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How To Achieve A Successful Transition Of Family Wealth

Friday, September 27th, 2019

Family Wealth Challenges

The creation of family wealth takes years of dedication, sacrifice, and hard work. Because of this, no family wants to be in a position where they need to create their wealth twice. Instead, they are desperately seeking the financial peace of mind that comes from knowing that their interests are being placed ahead of their professional advisors and that their hard-earned wealth is being prudently stewarded in a manner that makes it sustainable for their lifestyle, family legacy, and philanthropic aspirations.

The challenge for many affluent families, though, is that wealth is not self-perpetuating. Without proper advice, planning, and communication, family wealth is often eroded within 2 – 3 generations.  The British proverb, “Clogs to clogs in three generations” is a global phenomenon that appears in every culture.

Research by an independent US family advisory firm studied approximately 2,500 US families, over a twenty-year period, who had owned, sold a business, and gone through a generational wealth transition. The results of this study were that 70% of family wealth transitions failed primarily due to a combination of trust and communications breakdown, inadequate preparation of heirs, and poor governance for the guidance of decision making. Given that the resolution to these issues are all teachable, I’ve always held the view that deficient mentoring is the root cause of family wealth transition failures.

Mentoring Is the Answer

In the trade industries, such as carpentry and plumbing, ‘mentoring’ has been a core component of these careers for many decades as a prudent approach to teach the next generation to become high-quality tradespeople.  To solve the behavioural issues in family wealth succession, I believe that the same mentoring approach needs to be adopted.

Mentor definition: those who build and educate people to be better people by helping to shape their philosophies – beliefs and values – in a positive way, often in a longer-term relationship, from someone who has ‘travelled the path before.’

Family Wealth Mentoring PyramidTM

Like any profession, there is a set of knowledge and skills that need to be learned; the family wealth management industry is no different.  The goal in mentoring family members is to not try to turn them into ‘wealth management experts’ but to make them highly effective stewards of their family’s hard-earned wealth.  The concept of stewardship dates back to ancient times, where the role of a steward was to guard what was entrusted to their care by making wise decisions and protecting from harm. Almost every business concern had a steward who served like a Chief Operating Officer running the daily affairs of the master of the house. Effective stewardship adopts a set of life principles and processes that prepare people to eliminate their greatest dangers, capture their largest opportunities, and maximize their biggest strengths.

For this reason, when mentoring families, I’ve used the Family Wealth Mentoring PyramidTM as a highly effective framework to coach and mentor:

Each member of an affluent family has a unique set of aspirations, knowledge, skills and abilities that first needs to be assessed, with the result being a tailored Family Wealth Mentoring Program for each relevant family member.  Typically, though, there are upwards of 5 areas in which they need to be mentored:

Life Purpose:

  • Although not a ‘wealth management’ issue, it is a critical ‘family wealth succession’ issue, as members of affluent families cannot be effective stewards of their family’s wealth if they don’t have a defined and established purpose for their lives.  Through 30+ years of industry experience, I strongly believe that everyone needs to have a purpose to their lives, as, without purpose, life can lose its meaning, and in its absence, people – especially those who have considerable financial resources – can easily wander through life and become distracted by costly, unproductive, and sometimes unhealthy life choices.  As a result, an effective mentor can assist affluent family members to identify a purpose for their lives through a combination of in-depth discussions and various assessment tools.

Wealth Theory:

  • Family members need to understand the basics of wealth management encompassing the 3 core areas of investments, insurance, and financial planning.  As mentioned above, the goal is to not create wealth management experts, but to develop future family wealth stewards who have a solid understanding of wealth management fundamentals and know what questions to ask.

Wealth Operations:

  • The global wealth management industry tends to be a complex one.  To be an effective steward, family members also need to understand how the wealth management industry is structured, who are the various participants, what do they each offer, and how do they all ‘fit together’ in the regular operation of the family wealth.

Communications Practices:

  • Effective stewardship of family wealth requires regular communication amongst both family members and various wealth professionals such as investment, insurance, planning, accounting, and legal. For this reason, family members who don’t have experience dealing in these complex types of environments often need to be mentored on how best to manage their communication – both written and verbal.  Given the complexities of the global wealth management industry, ineffective or misunderstood communication can often result in costly consequences.

