From fear to engagement in transition planning

The Baby Boomer's are the wealthiest generation in human history having accumulated incomparable financial resources in the decades following the Second World War.

The transfer of this wealth will be a defining issue for a generation of private wealth advisors and the outcome will affect financial markets, national economies, and local communities.

Advisors have an important role in preparing families for a successful transition. But, for many advisors, a shift in mindset is required to ensure we set up our clients for success rather than self fulfilling prophesies.

What does success look like?

Success in a wealth transition plan means different things to different families and it is important for advisors to understand and define this at the outset.

It will be determined by such factors as:

• The family’s hopes and expectations going into the process.
• How the family engage with each other during and after the process.
• Any financial value realised at the end of the process.
• What the family does next.

The outcome of a successful process is usually either:

• The equitable (not necessarily equal) division of financial capital between family members who then go on to become successful independent economic units in harmony with other family members.
• The consolidation and aggregation of all forms of family capital (financial, social, human, intellectual, and spiritual) into a sibling partnership or cousin confederation held together by a formal governance programme.

Fear based advice is impeding purposeful planning

We have all heard the proverb “clogs to clogs in three generations”. There are various regional variations on this proverb in common use around the world.

They all purport to describe the "truism" that wealth earned in one generation seldom lasts through the third (grandchildren’s) generation

Many proverbs about family wealth are myths

The problem is that there is actually not much evidence to support the proposition. Studies have been done over the years and there is some basic, outdated research but it is limited to very small, localised datasets from specific sectors and based on dubious criteria for “success”.

On the contrary, there is plenty of empirical evidence to show that family businesses often outperform certain indexes of small and mid-cap listed companies.

We now know that many proverbs about family wealth are myths that should be debunked. Business families and family businesses actually start from a position of relative strength and are no more likely to lose wealth or fall out with each other than other types of families or businesses.

Progressive wealth advisors are taking a different approach to the succession planning

The thought leadership of Kristin Keffeler, James Grubman and Dennis Jaffe on this issue is profound. Their seminal article “Wealth 3.0: From Fear to Engagement for Families and Advisors” argues that often advisors feed fear and reinforce the tired tropes and stereotypes about future generations losing the family wealth.

This then becomes a self-fulfilling prophecy because families become anxious to engage with their advisors and collaborate with each other to develop a succession plan. Ultimately, this leads to inertia and, often, failure in succession planning.

Andrew Taylor, co-founder of Orange Kiwi LLC recently explained the issue to me in plain terms:

“We often refer to the analogy of funeral planning for the individual. Advisors in that space could tell us all day about the risks of dying during the course of daily activities (e.g., driving to work) but it is unlikely that would motivate us as individuals to suddenly start planning for our funeral. Likewise, risk mitigation for the family business is not nearly as motivating as advisors would like to think it is - particularly when founders are involved and whom most often have shouldered enormous amounts of risk year in and year out to grow the business.”

When I first studied Wealth 3.0 theory I found it confronting as I realised that I too had perpetuated some of these myths over the years. I felt vulnerable and humbled that, even after all these years, I might have actually have been doing some clients a disservice.

This self-examination motivated a major change in my mindset and methodology. The results were transformational for me and my clients.

Risk management is still important but must be proportionate, informed and pragmatic

Wealth 3.0 theory is not intended to dismiss the important role of advisors in managing risk, but rather keep it in proportion. Family assets typically experience linear growth over a generation, but the risks to family wealth increase exponentially over the same period. So, risk management certainly remains a core role of the advisor but it shouldn’t be a defining one.

In my view, a whole generation of families have been influenced to set up complex structures to manage real or perceived risks without much interrogation of the rationale for doing so.

Private wealth structures are traditionally designed for tax efficiencies and creditor protection. But, over time and typically when the next generation are involved in the family business, these external risks usually become less relevant and the structure itself may become the most acute risk to the family.?

Call to action?

My call to action is for advisors is to take a few simple steps:

• Embrace a Wealth 3.0 mindset and make transition planning an inherently positive process.
• Eschew tired and unhelpful tropes about the competency of future generations to manage family wealth.
• Rethink traditional wealth planning and consider alternative structures and focus on the processes within those structures.
• Organise family affairs with a focus on all the constituent parts of family capital.

Some families and their advisors are already doing this and we are starting to see a gradual evolution and professionalisation of private wealth.

But there are significant variances and there is a lot more work to be done.

Get in touch if this topic interests you as much as it does me.

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