Keeping it all in the family: Successfully managing and retaining wealth for and within high net worth families

Prepared by: Mark O’Toole

“It’s a process of engagement that you’ve got to start early. Anyone in their forties who’s heading a significant family business that is not thinking in this space and planning for it, in my mind is in terrible trouble”
Daniel Grollo, managing director of Grocon Pty Ltd

General Advice Warning

This advice may not be suitable to you because it contains general advice that has not been
tailored to your personal circumstances. Please seek personal financial advice prior to acting
on this information

Disclosure

Mark O’Toole and Gordon Thoms, Ascent Private Wealth Pty Ltd are Authorised Representatives
of Godfrey Pembroke Limited an Australian Financial Services Licensee,105 -153 Miller street,
North Sydney NSW 2060 and are members of the National Australian group of companies

“It depends on the depth of capital they’ve got, but I think the major financial challenge is maintaining a lifestyle and expectations of family members not in the business and not part of the family office.”
Dominic Pelligana, Partner KPMG Middle Market Advisory Melbourne

This whitepaper explores the financial and wealth management challenges that are facing many of Australia’s high net worth family groups. Families with many complex business and other financial interests in excess of $30m in net assets or family incomes in excess of $1.5m net per annum.

The research presented in this whitepaper is based on numerous interviews conducted by Ascent Private Wealth in the last quarter of 2008 and 1st quarter of 2009 with high net worth families and the various advisers that they deal with. The interview period was also during an economic time of considerable financial strain for many high net worth family groups, due to the unfolding global financial crisis.

“They think it is important and recognise that it’s important, most families do, but it’s very often put in the too hard basket so it’s not addressed until it’s too late. They don’t deal with their personal succession planning either”
Emma Woolley, Special Counsel Hall & Wilcox Lawyers

“The old adage of clogs to clogs in three generations is as alive and well today as it ever was. So I think it’s that, how does a wealthy family orchestrate itself so that it has the disciplines, and the procedures and the training for the next generation to effectively take over and run the business and family wealth?”
Michael Gaylard, Solicitor of Rogers and Gaylard

“I also think succession for groups is a huge issue, how wealth gets transferred from one generation to the next, how the responsibility, the stewardship, of that wealth is managed, handled and transfers are huge issues”
Daniel Grollo managing director Grocon Pty Ltd

Many HNW family groups find it challenging to do all the things that need to be done to manage, preserve and build family wealth.

This is especially the case for those families that do not have sufficient wealth to set up their own family office structure.

Families want a solution that takes into account the personal needs and make up of the founder and their children; and may include siblings, in-laws and other family members such as cousins.

Need to take account of their interconnected personal relationships, (functional or dysfunctional) both now and in the future.

The Challenges

Results from our research reveal that high net worth family groups face a complex web of challenges when it comes to managing the competing demands of family & wealth.

This is further complicated by the intertwined and competing management requirements of family businesses that they own and their own individual private wealth.

Over lay this with multiple sibling and intergenerational relationships and you have a significant strategic, operational, personal and interconnected family nightmare in
the making.

This is because most HNW families:

  • don’t have an overarching family wealth management strategy connected to all family stake holders;
  • have a patch work of technical advisers without having one trusted adviser bringing it all together under one central strategy map;
  • have high risk appetites and tolerances
  • don’t have a comprehensive succession plan that encapsulates all family’s wealth,
  • or simply have no succession plan at all or have failed to implement it;
  • exposed to unintended ,unplanned or unforeseen risks in multiple areas;
  • have a high concentration of assets in a business or multiple businesses;
  • founder never letting go control;
  • deal with family dynamics and different skill sets;
  • founders often have difficulty extracting significant wealth from the family asset pool for personal use;
  • prone to make poor quality family and personal financial decisions, because they are too close emotionally to consistently make smart decisions in their family’s best interests.
  • make financial decisions in isolation of other family members or partners and or can’t reach agreement on the trade offs;
  • struggle to come to grips with complex financial & investment arrangements and how to maximise outcomes;

“They may have no idea about financial management. They‘ve grown up in a family where they’ve never needed to worry about their financial management.”
Daniel Grollo managing director Grocon Pty Ltd

1. Key Finding

HNW Family groups are prone to make poor quality family and personal financial decisions, because they do not have the time or are too close emotionally to consistently make smart decisions that are in their own and family’s best interests.

Good at strategic planning in their day-to-day roles and in the business; but they do not necessarily use these skills in their own personal lives or in the multitude of strategic and financial matters they face overall as a family group.

“Probably more of a family orientated one would be putting plans in place for the future between the different family members involved.
How we manage that and how we manage our personal finances as opposed to our business ones is important; and having clear separation between the two”.
Eliza Brown CEO, Angela Brown director, All Saints Wines.

Solution

Individual family members to take greater control of personal finances.

HNW Families, individual members need to take control and be accountable for their personal finances and not just rely on the family, or assume everything will work out for them.

Need to become better at managing their own finances and making financial and business decisions, then they will be better equipped for any future succession of family wealth.

2. Key Finding

HNW families don’t have enough communication and ongoing financial education for family members. APW research highlighted that in many HNW families, talking about finance and money, especially at the family and personal level, is often just not done especially between the founders of these successful families and their children.

The results of this lack of communication about money, family and succession and family education about it, often leads to greater risk for the future successors of the family’s fortune.

…“So I think they (the older generation) hang onto the investments as long as they possibly can. They’re protecting their kids but in the end they’re probably not really protecting them that much because the kids never learn to deal with the day- to- day investments anyway”
Eliza Brown ,CEO, Angela Brown director, All Saints Wines.

Solution

Communicate and educate

HNW family groups don’t talk to each other within the family and between generations about money, finance and succession; and the earlier these conversations take place the better.

