Identifying & Managing Family Wealth Risks

By Mark Barnicutt, MBA, FCSI, CFA on August 26th, 2015

In his book, Family Wealth: Keeping It In The Family, James Hughes Jr. believes that every family, looking at the next generation, hopes to confer advantages that are more than just material and financial – to inculcate character and leadership, to inspire creativity and enterprise, to help all family members find and follow their individual callings, and to avoid the financial dependence and loss of initiative that can all too often be an unwanted consequence of financial success. Yet many families never succeed in realizing that vision, much less sustaining it for three, four or five generations and beyond. For this reason, Hughes believes that affluent families must create strategies to preserve their human and intellectual capital as well as their financial assets.

When combined with the reality that affluent families depend heavily upon the professional expertise of various advisors, I believe that there are three (3) categories of risks that families face in pursuing sustainability:

1. Financial:

Definition: The movable & immovable property it owns (ie: assets & cash flow) to support the growth of the family’s human & intellectual capital.

Sources Of Risk: Anything that can impair the assets and cash flow of the family.

Risk Mitigation Strategies: Can include prudent asset allocation policies, asset monitoring processes, applicable legal & financial structures, sensible debt management as well as cash flow mitigating strategies and off-balance sheet solutions using select insurances.

2. Human:

Definition: The individuals who make up the family and advise the family.

Sources Of Risk: Anything that impairs the physical & emotional well-being of all family members.

Risk Mitigation Strategies: Ensuring the basic necessities of family members are met but that they understand the importance of the dignity of work to an individual’s self-worth, and assist each family member in finding the work that most enhances that individual’s pursuit of happiness.

3. Intellectual:

Definition: The knowledge gained through the life experiences of each family member, or what each family member knows.

Sources Of Risk: Anything that impairs the knowledge of the family.

Risk Mitigation Strategies: Although the strength of a family rests on what it knows, information is of no use unless families have a well-educated sense of how to discriminate in using it. This often results in providing tools younger family members to learn the family stories and prepare for later roles in family governance, while providing incentives for the family’s highest achievers to take representative & leadership roles within the family governance structure.

By recognizing & addressing these risks, with the appropriate professional advice & support, we believe that affluent families will be successful on their journey to creating sustainable family wealth. As James Hughes Jr. states:

“Families fail to understand that wealth preservation is a dynamic, not a static, process and that each generation of the family must be a first generation – a wealth creating generation.”