Wealth Governance:

  • The final area to be mentored is how to organize the ‘collective oversight’ of the family wealth so that the family achieves its long-term aspirations through the intellectual and experiential contributions of the appropriate family members as well as the family’s professional advisors such as investment, insurance, planning, accounting, and legal. Increasingly, many affluent families are establishing ‘Family Wealth Boards’ as a prudent mechanism to ensure effective and efficient governance that significantly increases the probabilities that the hard-earned family wealth will be sustained for multiple generations.

You Reap What You Sow

Like the training required for any profession, success is not achieved in a day or even a month.  The positive results of effective mentoring – which lead to prudent stewards of family wealth – take time and are primarily a function of each mentee’s commitment to the mentoring process.

The time and monetary costs of such a mentoring process, though, are a worthwhile investment with significant returns that can result in the preservation of the family wealth for many generations instead of the common erosion of family wealth within 2-3 generations.

“A family can successfully preserve wealth for more than one hundred years if the system of representative governance it creates and practices is founded on a set of shared values that express that family’s differentness.”

James E. Hughes Jr.

How To Build Sustainable Wealth For Future Generations

Tuesday, April 23rd, 2019

You’ve worked hard to get where you are. You’ve built your wealth over time and now you want to ensure it will last for future generations.

You already know how difficult creating wealth is, but you may just be realizing that preserving it comes with its own unique set of challenges: you want to know the money isn’t going to run out; that you don’t have any gaps in your wealth management strategy; that you will be able to comfortably fund your lifestyle and evolving goals; that you have a solid estate and business succession plan.

Family Wealth Is Not Self-Perpetuating:

Regardless of culture, the global tendency is for family wealth to become depleted after about three generations, and often after two or even one.

A study by The Williams Group of 2,500 wealth transitioned families over 20 years found that 70% of families lose control of their assets and family harmony within one to three generations following the wealth transfer. This was true for families with both owned and sold businesses.

The typical family wealth life cycle is as follows:

Generation 1: Wealth Creation

Generation 2: Wealth Consumption

Generation 3: Wealth Depletion.

The top reason study participants gave for wealth transition failure was a breakdown of trust and communication. Other factors included a failure to adequately prepare heirs and a lack of family mission statement.

“Preservation of long‐term family wealth is a question of human behaviour.”

  James E. Hughes Jr.

What Factors Cause Successful Family Wealth Transitions?

If family wealth is such a challenge to maintain, what are the factors associated with a successful wealth transition to children and grandchildren?

  1. Total Family Involvement:
    • Both spouses and bloodline.
    • Can be challenging and time-consuming BUT avoids ‘Mom and Dad’ dictating ‘the future’.
    • Ensures buy‐in from future generations.
  1. A Process that Integrates What the Family Members Learn Together:
    • Decisions made by the entire family (before parental/G1 death) require that all the elements of the family wealth succession plan be addressed.
    • Needs to be included in a family governing document; i.e. Family Wealth/Office Charter.
    • The family governance process will identify competencies and roles to fulfill family aspirations, hold members accountable, and keep everyone ‘on target’.
  2. Learning and Practicing Skills in the Areas of:
    • Communication
    • Openness
    • Trust
    • Accountability
    • Team consensus building.
    • Articulating and sharing values.
    • Unifying behind a common mission.

How to Create Sustainable Wealth?

When you commit to developing the factors mentioned above, you will be well on your way toward family wealth preservation.

With the right professionals by your side and a dedication to developing the familial trust and unity, you can successfully preserve your wealth for generations to come.

What Is Wealth Stewardship?

Thursday, March 15th, 2018

“Looking back, it feels like we made endless sacrifices for 30 years to create our wealth, and now we worry about preserving what we’ve built for ourselves, our children & our grandchildren.”

            Family Client of Mark Barnicutt

The challenge for many affluent families is that family wealth is not self-perpetuating. Without proper advice and planning, family wealth is often eroded within 2-3 generations. The Irish proverb, clogs to clogs in three generations is a global phenomenon that appears in every culture.

