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Financial education - the undiscovered benefits

GOVERNANCE: BUSINESS EDUCATION

Niall Firth is a freelance journalist based in the UK.

Most family businesses would benefit from a financial education programme to teach the next generation about the world of investment portfolios, hedge funds and private equity. But, as Niall Firth discovers, they are not all that easy to find …

Banks and lawyers are famous for their ability to baffle with words. They can throw up a smokescreen of banking jargon or "legalese" behind which they can smuggle through hidden charges or sell additional products.

It is a situation with which heads of family businesses are well versed and can generally hold their own through a solid mixture of their own business nous and a team of financial consultants.

But not all members of the world's most successful families are as financially astute – a situation that a number of financial institutions are looking to remedy.

Richard Saunders, senior investment manager with Guernsey-based private investment firm Butterfield Bank, says companies like his are doing all they can to meet the financial education needs of their clients. However, in his experience, financial education is a particular service that does not lend itself to a formal framework like so many other investment products. Financial education, as far as investment banks are concerned, is a value-added service that can be used to enhance a bank's relationship with its wealthiest clients.

"We have had the occasional request for financial education packages but nothing formal so far," says Saunders. "Our service leans heavily towards working closely with family businesses so, if that's what they want, we can devote a bit of time to these extra aspects of the relationships."

Educational relationships
Recently, Butterfield Bank was able to offer exactly this type of service as it dealt with a family business that was going through a transitional period. The family patriarch, an experienced businessman and investor who had all the say in dealing with its vast portfolio of assets, was in the process of handing over the reins to his daughter. He approached Butterfield Bank about devising a package of specialised financial education for his inexperienced daughter.

"What we've done is work very closely with the daughter to develop a financial education for her," says Saunders. "The assets are divided partially between the ones we run, and the ones the father and daughter run together."

As the family business is based in the US, one of the key considerations in terms of the family's assets was for the daughter to receive sound financial advice regarding investment issues in Europe.

"We meet formally on a quarterly basis and give our view, and they are looking at us working much more closely in the future with the daughter. She bounces questions off us, and we give our advice on the different risks and the possible decisions she might make.
 
"It's not a formal arrangement, and not something we charge for, but it's a service we provide for the family as an added extra value to strengthen and deepen the bond between us and the family," he continues.

"With all these things you provide to families, it is so bespoke that you have to tailor it to the individual. We have to try and identify the families who may require some sort of financial education, and how best to approach it. For this reason, although it is important, it is unlikely to become formal in the future."

However, there are others in the industry who believe the banks, particularly the large multinational organisations, are letting their family business customers down when it comes to financial education. These big-hitters have not always got their clients best interests in mind, suggests family business investment specialist Hakan Hillerstrom.

Hillerstrom, originally from Sweden, has been working with family businesses and family offices for the past seven years at his financial consultancy, Hillerstrom Family Business Advisory Service, based in Geneva. Coming from a third-generation family business himself, it as an area he is passionate about, well-versed as he is in the highs, lows and idiosyncratic problems that family businesses can face.

He works with family businesses on specific issues, such as succession problems, as well as offering more conventional services, such as asset management.

Hillerstrom believes that, despite the myriad of services that consultancies such as his can offer to families, there is an increasing need for families to be able to manage their own affairs. The tool that makes this possible – financial education – is a gap in the market that has not been satisfactorily filled, in his opinion.

Lack of information
Recently, one of his family clients was looking to liquidate their business and divide the money out between the family members. When any family makes a major decision of this kind one of the key considerations is to assess the impact on the different generations, particularly the younger members of the family. At the time, some of the family's senior figures voiced concerns that with large sums of money in the bank, these younger generations would become complacent about its investment and not make the best use of it.
 
Three other branches of the family business also had concerns about money management and so approached Hillerstrom – in his capacity as an independent advisor – to look into suitable financial education packages that could help meet the family's differing needs.

What he discovered surprised him. After much investigation among the big financial institutions for an education course that would fit his client's criteria, he made precious little headway. Although all of these big multinational investment banks offered a form of financial education for their clients, every package was a tailor-made service designed to guide their wealthy customers towards that bank's own financial packages.

He found that even the most respected institutions would pepper their financial education courses with friendly talks from their private equity team about all of the fantastic private banking opportunities they offered. Time was an issue too. No single financial education course he found lasted less than five days, much too long for a family business member to take time out of their schedule to attend.

"We went right through the market and we couldn't find a single neutral financial education programme," says Hillerstrom. "It was a lot to do with selling rather than providing a solid financial education."

Filling a gap
To help meet this gaping hole in the industry, Hillerstrom did what a number of other smaller institutions have also done – he set up his own financial education course. His firm's two-day course covers a wide range of finance and investment topics in enough detail so that relatively inexperienced family members can feel more confident in their own money management skills. Although set up to fit the original family, it is now being tailored to fit two more families in the UK who have also expressed an interest.
 
"The next generation of a family business will have relatively limited hands-on experience of controlling money so we take them through the basics, such as what is an equity, a bond, a dividend; just going through the ABC of family finance," says Hillerstrom of his course.

"The feedback has been very good as we're not selling any products, just making them aware of the basics of why you diversify, for example. If you are a family business that has just made £100 million you need to know how that can be used to build for the next generation. It makes sense to get educated financially."

Everyone with a family worries about the next generation and hopes that they are equipped with the skills to survive in the future. For family businesses, no matter what their size, these concerns are magnified; the development of business skills in the younger members of the family is key to the business's evolution and, ultimately, its legacy.

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