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

The Adair family patriarch sold the business he built when his children were in their mid-20s. He had a long career ahead of him and channeled his entrepreneurial passions into investing in smaller, early-stage businesses where he could play an active role in mentoring management and participating on the board. Fast-forward 15 years and the patriarch wants to involve his children in the family office he has created. For estate planning purposes, he has passed down shares in the Family LLC that houses the investments. But more important to him is to create involvement and engagement in the next generation. 

During a meeting with the next generation to discuss their interest and involvement in building the family office, he was disappointed to learn that they didn’t have any interest in playing the role he had in governing the smaller business investments. Further, they were concerned about the risk level of the investments he had pursued. Their vision for the family office was one where they could be ensured a return that could help pay for their children’s education and prepare them for retirement. They all had careers of their own that they wanted to continue to pursue, and none were interested in playing an active role in family investments. 

While they have vastly different investment approaches, neither the Riveras nor the Adairs have achieved engagement with their wealth. With a few changes, both families could create more engagement by adjusting their approaches to meet the needs of their families.

Rivera family members who are not attracted to the market investing approach may be more engaged by smaller investments that could be made in areas that interest them. In the Adair family, they may be more engaged by shifting to the Rivera family approach that could provide secure returns for their family and minimize time commitment. 

There is no one-size-fits-all approach to guarantee family engagement. The key to success is initiating family dialogue about what types of investments are interesting to family members along with how much and what type of involvement they want with their wealth.

Typically, families measure the success of family investments solely by the returns they generate. Generating adequate returns is necessary but not sufficient to achieving wealth continuity. To ensure wealth continuity, both returns and family engagement are crucial. 

The Gambel Family

That said, returns cannot be ignored. Both measures need to go hand in hand to be successful. For example, the Gambel family recently created a holding company to house their investments in three operating companies. They have received an offer on one of the companies that will create enough liquidity for them to consider a broad range of investment opportunities. Family members have never had the opportunity to proactively consider where to invest. The three operating companies are legacy businesses the family has held for generations that never generated enough liquidity to pursue other investments. 

During a family meeting, a group of family members became very excited about the opportunity to invest in smaller businesses that aligned with their personal interests. They envisioned taking the investment returns to create a family investment fund where members could bring investment ideas to be funded by the family. While several family members were passionate about the idea, others were concerned about the level of risk involved with investing in businesses where they had limited experience. There was also the possibility of family discord if the investments didn’t provide desired returns. 

Through their continued discussions, they realized that while family passion and engagement were important, investments that generated interest should not be pursued at the expense of risking family capital. They understood that both returns and engagement were measures to be considered. 

The result was a decision to allocate returns from the sale of the business into several buckets. Most of the funds were invested in lower-risk, more traditional investments that would secure the future of the family. A portion was carved off into an investment fund to pursue investments that engaged family members. Processes have been established for creating a business case to request funds, for reviewing investment performance and for making decisions about selling an investment if it does not perform as expected. 

Through the family dialogue, the Gambel family has found a solution to balance engagement and return to ensure the continuity of wealth across generations. They also had the unique opportunity to mold their investment mix to suit their interests. Most families don’t have this opportunity because they are saddled with an existing asset portfolio and allocation that may be difficult to adjust in the near term. However, that is not a reason to ignore the importance of engagement. Understanding what will engage the family in the long term can affect decisions made over time and allow the family’s wealth profile to evolve to a place where it is engaging to family members. 
 

Jennifer Pendergast, Ph.D., is a senior consultant with The Family Business Consulting Group Inc., where she specializes in strategic planning, family and business governance, and family office structure. To learn more, visit www.thefbcg.com.