mindsets that inhabit the family and anticipating how those could change over time as the family matures and grows. Here are some examples:
• In The Founder’s Team (see “Case Examples,” p. 37), the question of who to cast in the trustees’ role and how to advise them wasn’t an abstract “fill-in-the-blanks” question. The suitability of the trustee, including the capacity to grow into the role, was central to whether the trust would fulfill its purpose when the beneficiary-grandchildren become independent young adults, with their own talents and aspirations.22 You can wait to see this scene open in the real world after 15 years, or you can imagine it in advance in a scenario. Prioritizing the issues requires a technical judgment of an expert in many cases, such as the lawyer drafting the trust in The Founder’s Team, but it also requires weighing the emotional impact of the question, the disruptive affect should the risk materialize and the consequences of missed opportunities.
• It seems obvious that context affects the importance of a question, but commonly, the missing step in risk management for wealthy families, particularly when investment management or business operations aren’t involved, is the failure to take the time to visualize future contexts in which issues can arise. Scenario planning holds open that door. The divorce down the road in A Daughter’s Premature Death (see “Case Examples,” p. 37) undoubtedly affected the plan for relying on the annual releases from liability. The question of what information is provided to trust beneficiaries may not be of pressing importance in most trusts, but it certainly surfaces with alarming significance in the future described in Neglected Beneficiary.
• Consider how easy it may be to put off explaining a family trust to a college sophomore who’s preoccupied with athletics and, yet, how embarrassing it may be for that same beneficiary a few years later to explain to his fianceé why he’s clueless about the family’s wealth. We know that even without the overlay of unresolved prior issues, the circumstances in which spouses join the family carry emotional content.23 Complete ignorance of family wealth in young adults may send a message of lack of responsibility by that generation or a lack of confidence in them by elders and trustees. Scenario thinking for a business family may also suggest that the best step forward wouldn’t revolve around cold financial statements, but instead would reach out to the young adults who aren’t involved in the family business by, for example, retracing some critical past business decisions through “war stories” and video interviews of some of the key players.
• More broadly described, scenario planning can help a family identify the more important influences and consequences that can play out over time in their specific circumstances, and thus, they can enjoy greater confidence to put aside other items on the long list of concerns proposed for families generally.
How It Fits
We’re not suggesting that scenario planning comes pre-assembled out of the box and ready for use in a family setting. Indeed, even in the business and public policy environment of its origin, scenario planning requires preparation and diligent attention to the case at hand. The environment must be well understood, forces and influences identified and evaluated, time frames and goals of the process selected and scenarios created that are plausible, vivid and fresh.
We have handicaps to overcome in planning for the future because we’re human. It’s common to overvalue what we know and undervalue the implications of our ignorance. We have a stronger emotional connection to the past experience that we have known and felt, so in the competitive balance, we tend to overlook the limits of that experience and believe it’s more predictive of the future than is warranted.24 This bias can be compounded by a tendency to overestimate what control we had over past events, so taken together, we believe more strongly in our ability to control future events.25 Cognitive psychologists have explored many ways in which our thinking about the future is biased, and this is only a sampling.26
Given these challenges, we don’t want to imply that scenario planning is always fully successful in changing how one understands and prepares for the future.27 Scenario planning can fail to reach its potential in any given instance for many reasons.28 Instead, we propose that noticeable improvements will be achieved by using scenario planning when a wealthy family undertakes deliberative plans to manage future risks.29
Scenario planning also requires adjustment when adapted to the context and objectives of wealthy families. Problem domains that are tightly connected to interpersonal issues call for careful preparation to consider who participates and in what sequence. Advisors need to serve as proposers, leaders and filters rather than commanders and competitors. Many times, the different kinds of family issues and concerns will be affected by drivers that interact over time in a sequence of overlapping time frames of different durations, so a tiered set of scenarios could be required to represent these layered time frames. Furthermore, we have used four brief case examples to illustrate the potential of the process, but these examples highlight issues more clearly than would be typical in actual family settings in which the connections between cause and effect tend to be fuzzy, and it may even be difficult to differentiate cause from effect. In the next article in this series, we’ll consider how the process would be adapted for risk management for wealthy families, including how it promotes an adaptive, learning mindset.
—This is the second of a series of three articles. The first in December 2012, proposed that a more comprehensive approach should be used to manage risk and opportunities for wealthy families. The third article will outline how scenario planning can be adapted from the role in business to serve families.
