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By Serge Ejzenberg
Posted Sep. 11, 2005

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The expected wealth transfer over the next 50 years sill be surpassing the $40 trillion mark

The organization of private office and staff involved in managing the "business of the family" has been the inspiration of wealth management models for over two centuries.

It carries even greater inspiration today, as everyone from independent advisors to large financial services firm to third party wealth managers scrambles to find, garner, and retain the assets of the ultra wealthy. The commotion and confusion characterizing the increased focus on this lucrative segment can be attributed to the multiplication of family members and to inheritance projections regarding the expected wealth transfer over the next 50 years, which are surpassing the $40 trillion mark!

Wealth advisors are intently targeting this lucrative segment, the success of their endeavors presently is mitigated by the minimal cognizance of and concern with the influences of family dynamics and the family office governance structure.
These two forces have greater bearing on investment decisions, yet are more often overlooked than any other aspect of wealth management.

The interweaving of these elements has continued over time; however, the relationship between them is undergoing rapid transformation. As with development in other areas of the economy, changes in this relationship initially occurred quite slowly, with the pace increasing exponentially over the past three decades.
An example is the increased number of family members with which the wealth is to be shared

History of “Family Office”

The modern management of family wealth exists since ….300 years!
The pioneers started when the rich people in Europe started to travel (traveling at that time required months, years…) and during their absence to avoid a vacuum in their assets they began setting banks…

The modern management of family wealth exists since ….300 years!

The history of some major Swiss banks shows us that they inherit from dynasties.

Of course the ages put more regulation on this activity which remains quite flexible in it’s operating mood and is demonstrating some innovation in an area in which boundaries are often not extremely well defined.

A new dynamic after World War 2

The “silent generation” (generation from the soldiers of WW2), followed the dictates of their parents, suppressing their view on how the money should be managed.

The “silent” gave birth to the “baby boomers”, and they became more permissive.

The characteristic of the “boomers” was to determine their live according their own terms, regardless of the authorities of their patriarchs.
The luxuries offered in the 60’s and 70’s lead sometimes, due to too permissive parents, to irresponsible adults.
Some “boomers” observed the permissive and adverse effects of their peers on their wealth and are more cognizant .

They dictated family rules to enhance the real power of wealth and how to foster their own generation to recognized the dictates of their grand parents.

New guidelines for family offices

Those changes on the “wealth approach” affected the activities of the family offices. For instance the growing interest in philanthropy is a direct result of this concern.

On the global overview let’s be realistic: the family are getting into more complex wealth management strategies: buying-out, mergers and acquisitions, diversified asset allocation, hedge funds, etc….

The role of a family advisor has to take into account this new dynamic; several questions have to be considered:
• The inheritors may want to start their own business, based on the family assets
• Should the money be dispersed, how ?
• Should the money be invested collectively?
• What will be the impact on the founder’s legacy?
• How will be the voting right being distributed?
• Should the founder continue to carry the weight in decision making or should he pass the torch to the next generation?

All others alternatives may also be considered: the increase of divorce rate threatening unplanned wealth dispersion,…

As those factors have to be taken into account to properly set the “family dynamic”

There is no “out of the shelf” solution to implement an efficient wealth management program

The family governance is the structure through which the wealth management is facilitated or at least values are nurtured.

As I explained it in my previous articles here and here, the governance “is the structure through which decision making happens for the family”

Decision about the family’s philanthropic activities, vacation, education, large purchase (home,…) have a direction or bearing on how the financial assets are managed.

How to implement the “new family governance” ?

There is a huge variation on how the wealth is perceived amongst the generation.

Often the understanding of the family governance and its impact on wealth is linked to the following observation: “the more people with interest in the wealth, the more complex the decision making becomes, increasing the intricacies of optimal management of the wealth.”
We can complex this by adding technology and outsourcing some advisory functions (bill paying, accounting, etc…)

In practice

The effects of the family dynamics have very disparate value based on generational attitudes: family members may have some diverse or adverse view on how the wealth should be managed: the father may consider to invest more money in it’s company, the son wants a diversified portfolio of activities while the grand mother is willing to set a philanthropic foundation….

The good practitioner of “family office” should have a real in-depth understanding of each family members toward money, their individual goals and to seek if their dreams fit within the goal and the dreams of the founder.

Non-financial assets and other non-correlated assets are rarely considered in asset allocation decisions; few consulting questionnaires cover those areas.

The family office which reflects the attitudes of the founder and subsequent generation towards their wealth.

In observing those factors we can assert that wealth management decision are highly influenced by family dynamics and by the manner in which the wealth is controlled.

The Family Foundation

One of the most obvious instruments to integrate both family dynamics and wealth management is through the family foundation.

The family foundation serves a dual purpose as a training playfield for future family leaders and to perpetuate the legacy of the founder.

Smart effective planning requires that advisors be familiar with their client’s values, motivations and goals.

Advisors need to understand who their clients are beyond their investment portfolios and donors need to understand themselves and what they want to achieve with their giving.

Too often we forget that philanthropy is a social investment and, as with all investment opportunities, both advisors and clients must first determine their goals and set a plan based on that vision.
Smart effective planning requires that advisors be familiar with their client’s values, motivations and goals.
The family council and the family foundation are two entities similar to institutional investment committee, with a key difference that the advisor willing to maintain a long term relationship needs to fully understand the family dynamics and governance.

In conclusion “Optimal Wealth Management”

There is no “out of the shelf” solution to implement an efficient wealth management program.

Several aspects have to be taken into account: impact of taxation, attitude of the each individuals within the family to approach financial risk, cash flow requirements, etc…

The successful advisor, in our view, will be able to combine immediate wealth and empowering the next generation.
The optimal ways to develop wealth and foundation are: financial, estate and investment planning.

With a good knowledge and understanding of the family governance, the advisor sit in a place where he can ensure continuity of the values of family across generation.

Again the valuable advisor should be able to get into the inter-twisted: family dynamics (the “internals of the family”) and the family governance; having in mind that family dynamics determine the family governance…

Patience and understanding are the key points to have.

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