It’s for this reason that the proper stewardship of family wealth is a key best practice that affluent families should adopt if they desire to make their wealth sustainable.

The Merriam-Webster dictionary defines ‘Stewardship’ as: “The activity or job of protecting and being responsible for something.”

The concept of stewardship is an ancient one. Specifically, the Greek word for ‘Stewardship’ is ‘Oikonomos’ which means ‘Ruler of the House’. In the ancient world, stewardship was not a religious term but a key component of commerce. Almost every business concern had a steward who served like an ancient Chief Operating Officer, running the daily affairs of the master of the house.

Given the role of a steward, there are four key principles that have always applied; principles that I believe continue to apply today to anyone who is placed in a position of trust to oversee the business affairs for the benefit of others.

Four Key Principles of Wealth Stewardship

  1. Ownership: A steward doesn’t own; they hold in trust and use what’s been given for the benefit of the one who owns.
  2. Responsibility: A steward is responsible for the care and development of what’s been entrusted to them.
  3. Accountability: A steward needs to provide account to the owner of how well they’ve managed what’s been entrusted to them.
  4. Compensation: A steward is entitled to compensation for a job well-done.

With the growing level of affluence in our society, these Stewardship Principles are prudent and sound yardsticks by which both the mindset and actions of all wealth advisors (i.e. financial stewards) should be measured, to ensure that clients’ hard-earned wealth is protected.

Integrated Wealth Management Advice for Affluent Canadian Families: Part 5 – A Different Approach

Tuesday, February 21st, 2017

This is my final blog in this series, wherein I will present a solution to the problems presented in the previous posts.

Affluent Families Have a Myriad of Professional Advisors

Over many decades of managing wealth for affluent families, it has been my experience that they each have an individual level of complexity which has evolved over the family’s evolutionary life cycle. Complex structures are needed to address the delicate balance that exists between tax and estate matters, asset protection, and income splitting issues as well as current lifestyle versus longer term succession and philanthropic goals.

To address these subtle and sometimes not so subtle matters, these families have had to surround themselves with a myriad of professional practitioners (such as lawyers, accountants, investment advisors, actuaries, and consultants) to provide the technical expertise in each specific area of their wealth continuum, including estate laws, tax laws, tax accounting, pensions, risk management, and investments.

As a result, it has often been left to the families to try to synthesize the various solutions provided to them; unfortunately, most often they remained unintegrated. Although each piece of advice was technically sound on a stand-alone basis, the advice ended up to be somewhat less than effective as a cohesive solution to support the family’s purpose and journey in life.

As reviewed throughout this series, I don’t believe that these affluent families are best served with the One-Firm-Knows-All approach of large wealth management firms. So, what’s the solution to deliver integrated wealth advice? Affluent families clearly need an answer to this problem!

A Different Approach to the Integration of Wealth Advice for Affluent Families

The short answer is: professional collaboration!

I believe that affluent families’ interests are best served when the truly objective advice of their independent, expert professionals is integrated through a process of collaboration and accountability. 

To ensure that a family’s wealth is sustainable for generations to come, it is critical that effective governance structures be established with specific mandates, and with roles and responsibilities clearly defined for all of those professional advisors who have been charged with a stewardship role for the family wealth.

A Family Wealth Council brings together a designated group of key expert, independent, professional advisors (i.e. accounting/tax, legal, investments, insurance, pensions, etc.) to help affluent families, on a variable, cost-effective basis, make important financial decisions and collaborate to create integrated solutions that address the family’s long-term wealth objectives.

Having facilitated Family Stewardship Councils for many years, our clients have consistently told us that this process makes their lives easier, as all of the important financial decisions that need to be made are done so in a disciplined manner with the appropriate advisors all working together.

In addition, they attain the financial peace of mind that the expert advice that they are receiving is truly objective, transparent, integrated, and solely in their best interests!

Integrated Wealth Management Advice for Affluent Canadian Families: Part 4 – The 5 Costs of One-Stop-Shop Wealth Advice

Wednesday, October 12th, 2016

This article will delve into this subject to explore the top five potential costs of the convenient, integrated “one-stop-shop” approach.

