Investment and wealth advisors who work with high net worth and ultra-high net worth clients are often uninformed—or, worse, misinformed—about services related to family governance, family wealth dynamics, and family financial education. (Here I refer to those services collectively as “family governance.”)
How do I know?
I’ve interviewed scores of them on the subject. In this post I describe the most common misconceptions I’ve found among advisors, and why it may be worthwhile for you to learn more about these vital services.
I say “vital” because the greatest threats to your clients’ long-term family wealth are not low returns or high taxes. The greatest threats to your clients’ long-term family wealth are their loved ones.
You already know this. I have never spoken to a seasoned trust officer, private banker, family office executive, investment advisor, or attorney who lacked for horror stories of wealth gone to waste. You also know the reasons: unprepared heirs, poor decision making, spendthrift behavior, gold-digging spouses, inept in-laws, and—the coup de grâce—intra-family lawsuits.
Yet most wealth advisors cling to the idea that healthy returns and aggressive tax planning will, on their own, preserve wealth.
I understand. You’re not in the family governance business. You deal in numbers, rationality, and measurable outcomes.
When you do think of family governance services you no doubt ask, “How can they boost my AUM or account retention?”
That’s a totally sensible and legitimate question.
So here, and in other posts, I want to provide another view of these services. This view may be useful when your clients encounter some of the very real problems that come with family wealth or with any jointly owned assets.
This view may also help you to forge broader, deeper, more durable client relationships.
A changing landscape
The wealth management landscape is changing.
Competition for the best clients is intense and margins are thin. Economic uncertainty and geopolitical risks abound. Fintech is already transforming money management and investing.
Anyone even dimly aware of these developments knows that relationships will be the most important success factor in HNW and UHNW wealth management going forward.
Your clients now expect relationships to go deeper than dinners, retreats, sporting events, evenings at the theater, and other forms of socializing. They need practical advice and genuine support in navigating the problems that wealth creates in their families.
Trust companies, private banks, family offices, and wealth management firms that understand this will survive and prosper.
You’ve seen the statistics. Some 500,000 individuals in the United States alone have incomes of at least $1 million per year.[i] An estimated $68 trillion in wealth will be transferred from Baby Boomers to Millennials in the next few decades.[ii]
Those numbers represent either happiness or misery for hundreds of thousands of families, and millions globally. They also represent new opportunities for wealth management professionals.
Enter family wealth governance
As you know, family governance originated with the need for families with businesses to manage the impact of family relationships on the business.
Families with businesses and their advisors learned that even typical family dynamics [link to Family Dynamics 101 post], such as parental favoritism, sibling rivalry, and family factionalism, often hobbled or destroyed a family’s business. (Note that it is called family governance—tacit admission that it is the family that needs governing; the marketplace ultimately governs a business.)
Family governance—structures and practices that address the impact of family dynamics on the business—gained popularity. Practitioners in family governance arose, as did practices devoted to succession planning and ancillary disciplines.
Given today’s unprecedented levels of wealth creation and concentration, the need for family governance—even over money under professional management—has been recognized.
Hence, the rise of family wealth governance (also known simply as family governance) and structures like the family wealth enterprise. The family wealth enterprise views the family’s wealth as an entity unto itself—whether it is inherited, created by a liquidity event, or generated by a business, real estate portfolio, farm, ranch, or intellectual property.
The family wealth enterprise recognizes that wealth should be governed in ways that preserve and nurture the wealth (and, if applicable, its source) to the benefit of the family and generations to come.
Many in the wealth management community recognize this need. Almost half of the members of the Purposeful Planning Institute are behavioral specialists. Several multifamily offices (MFOs) have family governance/family financial education practitioners on staff. Books on the impact of wealth on families abound.
Yet many advisors still cling to misconceptions about family governance, the most common being:
- It’s “touchy feely” or psychological.
- It’s only for addressing conflicts.
- It’s about family meetings, mission statements, and so on.
- It’s unnecessary and unprofitable.
Let’s briefly examine each of these notions.
It’s “touchy feely” or psychological.
It may be natural for advisors to see family governance like this. After all, it aims to help people integrate family issues into financial decisions, and that puts a different lens on wealth.