1. Don Kozusko and Miles C. Padgett, “Coordinating Risk Management,” Trusts & Estates (December 2012), at p. 12 (Kozusko and Padgett).
2. Ronald M. Bradfield, “Cognitive Barriers in the Scenario Development Process,” Advances in Developing Human Resources, Vol. XX, at pp. 7-8 (Sage Publications 2008) (Cognitive Barriers); Kees van der Heijden, Scenarios: The Art of Strategic Conversation, at p. 49 (2005) (Heijden). A colorful example of perspective influenced by experience is the assessment of Tony Espera, a former “repo man” from Los Angeles, converted into a Marine grunt. As reported by his platoon leader Nathaniel Fick in the book One Bullet Away, at p. 318 (2005), the lowly Marine, who was one of the “boots on the ground,” made an uncannily accurate prediction shortly after the fall of the Saddam Hussein regime. In colorful language, Espera described why the “guys our age” in the Iraqi population would turn against the Americans. Defense Secretary Donald Rumsfeld’s message to Congress was then quite different—that the attacks against the U.S. troops were merely the last remnants of a dying cause.
3. To learn the basics about scenario planning, visit www.scenariothinking.org, which provides an online community. See also Youtube videos featuring Paul Schoemaker, an early leader in the field.
4. From a speech to the National Defense Executive Reserve Conference in Washington, D.C. (Nov. 14, 1957); in Public Papers of the Presidents of the United States, Dwight D. Eisenhower, 1957, National Archives and Records Service, GPO,at p. 818.
5. Thomas J. Chermack, Scenario Planning in Organizations: How to Create, Use, and Assess Scenarios, Part III, no. 11 (Berrett-Koehler Kindle ed.)
6. As the name implies, “design thinking” comes from the design world; it emphasizes human-centered observation, among other attributes. Tim Brown, “Design Thinking,” Harvard Business Review (June 2008). “Brainstorming” was born on Madison Avenue as a process that suspended judgment to give the imagination the opportunity to “storm the brain” with fresh thinking, as the father of the concept, Alex Osborn, later described it in the seminal book, Applied Imagination (1951).
7. The scenario planning method we discuss here is the one most often referred to by business consultants. To differentiate it from other schools of thought it’s been categorized as the “intuitive-logics” school, as in Ron Bradfield, George Wright, George Burt, George Cairns and Kees Van Der Heijden, “The origins and evolution of scenario techniques in long range business planning,” Futures 27 (2005) available at www.sciencedirect.com.
8. Thomas J. Chermack, Susan A. Lynham and Wendy E. A. Ruona, A Review of Scenario Planning Literature (2001) (Literature Review).
9. Mats Lindgren and Hans Bandhold, Scenario Planning: The Link Between Future and Strategy, at pp. 45-46 (rev. ed. 2009) (Lindgren); Heijden, supra note 2 at pp. 91-95. While it’s certainly difficult to distinguish between what is and isn’t predictable, Heijden aptly observed that strategic planning wouldn’t be meaningful in a world where everything was entirely predictable or entirely uncertain.
10. Heijden, supra note 2 at pp. 107-111.
11. This approach isn’t universally suitable, however, and several different kinds of organizing formats are in use. Lindgren, supra note 9 at pp. 72-74; “Guidance Note, Scenario Planning,” Foresight Horizon Scanning Centre, Government Office for Science, at pp. 12-14 (Guidance Note).
12. Heijden, supra note 2 at p. 49. “Narrative” ways of organizing and communicating data and patterns are being used in knowledge management and software development due to the complexity theory. See www.cynefin.net. See also Perry infra note 23 at p. 125 on the role of stories in family legacy.
13. Kozusko and Padgett, supra note 1.
14. Dietrich Dörner, The Logic of Failure: Recognizing and Avoiding Error in Complex Situations, at p. 198 (1996). In a novel by Mark Haddon, The Curious Incident of the Dog in the Nighttime (p. 156), the lead character, an autistic child, describes why it’s more difficult to keep track of “time” as compared to “things:” “… time is only the relationship between the way different things change,” and there’s no “place” to look for something misplaced.