I believe that it’s materially more challenging for these One-Firm-Knows-All, integrated wealth advice propositions to be truly effective in all areas of professional expertise for high net worth families, given their more complex needs in a global market place of increasing knowledge, and rising professional specialization.

Having said this, I also know there are many high net worth family clients across Canada with long-established advisory relationships with large financial organizations – so, if it works for them, then it works. I believe, though, it’s important for all affluent families to recognize the five potential advice costs associated with the convenience of this ‘One-Stop Shopping’ approach to wealth management:

Potential Advice Cost #1 – Competency

As discussed in part 3, my ‘Law of Professional Diworsification’ dictates that the higher the family net worth, the greater the probability that a One-Firm-Knows-All approach to integrated wealth advice will face greater challenges in giving advice for some wealth practice areas. 

For instance, I don’t call my lawyer to fix my personal taxation problems… I call my accountant, so why should affluent families call their large wealth management organization to fix their tax problems?

Potential Advice Cost #2 – ‘Free’ Isn’t Free

I’ve noticed in recent years that several large wealth management organizations have hired their own accountants and lawyers for tax and estate planning services, which are being positioned as ‘free’, as long as family clients invest their assets through the large wealth management organization.

The problem I have with this positioning is that, in my experience, there’s simply a cost to quality professional advice. In other words: “Ya get what ya pay for!”

It’s typically taken many years for affluent families to accumulate their wealth, and they most often don’t have the time or the desire to create their wealth twice. So, the question for affluent families to ask themselves is:

“Do we really want to have ‘free’ professionals advising on our hard-earned wealth?”

Everything has a cost.

Potential Advice Cost #3 – Transparency

Obviously, the cost to the large wealth management organization of providing advice to affluent families has to be covered somehow; when tax and estate planning services are positioned as ‘free’, the costs of delivering this advice just get covered through the costs associated with other products and services, such as investments and insurance. This arrangement isn’t always simple, and it can be difficult for families to determine what they’re really paying for what!

I believe that affluent families are best served when they view their family wealth as a business in which all expenses are fully and transparently disclosed against the discrete services received. Who runs a business without knowing exactly what they’re getting for what they’re paying? Why should family wealth be any different?

Potential Advice Cost #4 – Objectivity

Large wealth management organizations are comprised of multiple legal entity businesses that offer investment management, full-service brokerage, insurance, banking, custody, and trust products and services. When designing an integrated wealth plan for an affluent family, these diverse product and service offerings have the potential to create many conflicts of interest.

So, the question for affluent families to ask themselves with these One-Stop-Shopping propositions is:

“Is this product or service being offered because it’s the best solution for us, and in our best interest or is there a potential conflict of interest going on?”

Potential Advice Cost #5 – Freedom

I believe that large wealth management organizations, by providing integrated advice services, are looking to ‘put a fence’ around family clients. This makes sense from a business perspective, but is it in the family client’s best interest? How can an affluent family tell if they’re truly receiving the best advice available, if there’s a ‘fence’ around them?

Therefore, a potential cost to the One-Firm-Knows-All advice proposition is that affluent families can inadvertently give up their freedom to access expert advice for the cost of perceived convenience. In other words, it’s a trade-off between control and collaboration.

In all One-Firm-Knows-All, there’s always an element of control being exercised:

Control: ‘Don’t worry about that… we’ll take care of that for you.’

In contrast, when affluent families have an open dialogue amongst independent, specialized professionals, it’s about collaboration:

Collaboration: ‘Your accountant, lawyer, and I believe that this is best course of action for you and your family.’

Avoiding These Costs

I believe that affluent families need a different approach to integrated wealth management than most large financial organizations can provide.

In my fifth and final article in this series, I will discuss that different approach for high net worth families.


Integrated Wealth Management Advice for Affluent Canadian Families: Part 3 – Convenience vs. Competency

Thursday, July 7th, 2016

In this post, I will discuss the tension between convenience and competency in wealth management advice for affluent families.

Achieving Integrated Wealth Advice for the Affluent Family: Convenience vs Competency

I believe that the successful delivery of integrated wealth advice – given the breadth of professional disciplines potentially involved – is best viewed as a trade-off between two opposing factors: convenience and competency.

