In this column, we will address the myriad factors that play into successfully maintaining wealth across generations. Some obvious requirements for ensuring continuity of wealth over time include selecting good investments, controlling spending and making sound tax and estate planning decisions. If you don’t manage the wealth wisely, it will not last for future generations.
Beyond these obvious factors, there are other considerations that affect wealth continuity. They have to do with the involvement of wealth creators and their families in the wealth planning, management and transition process. Based on extensive experience with wealth owners, I believe that active engagement with their wealth, along with an appreciation and understanding of the assets, is key to being a successful and happy family.
“Engagement” includes understanding what you own, reading reports provided to you, participating in decision-making around how wealth is held, asking questions when you don’t understand. It can also be something more philosophical about having a connection to the money—thinking about what you want to accomplish with it (Is it about returns? Giving back? Continuing a family legacy?) and ensuring you have a plan in place to achieve what you want to accomplish.
What are the requirements for active engagement, appreciation and understanding? Financial advisors to the wealthy will often focus on education, such as meeting with investment managers, attending conferences and taking classes on investment terminology and decision-making. Family advisors will suggest developing an appreciation for the wealth creator’s legacy and the wealth itself by identifying what the wealth means to you and what opportunities it creates.
I fall somewhere in the middle of the financial camp and the family camp. While I strongly believe that an understanding and appreciation for wealth are critical, the third element—engagement—should not be overlooked. Without active engagement, energy and interest dissipate over time. One of the challenges of wealth is that it doesn’t manage itself. Even if you outsource decisions to a third party, as wealth owners you still have a responsibility to oversee their decisions and plan for your future. Being an owner of wealth takes a commitment of time and energy to ensure the continuity of that wealth to future generations. Research shows that people who are more interested and engaged in their activities are more effective and happier than those who are disengaged.
Beyond the obvious value of enjoying the task at hand, it is important to consider the downsides of the lack of engagement. In my experience, families who lack engagement tend to be those who end up in disputes because they become primarily interested in what is “in it” for them—namely the ability to access money. They may have unrealistic expectations about what their investments can generate, or worse yet, not care about investment performance at all but focus only on money accessible to them. In other cases, they may care about investment returns but not care about staying invested together. If the asset structure allows, they will choose to sell their interest so they can have the freedom to invest their assets on their own. Or they will become disgruntled owners if not allowed to sell their interest in joint family investments. None of these scenarios support the goal of successful transition of wealth across generations.
The number one way to engage family members with their wealth is to make it relevant and matter to them. To demonstrate, let me share two examples of engaging with wealth:
The Rivera Family
Rivera family members convene each quarter to review their investment portfolio with the head of their family office and their third-party investment advisor. The advisor is responsible for recommending the family’s portfolio allocation and for selecting managers to manage their investments. The family has an investment committee responsible for approving the portfolio allocation and reviewing the managers’ performance. All family members, whether they participate on the investment committee or not, are responsible for meeting with investment advisors to review the performance of assets held by various fund managers. Presentations provide updates on the current asset allocation versus the policy portfolio, market performance and the performance of fund managers against benchmarks (similarly invested managers). This approach is engaging and interesting for a very specific subset of people, namely those who would be interested in a job on Wall Street. The majority of family members are obligated to participate but don’t have any engagement with the process.
The Adair Family