By Siobhan Wagner, Suzanne Woolley and Tom Metcalf
(Bloomberg) -- From geopolitical uncertainty to real estate bubbles, the world is full of risks to investment portfolios. Yet the biggest threat to a family losing its wealth over generations may be internal. Fights over succession planning or individual investment decisions can pull a family—and its hard-earned fortune—apart. Here, wealth managers and multigenerational businesses share some of the most effective advice they’ve given on how a family can build a solid governance structure that will stand up against both external and internal threats to a legacy.
Amy Szostak
Chief Fiduciary Officer and Co-director of Family Education and Governance, Northern Trust Global Family & Private Investment Offices
“We worked with one family who was struggling with the transition of decision-making power from G1 [first generation] to G2. The process of identifying a few shared values allowed the family’s vision to reveal itself. As it turned out, their definition of success was to create an environment that supported G3 preparedness to serve on the family boards. With G3’s ages spanning more than 30 years, the mission had to be flexible and customizable. We worked with the family to develop an education plan that would be reviewed annually and tailored to each G3 member’s needs with guidance from each family unit. Today the family has successfully transitioned the leadership of the family enterprise to the second generation and has seven G3s serving in various roles in their governance structure.”
Anthony DeChellis
Chief Executive Officer, Boston Private Financial Holdings Inc.
“Often in large families with considerable wealth, there is a group—usually older—that winds up being stewards for the family. Resentment can grow, because some members who haven’t been active participants find themselves in their 30s or 40s and not involved. Later they’ll find almost any reason to be critical. We advised one multigenerational family to set expectations about returns, because someone is going to go to a cocktail party and hear about some hedge fund up 40% and say, ‘Why aren’t we making that?’ Rather than defend yourself, say, ‘This is the return we are aiming for; this is the risk we are taking. We may aim for larger returns with a portion, but the core portfolio is in conservative assets.’ Family members need to understand strategy at a high level. It’s more peaceful after that.”
Matthew FlemingHead of Family Governance and Succession, Stonehage Fleming
“We have a U.K.-based client at the moment who is a successful entrepreneur. The client built up their business themselves and was concerned about its future and the relationship between the family and the business. They were worried about the impact of the business, which is a brand and quite cash-generative, on the motivation and values of their children. In their attempt to de-risk the intergenerational transfer, they were in danger of being so cautious and taking no risks at all that the lack of risk-taking might be a threat. There’s reckless caution—when you get so frightened of making a decision that you end up being more of a danger to the future of the family business. While we are helping this family recognize appropriate risks and putting mitigating strategies into place, we’re also, when necessary, encouraging them to take the odd risk. You have to in order to develop and grow the business of the family.”
Thorne Perkin
President, Papamarkou Wellner Asset Management Inc.
“A very wealthy family in San Francisco asked for our thoughts on estate planning. You could take it as a foregone conclusion that the kids in the family will finish high school, but if you are 15 and have access to a lot of money and know you don’t need to be educated, it can lead to bad things. We encouraged the family to introduce goals for the kids into the will, and they’ve been thanking us ever since. If the children graduate college they come into 25% of the inheritance, when they are 30 and have been gainfully employed for five years they get the next 25%. If they come to family meetings and contribute, they may get some kind of bonus payout. Some families set up trusts to cover specific things, like health care or education, and say you can’t use the money to go to St. Barts or buy a Ferrari. The incentives give people something to work for, which can give them pride.”
Willem van Eeghen
Former Managing Director, Van Eeghen Group
“I think succession is different in every generation. The way we handled the hiring of [current Van Eeghen Group managing director and cousin] Jeroen was excellent. We outsourced the hiring process. In 2011 the supervisory board sent a letter to the broader family and said I was about to retire in a few years. We also said if no qualified candidates presented themselves, we’d look outside the family. People had to send a cover letter and CV. They made a committee with an external head hunter with an HR person, and they did the preliminary assessment.”
Chris Cecil
President, Biltmore Family Office and chair of the Charlotte chapter of TIGER 21
“ ‘Each generation is the first’ is advice I give at the onset of a governance conversation. The mindset and framework that created entrepreneurial wealth must not be lost through the sale of a business and conversion of balance sheet from concentrated and illiquid to cash and liquid investments. Today so many families are ‘sold’ the concept of relative returns. Family governance must acknowledge that wealth wasn’t created relative to the S&P 500. It typically isn’t spent relative to the S&P and is rarely given away relative to the S&P.”
Alvina Lo
Chief Wealth Strategist, Wilmington Trust
“The choice of trustee is so important. I worked with a family that had significant wealth from an invention on the grandparent level. There were two sons; one was not in good health. There was some resentment about what drove the son to the state he was in—they seemed to blame the son’s wife. It was decided that if anything happened to that son, the money would go to his kids. The question was who would control it: the wife or the remaining brother? I suggested bringing in an independent third-party trustee who could cast a deciding vote and be the ‘bad guy’ if need be. The family chose a corporate trustee to professionally administer the trust to terms agreed and made a list of reputable names and requirements for future trustees in case the original one didn’t work out. The son died, and while there was tension, everyone had agreed on the terms of the trust and the third party. The more objective you can make things, the better it will be.”
This story appears in the Family Office special report from Bloomberg Markets.
To contact the authors of this story: Siobhan Wagner in London at [email protected] Suzanne Woolley in New York at [email protected] Tom Metcalf in London at [email protected]