For example, if a given wealth management organization states that they can service all of my wealth management needs, it is convenient for me; I only have to deal with one organization, and I can rely upon them to pull together the professional resources from within their organization to provide the integrated wealth advice that I require.

I believe the trade-off to this approach, though, is that it is challenging for one single wealth management organization to attract and retain the breadth of competencies required to advise the clients with the most complex needs, such as affluent families. 

I call this the “Law of Professional Diworsification”, which means that most organizations can only truly excel in one, maybe two, areas of professional practice. Once you move beyond this (the more you ‘diversify’ your services), the less focused and more ‘diworsified’ you become – and it’s the client with complex needs who typically suffers.

For instance, in my experience, most affluent families have at least six professional advisors/service providers tied to their wealth:

  • Investment
  • Insurance
  • Banking
  • Legal
  • Tax
  • Pension

As a result, affluent families need ‘diverse’ advice. But despite their diverse needs, these affluent families still require their professionals to be highly experienced and competent in their respective areas of expertise. Additionally, these diverse areas of expertise are not simply differing areas of knowledge, but actually distinct professional practices where, in my experience, the best professionals practice and thrive within firms of similar professionals (i.e. lawyers with law firms or accountants with accounting firms).

Over my career, I’ve witnessed examples where legal firms and accounting firms have attempted to integrate their services under one roof, and in every instance, it’s been a failure. The reason is that although the practice of law and accounting are complementary, they are distinct professional practices that, to be fully optimized for the client and avoid conflicts of interest, belong under separate roofs! 

For instance, the fact that large wealth management organizations are attempting to increasingly integrate in-house legal and accounting expertise to service their family clients is a brilliant strategy from a wealth management firm perspective, but in my opinion, faces serious hurdles from a client advice perspective. 

Or another way to think about it: if your accountant or lawyer decided to offer insurance or investment advice, would you view them as being credible and highly competent in those new areas of professional practice? Probably not.

This is the Law of Professional Diworsification.

In part 4 of this series, I will dive deeper into this topic and outline the top five potential costs for affluent families receiving ‘one-stop-shop’ type advice.

Integrated Wealth Management Advice for Affluent Canadian Families: Part 2 – Are the Needs of High Net Worth Clients Met?

Tuesday, June 21st, 2016

In Part 1 of this series, I explored a brief history of wealth advice integration in Canada, up to the present day when large organizations continue to increase their dominance in the family wealth management industry.

So, we know that this advice integration strategy has worked well for large financial organizations (i.e.: ‘Sticky Clients’), but as an investment fiduciary for affluent Canadians, the important question I have is: What are the specific challenges large financial organizations face when integrating advice for the High Net Worth Market?

The comments that follow are my personal, professional views based upon my 26 years of experience practising in the Canadian wealth management industry for both Big Bay Street firms and Independent Wealth Management firms, in both business leadership and client advice/service roles for varying segments of wealth clients. I should also declare that I’m currently the President, CEO, and Co-Founder of an independent investment management firm (HighView Financial Group), so if people consider my views biased, that’s their choice and I understand; I’m simply sharing my career experiences as a long-standing, investment fiduciary about what challenges face organizations advising the High Net Worth Market.

I believe that if someone would objectively measure – from a client’s perspective – the degree of success associated with the integrated wealth management advice provided by large financial organizations, they may find that it works well for the mass wealth market but faces distinctive challenges for investors in the high net worth market. This is primarily due to the integration of advice across traditional, siloed business divisions that address the unique needs, desires, and complexities of high net worth individuals, combined with the difficulties faced by large financial organizations, given their ability to create and derive revenue from proprietary financial products, in objectively advising across the diverse professional financial disciplines required by high net worth individuals.

The Mass Wealth Market vs The High Net Worth Market

The needs of the Mass Wealth Market (i.e. families with investable assets < $ 1 Million) are generally straightforward, as individuals tend to accumulate their wealth through employment activities, and have a single purpose long-term goal of lifestyle funding for retirement.

