Wealth planning professionals understand that helping UHNW clients manage financial capital is central to their advisory role. Many would probably not assign the same degree of centrality to addressing matters of human capital. Nevertheless, the reality is that the extent to which an UHNW family invests in, manages, grows and develops the family’s human capital will likely have a greater impact on the family’s long-term success and happiness than their success in managing financial capital.
Because family governance—a short-hand way of encompassing all the components of managing human capital—should play a foundational role in the advisory relationship with UHNW clients, we recently launched The Morgan Stanley Family Legacy and Governance (FLAG) Institute in order to help professionals who work with UHNW families understand the importance of paying at least as much attention to human capital as they do to financial capital. Our goal was not to minimize the importance of the largely quantitative task of managing the financial side of the ledger, but to highlight the essential qualitative undertakings that provide an environment in which families can continue to achieve and thrive.
Multi-generational success depends on driving alignment around a deeply held set of shared family values, creating processes that keep the family working toward its mission, making necessary course corrections along the way, and creating sound processes for making decisions together with respect to a family’s joint enterprise, if they have one. The wealth planning professional must emphasize the importance of these elements so that the family can create an environment in which their financial capital is empowering, adding richness and meaning to life, rather than see their financial capital stifle ambition, initiative and productivity, or fuel devastating family conflict over power, status and control. Here are a few things to keep in mind as you get started talking with your clients about family governance.
Recognizing A Level Of 'Awkwardness' And Artificiality
An extremely powerful and effective way of driving alignment around family values is to bring the family together to create a family mission statement. At first, many families may find it awkward and uncomfortable, at least at first, to talk about their values and goals in the context of a formal meeting. Moreover, it’s seldom the case that everyone comes to the table with the same level of commitment. It’s important to acknowledge feelings of discomfort and possible skepticism, but we shouldn’t allow such feelings to deter the family or us, as advisors. Instead, we should ask those who may be skeptical to do their best to suspend those feelings for the time being, and assure the family that as we get into the discussion, feelings of awkwardness tend to melt away; by the end most families will say they found the work fun and enlightening.
In order for these meetings to be successful, it is important for wealth planning professionals to create an inclusive environment in which family members will feel safe asking questions and expressing concerns. In order for these meetings to be successful, everyone needs to feel as if she or he has a seat at the table. That sometimes means that matriarch and patriarch need to modulate somewhat what may be their natural tendency toward dominance. Sometimes togetherness requires contraction.
Beginning the conversation often is the hardest part. If families are having trouble getting started, advisors may find it useful to ask family members to reflect on the role that others—parents, grandparents, aunts, uncles—have played in their lives. This may help to bring everyone together emotionally, so they can identify fundamental values, ultimately determine what is most important to them and begin to articulate goals.
Whether you are an estate planning lawyer, certified public accountant, family office executive or financial professional, by helping the family to manage these conversations, you get the privilege of exploring with the family the things that typically matter most to them. It is always a unique experience. Those of us who focus exclusively on more traditional and quantitative matters typically don’t get that opportunity.
Disagreement Isn’t Always A Bad Thing, But Conflict Needs To Be Managed
Disagreements may emerge, and that isn’t necessarily bad. We may be predisposed to think that the opposite of conflict is agreement, but that isn’t true. The opposite of conflict is no conflict, and there may be reasons, other than agreement, why conflict is absent. One such reason may be apathy, and that could be worse than conflict. When I see families disagree, I know immediately that they care; they care enough to have opinions, to express them, and even to weather the consequences of their disagreement. Apathy may be worse.
Of course, disagreement, if not managed, may grow into devastating family conflict. That is why, in order to minimize the potential for so horrible a result, families who engage in some form of joint enterprise typically will benefit from sound decision-making frameworks and processes. In short, families that create a normative decision-making process—a framework pursuant to which decision-making is rule-bound, transparent and repeatable—position themselves to make decisions that are more likely to be respected over time, thereby significantly reducing the potential for devastating family conflict.
Breaking Misconceptions About Family Governance
When it comes to family governance, early planning is key. I have found that many families either never fully address their governance needs or wait until they are in the midst of a crisis, when it’s often too late to help very much. One of the key themes at the FLAG Institute this year was the need to break the stigma that family governance is for troubled families. In fact, most of the families with whom I work are far from troubled—most of them have a very happy and healthy family dynamic. But they’re forward-looking, and they conclude that, if they want their healthy and happy dynamic to continue over multiple generations, it’s important to do work now, when things are so strong, and build a foundation for continuing success.