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Keep Your Money: Talk to Your Family

By Spear's

Worse than stock markets or Ponzi schemes, the biggest threat to a family’s wealth is the family itself. Rupert Phelps outlines how the family that learns together, earns together

Beliefs affect behaviour, leadership guides activity and education improves skills. But how can beliefs come to be represented by a coherent set of values which family members broadly embrace?

How can a leadership model be established that includes diverse abilities amongst the family whilst bringing in outside professional talent? And what initiatives can a family embark on that will train them better for the collective and individual challenges that arise from the stewardship of family assets?

The practice of family governance seeks to offer a solution to these vexed questions and a methodology for drawing accountability and decision-making together to the benefit of the family’s wealth.

The biggest destroyer of family wealth is neither taxation nor investment performance. It is family conflict. This should not be a surprise, after all Dickens, warned his wide public so memorably that ‘Jarndyce and Jarndyce’ entered English usage.

One English proverb was that it took three generations to ‘make’ a gentleman, but more tellingly another adage, ‘shirtsleeves to shirtsleeves in three generations’ expresses the near universal truth (studies generally place around the 90% mark) that very few fortunes survive the third generation.

Two clear patterns amongst successful families emerge, whether they are in the 4th or a Wilsonian ‘14th’ generation: effective ‘family governance’ and considering the family capital more broadly than just its financial assets (what James E. Hughes, a pioneer in this area, describes as additionally human, social and intellectual capital).

This is to be unlike Bernard Amedroz, the patriarch in Trollope’s The Belton Estate, of whom the observation is made “he spoke of his cousin always as though the man were guilty of a gross injustice in being heir to the property.”

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One is also reminded of the emotional aspects of families as a collection of singular humans. Personal characteristics on both sides of the emotional ‘balance sheet’ (intrigue and inclusion, jealousy and joyfulness, greed and giving) are often writ very large in the arena of the rich.

Laura Rockefeller used her inheritance in a way that would have dismayed her great grandfather, declaring, “It’s very hard to get rid of the money in a way that does more good than harm. One of the ways is to subsidize people who are trying to change the system and get rid of people like us.”

Nonetheless there are also important parallels with the collective sphere of business and the rather more established principles of corporate governance.

Increasingly, a private or family office (FO) is the province within which family governance is practised. Where an operating company or family business is retained, a family is well advised to have their private office separate and distinct. R.O.I. Pty Ltd. (an Australian FO) has a deliberately a physically distinct building from the business and careful thought has even gone into the floor plan to enhance likely dialogue and accessibility.

There are some parallels between a multi-client family office (MFO) with the collective business issues that relate to corporate governance and the single family office (SFO), which is more concerned with family governance in its provision of impartial and conflict-free advice to a sole family.

There are many lessons that families and their private offices can learn from business. Chief amongst these is the role of teambuilding; together with a known and accepted procedure for making collective decisions and addressing succession planning of business leaders.

Mayer Amschel Rothschild required his five sons to establish banks in the leading financial centres of the day, also charging them to inform him, and each other, of any news that might be significant to the markets.  This collective and team-based spirit lives on the in the family meetings of his descendents today, where even the travel of less fortunate members is subsidised for them to attend.

The value of a wide group being present is fully recognised. Succession planning in the FO context must also include senior staff, as much as preparing for the death of the oldest generation.

The four usual motivations for establishing a private office are control, confidentiality, consolidation and conflict-free advice. Family governance should be part of this advice offering, but what are its actual component parts and their tools of application?

BNY Mellon’s family governance expert, Thomas C. Rogerson, describes a five-stage process to healthy family governance in which healthy (or effective) governance is actually the fifth degree and represents the culmination of four earlier stages of: education, communications, values and philanthropy.

Before this process can start, a family must accept that the usual dissipation of family wealth is a stark problem and that governance techniques form a powerful element of its solution. Then, the shift of gear to establishing an ordered and constructive procedure is the most challenging transition to make, but seeking more effective family governance will be worthwhile in itself.

The five-stages mentioned above are one method of articulating family governance, but must be firmly rooted in practical application and example. A well-conceived structure is nothing without the appropriate tools.

Education might begin with learning about basic financial principles, then move to successor councils and children’s committees. The Hewlett family involve the next generation from nine years old in a junior committee that is based around philanthropic activity through their foundation.

Peer group networking for opinion and experience sharing (which logically can lead to co-investment opportunities) is a growing occurrence, as well as media training and even skills testing. Communications need to be guided by regular family meetings that emphasise the opportunity for all members to contribute regardless of business experience.

They might be anchored by agreeing on a family (and individual) mission statement, leading to the next stage of Values, with perhaps a family creed or constitution. The de Wendel family from Lorraine established a family charter in 1872 that is still functioning (and acknowledged the role of in-laws and women as early as the 18th Century).

Family governance can be very effective in preserving donor intent in the sense of acting as a vehicle to transmit core values. The Iveagh Will Trust of 1927 (which included the Bequest at Kenwood) expressed philanthropic intent that was a continuation of the ideals of the Guinness Trust, which thrives today. On this theme, an appreciation of what a family’s history and endeavours stand for can be emotive and cohering, and should include the ethical dimension.

This will often include Philanthropy, another area where the practice is as beneficial to the giver as to the end receiver. Philanthropy can also be a powerful tool for younger family members to learn about the consequences of decision-making, the value of money and in the process deliver a lasting unifying effect, as demonstrated by the Hewlett family.

The final stage of healthy family governance is enacting the earlier stages described and continuing to do so. The core concept of governance is about defining roles and responsibilities between individuals in a way that embraces personal character and skills whilst enhancing unity.

This structure of leadership and accountability must be the precursor to engaged and informed decision-making that is transparent, objective and long-sighted, but which also is adaptive and able to evolve. Governance is a function of control and stewardship, but this should be in a way that includes all family participants and assigns roles and responsibilities to each one.

The best practical financial readiness comes from the conceptual plane of shared values and mission. Henry Phipps of Bessemer Trust established his famed ‘Family Plan’, which sought to preserve family unity including a mechanism to give more authority to the older generation.

So what are the advantages of effective family governance and can it deliver quantifiable benefits? A key role of the FO is that of a manager of risk in general, and counter-party risk in particular.

Following this language, the biggest risk is family conflict and thus potential counterparties become other family members. The ‘so what?’ is therefore that effective family governance seeks to be a solution to this overarching issue. Disunity is the greatest risk, but equally, unity is the greatest goal.

Beliefs, leadership and education matter because they are part of the potential mortar that enables human beings to be built into an effective family unit. This reflects the fact that governance is a tool as well as a concept, but in essence is concerned with the process for making collective decisions with measurable consequences. This is a potent force for harmonized deliberation.

Disharmony, from which conflict is a likely extension, is the biggest threat to a family’s wealth. Whether a family wishes to conserve, consume or contribute, where is the wealth-owner who does not wish this decision to be theirs?

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