In contrast, the needs of the High Net Worth Market (i.e. families with investable assets > $1 Million) are generally complex, as these individuals tend to be corporate executives, professionals (doctors, dentists, lawyers, etc.) and entrepreneurs, who often have a broader set of goals that not only speak to lifestyle funding but also – given the amount of financial assets that they own and are able/willing to pass on after their death – family legacy and philanthropic needs. Additionally, professionals and entrepreneurs frequently have complex financial structures such as holding companies, family trusts, and operating companies, which can make wealth planning a sophisticated process that requires the expertise and services of other professionals such as accountants, lawyers, and actuaries. Some large financial organizations are starting to employ in-house professionals such as accountants and lawyers who can speak to these unique client needs but my personal experience has been that it’s challenging to replicate the objective and expert advice of an independent legal or accounting professional.

As a result, the integration of wealth advice for affluent families is considerably more complex than that of the Mass Wealth Market investors. Integrated wealth advice provided by large financial institutions is – in my professional opinion – working toward meeting these clients’ unique needs but has not yet overcome some of the associated challenges.

In part 3 of this series, I will discuss the struggle affluent families seeking wealth management advice find between convenience and competency.

Integrated Wealth Management Advice for Affluent Canadian Families: Part 1 – A Brief History

Tuesday, April 5th, 2016

The combination of Canadian aging demographics and rising affluence for certain wealth segments is causing the delivery of integrated wealth management advice – across financial disciplines – to quickly become a major concern for investors, and a growing strategic imperative for wealth management firms, large and small. 

The question, though, is: how best to deliver integrated wealth advice to affluent families so that the best interests of the family are preserved?

In this blog series, I will review the dominant approach of large wealth management firms, as well as a new approach to the integration of wealth advice. To put proper context to all of this, though, this initial post will to go back in time a few decades to where wealth integration strategies began:

Family Wealth Management Phase 1: Consolidation

Thirty-years ago, the wealth management industry was structured very differently than it is today. Specifically, there wasn’t really a wealth management industry, as we had the regulatory separation of the core wealth management service providers, which was then known as the ‘Four Pillars of Finance’:

  1. Banking
  2. Investments
  3. Insurance
  4. Trust

When I started my wealth management career in the late 1980s, the regulatory rules had recently changed, and so began the consolidation of the Four Pillars – a strategic game that has persisted for the past twenty-five years, not just in Canada but in many of the developed countries around the world.

As we know, in Canada our largest financial organizations – particularly the banks – have been the clear winners of this consolidation game when measured by metrics such as market share, revenue, and profits. 

This is what I refer to as Wealth Management Phase 1: Consolidation, which lasted from the late 80s until the late 90s.

Family Wealth Management Phase 2: Integration

Then, in the late 90s, with the growing affluence of Canadians, the wealth management strategy conversations begin to shift to what I refer to as Wealth Management Phase 2: Integration

It was one thing to have all of the Four Pillars under one single corporate brand, but how do you now deliver a holistic wealth management experience for families that integrates the advice from each of the pillars?

The benefits to such an integration strategy were touted as:

  • For the Client Family: The convenience of having all of their wealth management services under ‘one corporate roof’, without the need for the client to attempt to integrate the advice from different service providers.
  • For the Wealth Management Firm: The ability to ‘cross-sell’ products and services to clients, which leads to higher family client retention rates, and increased revenue and profitability per family client. Large wealth management firms affectionately refer to this outcome as, ‘Sticky Clients’!

The Historical Challenges with Wealth Management Advice Integration

In my experience, since the start of this advice integration strategy in the late 90s, the biggest challenge facing large financial organizations has been getting the professionals within each of the Four Pillars to ‘play nicely together in the same sandbox,’ as each pillar was more concerned about preserving their own revenue and ensuring that they ‘owned’ the client relationship.

Additionally, the outliers to this integration strategy have been the large financial organizations’ full-service brokerage divisions, primarily because this business model has been historically positioned as what I refer to as a ‘Franchise Model’, vs a ‘Corporate Model’.  Specifically, the top revenue producers at the full-service brokerage divisions have typically brand-positioned themselves as ‘The Smith Group with ABC WealthCo’ vs ‘ABC WealthCo’, and they have always viewed that they own the client, and they will determine what services are provided to their clients (not some large financial organization – even if they sign my pay cheque!) This isn’t a unique problem for large financial organizations, as it’s challenging to integrate the differing cultures of Franchise Models with Corporate Models in any business.

