Michelle, ma belle...

We had a pretty good Christmas; a house packed with three generations whose combined ability to strip a house bare of food and drink would give a swarm of locusts a run for their money. Boxing Day evening saw the younger members packed off to bed while their elders slumped in a postprandial torpor, trying to summon up the energy to stuff away another mince pie. This gave Mrs R the opportunity she had been waiting for. Their guard was down; it was the perfect moment to introduce The Talk - what would happen to both acres that comprise the vast Ross Estate when we were called to a higher, or at least different, place?

The cobbler’s children have no shoes; the Ross children have no financial plan and now seemed as good a time as any to begin to put things right.

It started out well. More by luck than judgement we seem to have produced a brood that, even into adulthood, I still like (I’ve always thought you have to love your children but liking them is a bonus) and their initial responses along the lines of ‘we’re not interested in your money’ were reassuring. Thankfully, none was cruel enough to point out that a third of what was left after we’d paid for our dotage wouldn’t buy much more than a cup of tea and a bacon sandwich over which to reflect on our passing.

We should have left it there, kept things simple. But Mrs R had to nudge them. Over the next twenty minutes a disturbing narrative developed. A casual observer could easily draw parallels with a wider post-truth zeitgeist; unfortunately I was not only a participant, I was the protagonist.

It goes without saying that Mrs R emerged as a paragon who could be relied upon completely. I, on the other hand, had barely waited for the flowers to fade on the late Mrs R’s grave before I was off with a floozy so obviously only after me for my money. It would all end in tears when she ran away with a boy nearer her own age – taking their inheritance with her. Her name was Michelle. That I can only think of one Michelle I know and he’s a French chef called Michel, didn’t matter – they weren’t coming to our wedding and that was that. The only answer was for me to make sure any money I had was protected from her grasp.

Hang on, I protested, I love your mother dearly but she might fall under a bus tomorrow. I could live another 30 years. I could be happily married to someone else for another 25. Do you really expect me to restrict myself for the rest of my life?

Yes

Why?

We’ve told you – we don’t like Michelle

THERE IS NO MICHELLE!!!

It was all fairly light-hearted but it serves to illustrate just how easily family discussions can escalate to internecine warfare. Examples are easy to find. Peter Ustinov’s family has been battling since his death over a decade ago to the extent that his son is close to bankruptcy and the estate pretty much exhausted by legal fees. More recently, Robin Williams’ widow and children locked horns over the terms of his will. And it’s not even about the money. In Robin Williams’ case they are arguing about his memorabilia, which you’d think would be worth little compared to his overall wealth.

When it comes to estate planning, Inheritance Tax and divorce protection are important, but it is when we encourage family discussions well in advance that we add most value. It is usually when people are hit with the unexpected that things start to turn nasty. As with so many things, communication is key.

A trend we’ve seen developing is the move towards a desire to create a legacy – wealth that will be handed down through many generations. Often it’s people who had expected to leave behind a business that could be this legacy, only to realise, late in the day, that their children really weren’t that interested in running the family firm. This is an increasingly familiar situation – the rates of familial business succession have been plummeting for years. When you put a business into the mix, the potential for misunderstanding increases exponentially, making early discussion vital.

Wealth management is usually about helping people build a pot of money and then spend it at a rate that means it doesn’t run out before they do. Because we expect people to use most of their money during their retirement we must invest in reasonably liquid assets – we need to know that when we need the money we’ll be able to get it.

Taking an intergenerational view fundamentally alters our approach. Rather than managing a portfolio to sustain an income through a retirement with perhaps a bit left over at the end for family and friends, legacy planning starts with the assumption that the portfolio will be invested to create an indefinite income that spans generations. Relieved of the burden of maintaining liquidity we can look at longer-term trends.

For example, investing in a basket of developed market shares for five years will give a better return than cash just two thirds of the time. Not bad but hardly compelling. Extend the investment period to fifteen years and your basket will outperform cash over 90% of the time.

Similarly, small companies outperform large companies in two out of every three years but 95% of the time over fifteen years. Having an indefinite investment horizon means we can take advantage of these persistent factor advantages. It also means we can, more or less, close our eyes to capital value volatility and concentrate instead on creating a rising income stream.

We can also look to other indefinite investors such as the endowment funds of Ivy League universities for examples of alternative approaches. The Yale endowment fund runs to $25bn. Its investment allocation looks very different to a typical individual portfolio. Up to 50% of the fund is held in illiquid assets (venture capital, leveraged buyouts, real estate and natural resources) with only 4% of the fund in domestic (US) equities.

We can think about investments that reflect underlying socio-economic, industrial and political trends such as an aging population, the rise in robotics or the increasing importance of clean, reliable water supplies, gaining exposure to these areas through a growing number of specialist thematic investment funds. Having a team of enthusiastic economists makes us well placed to assess these opportunities.

None of which should bother the Ross children – Michelle would have spent the money long before any of the trends play out…