These conversations are often best had on neutral territory, not at home and with a trusted adviser present.

The trusted adviser would facilitate and foster the communication and ensure agreed outcomes are documented.

Strategies would then be put in place to achieve desired outcomes.

Encouraging good financial habits and education early on helps the individuals within the family first take control of their own finances

”No I think the older generation don’t want to talk about stuff like that, do they?” Angela Brown. “No they don’t want to talk about money because it’s a bit ugly”
Eliza Brown ,CEO, Angela Brown director, All Saints Wines.

3. Key Finding

HNW families don’t have an overarching family wealth management strategy connected to all
family stake holders.

Solution

Construct and implement an overarching family wealth management strategy

Constructing and implementing a complete family wealth management strategy is simply often overlooked.

The business and trading activities just dominate resources and crowd out thinking for such strategic family wealth planning and management.

Seeking external advice from a Principal Wealth Adviser to help formulate and implement this strategy will create greater family clarity, cohesion and certainty.

This would then enable the family to focus on what is important to them as
a group and lead to a greater chance of achieving the desired success for the entire family.

4. Key Finding

HNW family groups have high concentration of assets in a business or multiple businesses.

Solution

Manage the risks of high concentrations of wealth in one asset or business.

HNW family groups have made vast amounts of money and wealth by having high concentrations of their wealth in one asset or even business.

This strategy has worked out very well for many, for some of these families this may not always be the case.

In boom times this approach may appear to have a lot less risk than in tough economic times.

HNW families don’t want a catastrophic event to wipe out their business or a large part of their family wealth.

They will take action to avoid it if they can, or if they are fully aware of all the risks they are taking on as a family.

HNW families should take a strategic family approach with much greater diversification of assets

within both the family’s business and passive investment portfolios than in the past; in order to further reduce these risks.

A Principal Wealth Adviser can also assist the family in the formation and implementation of a family investment policy statement for their non business assets.

“No doubt the way this market’s collapsed will redirect how funds are invested in the future. They won’t be invested in the same ratio, same places as they were in the last 15 years. You can bet your bottom dollar on that!”
Daniel Grollo managing director Grocon Pty Ltd

5. Key Finding

  • HNW family groups don’t have a comprehensive succession plan that encapsulates all the family’s wealth, including business assets, passive family assets, and personal assets;
  • or simply have no succession plan at all or have failed to implement it.

Solution

Plan Succession early and don’t stay on too long.

Many HNW families talk about succession planning, or even just succession planning of their business assets; but often fail to complete either plan or implement them.

They need to start this planning early and when they are still in their prime.

Staying on too long can also present it challenges to the next generation.

HNW families need a comprehensive family wealth succession plan in place, that captures both business and passive assets.

Doing this early on will increase the probability that the family business and overall wealth is transferred successfully to the next generation.

“There are a lot of benefits in handing over management earlier because if you do it over time, there’s a learning educational factor in it.
I also think there’s a bit of family bonding, and a social benefit in sitting down and sharing investment decisions and what ever else.”
Trevor O’Hoy O’Hoy family group

APW research has identified that generally the patriarchs and matriarchs stay on and in control for too long.

Their adult children often would have preferred that the process took place a lot earlier and in a smooth orderly way that transitions the various businesses and passive family assets over time.

This could be perceived as purely in their own self interest, but was because they wanted a more successful transition for the entire family, with less fights and tension.

There is no perfect time line or solution; but transitioning early rather than late seems to be a preferred model, especially from the next generation’s perspective.

“We have one family business proprietor who has a $30m business and he can’t give it to any of his kids” The Patriarch said that he would hang around for 10 years to show them how to run it !”
Jon Kenfield The Solutionist Group

“The next generation sometimes just don’t want to be in that business. ”
Michael Gaylard Solicitor of Rogers and Gaylard

“To sell up the family business is not necessarily a bad thing if that is the way to
maintain wealth or even increase it”
Michael Gaylard Solicitor of Rogers and Gaylard

Seek professional advices from a trusted adviser

More and more HNW family groups are seeking out and engaging a key trusted adviser to act as their family’s Principal Wealth Adviser.

This is to oversee, coordinate and ensure the implementation of the family’s strategy, in junction with the family’s numerous other professional and technical advisers. The Principal Wealth Adviser has the family strategy map; and works closely with the family to create the environment for overall family success and to get the important things done.

Conclusion

Ascent Private Wealth-Principal Wealth Advisers for High Net Worth family groups.

Ascent Private Wealth is a leading private wealth management firm whose expertise is ensuring that high net worth family groups and individuals make smart financial decisions so they can achieve what is important to them.

We work with wealthy families to create a overall family wealth management strategy for the group, and its family members as individuals; to put order, clarity and greater certainty within the family and in the individual family members’ lives.

In our capacity as the family’s Principal Wealth Adviser, we objectively project manage complex family financial affairs and ensure that financial strategy gets implemented.

With a high level of personal service and attention to specific family and personal goals, we help the family and its’ members intelligently prepare for the future, providing constant management and integration of the family’s financial affairs and wealth strategies.

Our services are tailored to each family’s specific needs. Through our discovery and research process, we help the family and its members determine the right course of action to meet their long term objectives. We then take a very active role to ensure that agreed strategies are implemented in a timely and effective manner.

Utilising this approach ensures that high net worth family groups, and individual family members, make smart financial decisions so that they can achieve what’s important to them- family, work/life balance, career, the family business, travel or other interests.

Bibliography

1. Merrill Lynch Cap Gemini World Wealth Report 2005 page 18.

2. Family on the Couch-Manfred F.R.Kets de Vries and Randel S .Carlock with Elizabeth Florent- Treacy in ‘Addressing Transitions and Change’ page 191

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