Present Day: Large Financial Organizations Start to Achieve Advice Integration

Having said this, in recent years (since 2010), I’ve noticed that Canada’s large financial organizations have started to make material progress in addressing these advice integration challenges through changes to organizational structures, compensation programs (which drive behaviour), and branding. 

For instance, in recent weeks, one large financial organization announced the creation of one dominant, wealth management brand across all of their wealth management legal entity business lines (i.e.: full-service brokerage, investment management, trust, etc.), with minimal sub-branding by traditional pillar business lines. 

As a result, these large financial organizations are continuing to increase their dominance within the Canadian wealth management industry, and their growing revenues and profits are a testament to this.

So – how have clients faired with the integration of advice within large financial organizations? Stay tuned for my next post in this series!

Types Of Family Offices

Wednesday, March 2nd, 2016

It has been my experience dealing with families of significant means that they all have their individual levels of complexity which have changed over each family’s evolutionary life cycle. These complex structures are needed to address the delicate balance that exists between tax and estate matters, asset protection and income splitting issues as well as current lifestyle versus longer term succession and philanthropic goals.

To address these subtle, and sometimes not so subtle matters, these families have had to surround themselves with a myriad of professional practitioners, such as lawyers, accountants, investment advisors and consultants, to provide the technical expertise in each specific area of their wealth continuum such as estate laws, tax laws, tax accounting, risk management and investments. Often it has been left to the families to try to synthesize the various solutions provided to them, but unfortunately, most often they remained unintegrated.  As a result, on a stand-alone basis these solutions are often very technically sound but as a cohesive solution to support the family’s purpose and journey in life, they often ended up to be somewhat less than effective.

In order to combat some the complexity and to close the gaps between the various elements of their structures, many of these families have adopted a family office solution that would bring better integration and cohesion with enough simplicity and transparency to provide them with the comfort and peace of mind that only comes from being confident about one’s environment. Three broad types of family office solutions often used are:

Single Family Office: Many families with significant wealth have formed their own Family Offices (also known as a Single Family Office – SFO) with most of the required competencies. These were usually headed and staffed primarily with accountant and/or legal professionals. On rare occasions, they would also include an Investment Professional, but given the cost of employing an experienced, proven investment management professional, it is not surprising that this happens infrequently. As with the first option, the primary limitation, of the Family Office, is the competencies and depth of competencies of the staff hired. The added complexities include maintaining the competency level of professional staff hired as well as the overall cost of operating a private family office. The costs alone restrict this option to families with at least $100 Million.

Multiple Family Office: The Multi-Family Office (MFO) is where two or more families come together to share the costs of operating a Family Office, thus reducing the impact on each family individually. This alternative possesses all the same issues as the first option with the added complexity of all families agreeing on costs and staff hired as well as organizing the MFO to meet the needs of each family.

Virtual Family Office: Most families that I have worked with have established relationships with various professional practitioners, such as lawyers, accountants and consultants, who provide technical expertise in specific functional areas of wealth management such as legal, accounting, insurance, risk management and tax. The reality is that many of these solutions, although technically sound, can remain unintegrated and, therefore, many times, disconnected from a family’s overall purpose. In addition, many families work with multiple investment advisors who often provide conflicting advice and the family is left in the position of trying to determine how best to knit all of these ideas together. Not only is it challenging to determine how best to coordinate all of this advice to meet the family’s specific needs, but it can also be very time-consuming and expensive. For this reason, a growing number of families are opting to create a ‘virtual’ family office in which they create an integrated team of their professional advisors who collectively act in a coordinated manner to provide holistic and enduring advice to the family on an advisory/consulting basis.  Given the variable cost nature of the Virtual Family Office approach, families with assets less than the Single and Multiple Family Office thresholds (i.e.: roughly $100 Million) can economically access these services.

As each of these family office solutions has their own ‘pros and cons’, it’s critical that affluent families select a solution that matches their family objectives while balancing their own economic reality.

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Identifying & Managing Family Wealth Risks

Wednesday, 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.

  1. 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.

  1. 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.”