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Three Ways To Improve Next-Generation Family Office Communication
By: Joe Scime, CFA, CFP®, Senior Consultant, The Wealth Office™
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The Irish playwright George Bernard Shaw once said, “The single biggest problem in communication is the illusion that it has taken place.” Many families struggle with this issue, and it can create one of the biggest obstacles in the effective management and oversight of a family’s wealth.
Many families that have created significant wealth through an operating business (or other avenues) spend years cultivating and growing that business. After all that hard work, they are justified in protecting what they built by also focusing much of their time and resources on planning for succession of the family business and ensuring that wealth is ultimately passed on to the next generation in a thoughtful, tax-efficient manner.
However, the step that tends to be minimized or even neglected entirely is helping the next generation understand how they should manage the wealth they are set to inherit. The question families need to ask themselves is: “Does the next generation have the knowledge and the tools they need to feel informed and prepared to effectively manage the family’s assets?”
While every family faces its own individual challenges in answering that question, the nature of the question is universal. In fact, the top risks facing families today do not have anything to do with the late stages of the current economic cycle, negative interest rates or elevated market valuations; instead, their most significant risks relate to a lack of leadership and planning as well as intergenerational disputes and other nonmarket-related concerns, according to the latest Campden/UBS Global Family Office survey1.
The most effective way to mitigate the uncertainty of whether the next generation is prepared for the responsibility of managing a family’s assets in the future is to spend almost as much time and effort communicating about these types of financial topics as it took to accumulate the wealth. The following tips provide a framework for how to effectively communicate within a Family Office not only to assist with intergenerational planning but also to enhance day-to-day governance responsibilities.
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1. Write it Down – While written guidelines expressing goals and risk tolerance should be a part of every investor’s financial plan, Family Offices should be viewed through more of an institutional lens for governance purposes. Take the lead from fiduciary guidance like the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which was created for effective and thoughtful governance of large pools of funds. Creating a formal Investment Policy Statement (IPS) allows you to:
• Define the purpose of the funds
• Construct a cohesive investment plan
• Set appropriate guidelines for the ongoing management of your family’s wealth
• Possibly even incorporate a mission statement or family history within the IPS to memorialize the current generation’s intentions and better define why the funds exist in the first place
All of this can be a very powerful addition to help get the entire Family Office on the same page, helping future generations better understand and appreciate the responsibility being bestowed upon them.
2. Talk it Out – Set up regular family meetings to discuss investments, decision-making and future plans. It is not a prerequisite to divulge every discussion you have with the entire family, but you should be thoughtful in introducing new topics or concerns gradually over time. It can be easier to take small steps over the course of years as opposed to overwhelming them with such important information at the last minute when there is no longer a choice. Think about beginning to incorporate additional family members in the decision-making process slowly over time. Most companies do not just turn over the reins to an unproven or untested team but instead groom and cultivate successors over time. As such, investment decision-making at the Family Office level should be no different.
To enable this, consider creating an investment committee that is involved in decision-making together to lessen the burden over time. In fact, this can be a two-way street, as many Baby Boomers are used to being autonomous decision-makers, which makes it difficult for them to relinquish control of investment decisions. At some point, that key person will no longer be able to make those decisions, so clearly elaborating upon his/her decision-making process, including the how and the why behind it all, makes a major difference in ensuring a smooth transition. The UBS/Campden Global Family Office report shows that only 28 percent of next gens within Family Offices feel “very prepared” to take over for the current generation2. More importantly, the average age that this transition happens in the U.S. is 47, so it’s coming sooner than you think.
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3. KYL (Know Your Limits) – Don’t be afraid to outsource Family Office-related functions. A good Chief Executive Officer does not necessarily equal a good Chief Financial Officer or Chief Investment Officer. Growing and operating a family business can be very different from managing a Family Office. Just as companies have a full suite of C-level executives, many Family Offices require that same specialization. If you delegate responsibilities, you will reduce the burden associated with running a Family Office from the “CEO level” and free up time to have family discussions about purpose, goals, succession and a multitude of other topics that often get ignored when you are doing too many other things.
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Communication is an essential - if often overlooked - part of effective Family Office management, and the aforementioned tips can enhance and improve that communication. DiMeo Schneider’s team of professionals works with numerous Family Offices and has the experience and skills to assist in constructing the proper framework to guide families through generational planning conversations.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| 1,2Campden UBS Global Family Office Survey 2019
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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