It's just as important to manage the impact of wealth on family dynamics as it is to manage the actual wealth itself.
That was the major theme of the family wealth management breakout session held yesterday at the American Bankers Association Wealth Management and Trust Conference in Scottsdale, Ariz.
Two speakers with Ph.D.'s in psychology shared strategies for engaging ultra-high-net-worth families in discussions about the non-financial, qualitative aspects of wealth-sometimes referred to as human, intellectual or social capital issues.
"Families are dynamic in nature," said Arne Boudewyn, senior vice president and senior director of family dynamics at Wells Fargo. Some people consider helping families manage the impact of wealth to be the softer side of wealth management, he said. "We think of it as the complex side of wealth management, the side of wealth management that can derail the best laid plans, if not addressed."
Pat Armstrong, senior vice president and managing director of family dynamics at Wells Fargo, introduced the concept of "the family as a system." The term "family dynamics" comes from "family systems theory," according to which, every family, even though it is composed of individual members, results in a whole or "system" greater than the sum of its parts, she said.
The interactions of individual family members with each other and with the group are often referred to as "family dynamics," Armstrong said. Communication styles, behavioral patterns and emotions influence the dynamics between family members and the family system, she said. Significant wealth complicates these dynamics and can influence family members at the individual and the system level, for better or worse, she said.
Super-high-net-worth individuals rank qualitative issues surrounding wealth's impact among their top risk concerns, Boudewyn said, citing research by the Family Office Exchange (FOX). These issues include family legacy, family relationships, and family dynamics related to business and a family's reputation and public image.
A Grant Thornton survey on family business owners showed that their top two issues were resolving conflicts among family members who participate in the business and developing a succession plan, he said.
Boudewyn said the book he and Armstrong most recommend to clients is "Preparing Heirs" by Roy Williams and Vic Preisser. The book cites studies that show only 30% of families achieved successful wealth transition in which the wealth remains under the control of the beneficiaries. A whopping 70% experienced an involuntary loss of control of the assets.
Sixty percent of the losses were caused by non-financial issues, including a breakdown of trust and communication within the family, and 25% were caused by inadequately prepared heirs, according to the speakers. Only 15% of the losses were attributable to other causes, such as legal and tax issues.