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The Contrarian View: All in the Family? Maybe…

Ed Lazar, CFA™, President

Family management guru Jay Hughes, in his classic and influential book, Family Wealth: Keeping It in the Family (Princeton, NJ: Bloomberg Press, 2004), provides a road map for families who wish to work together as a group to preserve their human, intellectual, and financial assets.  When done well, managing wealth cohesively as a family can have enormous advantages, both financially and emotionally.  However, family leaders and their advisory teams too often presume that newly liquid wealth ought to be managed and controlled as one unit. Despite the advantages of doing so, make no mistake about the hardships such a journey will almost certainly bring.

Don't get me wrong being a unified "financial family" is not an all-or-nothing proposition.  Invariably, most families have one or more assets that must be managed as a single unit.  The key question is how best to create a balance between singular, unified management of wealth and the human autonomy often desired by individual family members.  More than one family situation has gone awry because this balance of unity and autonomy was never discussed, debated, and decided.

If a family is already emotionally strained or lacks capacity to create compromise without regret, its members may not be ready to sit down to a dinner of financial stew.  Serious heartburn can result.  Further, dad and/or mom, in the name of protecting the hard-earned financial wealth from taxing authorities and creditors, may become willing pawns in the creation of byzantine legal structures.  Worse yet, they may attempt to use money as a tool to control offspring and their behavior.  These situations tend to increase the toxicity of the family environment.

Assuming up-front motivations are pure, families should enter into a long-term financial arrangement with the same level of diligence one might use when undertaking any investment with third parties. It is typically best to first examine the plan's intent and structure as if doing so through the eyes of an unrelated third-party private investor.

  • Why would we want to do this together as a group, versus either going it alone or with some other group?

  • What do we seek to gain by working together, both for ourselves and for those who will or might come after?

  • How will we make decisions?

  • What are our respective roles and responsibilities?

  • How will we communicate and act with each other?  How often and to what extent will information be shared?  What about communication outside the family, understanding that those on the outside world have certain assumptions of their own – and not always well intentioned?

  • How often should our up-front assumptions and agreements be revisited?

  • If I or others are no longer willing or able to be a part of the family financial cabal, what is the process for unwinding our affairs in an orderly and civil way?

Once the preceding questions are discussed and alignment is achieved, families should test their plan against the grizzled veterans who have paved the path before them. In my experience, wealth-owning families are surprisingly candid and constructive in one-on-one peer discussion about their experiences. Family leaders are generally wise to choose not only advisors who know families with experiences to share, but also those who are willing and able to connect peer families with one another.  As family-to-family facilitators, advisors must have the knowledge, courage, and network of resources to help these peer connections succeed.

I believe the aphorism "shirtsleeves to shirtsleeves in three generations" has become a universal and truthful proverb. Driven in part by human behavior, the inertia of generational family wealth often follows a pattern: the first generation creates the wealth, the second preserves it, and the third spends it.  Mr. Hughes posits that families can break this generational cycle and preserve or build wealth for generations if they employ strategies already proven by a handful of legendary financial families.  I have no quarrel with this wisdom.  However, I do caution that those eager to accept this approach should consider thoughtfully whether and how much of this family journey should be done as a group.  If family relationships are not on solid emotional footing, real groundwork may be necessary before joint pursuit of wealth preservation will solidify the family's footing and ultimately help achieve financial success.

 

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