15. Heijden, supra note 2 at p. 49.
16. A typical horizon time is more than three and usually 10, 15, or 20 years. Guidance Note supra note 11 at p. 8. The time frame varies with the problem domain and objective because scenario planning fits best in a time frame that includes both predictable and unpredictable elements of importance. Heijden, supra note 2 at p. 111; Lindgren, supra note 9 at p. 57; Guidance Note, supra note 11 at p. 8.
17. For example, Lisa Zunshine, Why We Read Fiction: Theory of Mind and the Novel (Kindle 2012).
18. Hartley Goldstone and Kathy Wiseman, Trustworthy: New Angles on Trusts From Beneficiaries and Trustees, at pp. 58, 69, 91, 111 (2012), describes several case histories of successful trustee-beneficiary relationships in which the favorable result was not pre-determined, and one in particular at p. 44, in which the beneficiary feared being treated as a generic beneficiary, one of eight, without respecting her separate identity.
19. John Duncan and Anita Sarafa, “Achieve the Promise—and Limit the Risk—of Multi-Participant Trusts,” ACTEC Law Journal, Vol. 36, Number 4 (Spring 2011); John Duncan, “Master and Commander: Every Complicated Trust Structure Needs One,” Trusts & Estates (December 2003) at p. 38.
20. In Difficult Conversations (2010) by Douglas Stone, Bruce Patton, Sheila Heen and Roger Fisher, the authors from the Harvard Negotiation Project refer to the parties to a difficult conversation as each having a different “story” and then recommend that the parties pause to imagine and consider the “third story” that would represent the perspective (mindset) of a hypothetical disinterested third person reviewing their conversation.
21. For an in-depth discussion of sustainability for wealthy families and an assessment method, see Fredda Herz Brown and Fran Lotery, The Family Wealth Sustainability Toolkit: The Manual (2012) (Brown and Lotery).
22. The trustee’s role in such a trust should have followed the role of the generative trustee or trustee as mentor, as explained in the various commentaries of James E. Hughes, Patricia Angus and John Warnick. For example, James E. Hughes Jr., Susan E. Massenzio and Keith Whitaker, The Cycle of the Gift (2013).
23. Ellen Perry, A Wealth of Possibilities, at pp. 103-105 (2012); Brown and Lotery, supra note 21 at p. 29.
24. Cognitive Barriers, supra note 2 at pp. 7-8; Tali Sharot, The Optimism Bias: A Tour of the Irrationally Positive Brain (2012).
25. Erik Helzer and Thomas Gilovich, “Whatever is Willed Will Be: A Temporal Asymmetry in Attributions to Will,” Personality and Social Psychology Bulletin, 38, at pp. 1235-1246 (2012). As paraphrased by John Duncan in a conversation with the authors, “In other words, we believe we can see where we will be, based on where we never were.”
26. Daniel Kahneman, Thinking Fast and Slow, Part 2 (2012); Cognitive Barriers, supra note 2 at pp. 7-8.
27. Cognitive Barriers, supra note 2; Paul Shoemaker, “Scenario Planning: A Tool for Strategic Thinking,” Sloan Management Review, at p. 38 (1995).
28. Lindgren, supra note 9 at pp. 111-117.
29. Fortunately, at least one experienced lawyer has already taken the initiative to use scenario planning to test the thinking behind estate and succession planning. See Matthew Erskine, “The Scenario Planning Option for Clients’ Estates,” Wall Street Journal (Feb. 1, 2011). In “Risk Assessment Should Include Estate Plans,” Family Business Magazine (March/April 2012), Erskine recounts an experience in which scenario planning enabled him to prevent the discovery of an old buy-sell agreement from derailing a new equity financing for a family-owned business. Moreover, the Family Office Exchange (FOX), in its risk management studies, described scenario planning as a practical way for families to address risk with concrete relevance to their specific context; the more recent study summarizes some results of one family’s focus on certain specific future transitions in the family and family office using scenario planning. FOX, “Building A Financial Enterprise Plan to Deal With Future Uncertainty,” at p. 11 (2012) and “Managing Threats and Opportunities through Effective Risk Planning,” at p. 13 (2009). Scenario planning has also been recommended as a method for family offices to plan for the future influence of external forces, such as demographic trends (personnel shortages) and technology developments (outsourcing). Elizabeth Mathieu, “Thinking Outside the Family Office: A Case for Adding a New Dimension to Planning for the Future,” Journal of Wealth Management (2008) (detailed summary of four scenarios).