Family governance differs from traditional wealth management, which boils down to managing investments, minimizing taxes, protecting assets from future creditors, and planning one’s estate—all of which are necessary but not sufficient for long-term family wealth preservation.
Also, many family governance practitioners have backgrounds in psychology or sociology; meanwhile, most advisors deal in facts and figures. One wealth manager told me, “Few patriarchs or matriarchs want to hear that the family may need a shrink.” Thus many advisors see family governance more as an intervention than a best practice, which is what it is.
It’s for family conflicts.
Family governance is often positioned as a countermeasure to family disagreements, leading some advisors to see it as conflict resolution. Unless their clients face family feuds, why would they need this?
The answer is that good family governance (like good political governance) precludes many conflicts and provides mechanisms for resolving those that do arise.
Family governance is not conflict resolution in the sense that mediation and arbitration are. But family governance structures and practices do help families to handle the inevitable conflicts that arise in a family, which they will as they do in any group of people.
It’s about family meetings, mission statements, and so on.
Viewing family governance as activities, such as the family meeting, can mistake the parts for the whole. As one attorney put it to me, “A client of mine has been holding family meetings for 15 years, without ever making a decision.” Indeed, the whole exceeds the sum of the parts.
Family governance is best viewed as a set of ongoing practices rather than as an event. Holding a family meeting, conducting a values assessment, or creating a family constitution is an event, typically one that is soon forgotten.
Ongoing governance practices, such as educating family members about wealth, applying lessons from the family history, creating and administering a family bank, and participating in joint decision making, embody and support the process—the process of preserving and nurturing family wealth.
It’s unnecessary and unprofitable.
I understand why wealth advisors would see getting into family governance at any level, even just on a referral basis, as one more brick in their wheelbarrow. Who has the time? Is there any money in it? Why risk destabilizing client relationships?
Most advisors I’ve spoken to have told me, “People don’t want to pay for these services.”
Given the value of those services, and, quite frankly, some of the goods and services that HNW and UHNW individuals cheerfully spend vast sums on, that statement tells me one thing: The value of these services has not been articulated and the related business models and delivery mechanisms are deeply flawed.
As a cofounder of not one, but two, stillborn business in the family governance space, I know whereof I write. The challenges of communicating the value of these services and improving their accessibility are manifold. But they are worth addressing.
Because the amounts of wealth created over the past four decades is unprecedented. Therefore, the need for families to manage the impact of that wealth on themselves is also unprecedented.
What’s in it for you?
As to what’s in it for you, the wealth advisor, I point out that you will very likely develop:
- Stronger relationships with clients, based on a true understanding of the problems that wealth creates and your willingness to help them address those problems
- Greater trust in your client relationships, based on the fact that you assisted them with serious problems of a personal nature at moments that mattered
- Stickier assets during times of market volatility or business reversals, based on your ability to add value beyond high returns and the usual investment advice
- Enhanced asset retention upon intergenerational transfers of wealth or liquidity events, based on your knowledge of and relationship with the next generation
- Deeper professional satisfaction for you and your team, based on your ability to see beyond the numbers to the true value (and risk) of significant wealth
Incorporating these services into your offerings, acting as a source of referrals to practitioners, or at least being conversant with these services, can differentiate your firm in a crowded, commodified marketplace. Even addressing these matters at your website and in client and prospect presentations can amp up your content marketing efforts and enhance your intellectual property.
Moreover, these services have been proven to boost clients’ usage of financial, retirement, succession, and estate planning services. Clients who become aware of problems in their family, who lose their sense of shame about them, and who learn that solutions exist tend to engage with their wealth and with their wealth advisors in deeper ways.
They also want to use structural solutions like a family bank or family wealth enterprise, which also creates opportunities for advisors.
I’ve launched this blog, and published my most recent book—Family-Proof Your Wealth [link to Book Landing Page]—to introduce family wealth education, family wealth dynamics, and family wealth governance to a wider audience.
As an advisor to HNW and UHNW individuals, or as a family governance or family dynamics practitioner, you are a critical member of that audience.
So, I thank you for reading.
If you have ideas, thoughts, or opinions to share with me, please do so at firstname.lastname@example.org or 617-558-5800.