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Keeping it in the family

Families in Business chaired a roundtable discussion at Campden's European Family Office Conference to discuss how business families are preparing their next generation to manage the family wealth

Roundtable panel

Edward Allanby is a partner at Leman Management Ltd, a multi-family office based in Bermuda.

Merial Curier is vice-president of family services and wealth education for a single-family office in the US.

Benedict Götte was, until recently, an investment manager with a single-family office based in Zurich, Switzerland. He is now with cfx partners, Zurich.

Norman Inkster is managing director of Navigant Consulting in Toronto, Canada.

Justine Markovitz is head of Withers law firm in Geneva, Switzerland.

Filippo Noseda is principal in the International Wealth Planning Group, Withers law firm, London, UK.

Thayer Willis is an internationally recognised author and speaker on wealth psychology.

An important part of wealth management is understanding how to engage the next generation so that they can learn about the significance of what they are to inherit. What is the best way of going about this?

Edward Allanby (EA): We try to use synthetic portfolios so they get used to seeing numbers and issues with investing, they can begin to understand the trust structure, and that money can't come unless its been approved by the trustees.

Merial Curier (MC): When working with multiple living generations, we actively involve the next generation in a more holistic way. Learning about investment and investment management is a critical part of this. However, we get them involved with retreats and workshops so they get to know their cousins and explore the consequences of wealth in their lives. We also target the younger ones through parent education, so parents can help their kids understand and deal with the consequences of wealth.

Norman Inkster (NI): It seems to come down to the interest of the child – there isn't a "one size fits all" policy. It depends a lot on the personalities of the individual you are working with.

MC: Primary concerns include the habits and choices of the parents, as they are generally reflected in the child. Often parents of great wealth don't want to make the choices that may be best for their child, particularly when it involves making a more modest choice than the parent wants to make.

Thayer Willis (TW): The parent example is the most important factor. I always advocate that families begin financial education fairly young. This can begin with an allowance and the give–save–spend ratio, having the child keep a ledger and starting to teach them about philanthropy. As far as the family wealth is concerned, I would leave that until later.
 
Benedict Götte (BG): The family office I used to work with was in an unique situation where the owner of the business was relatively young and made his money during the software bubble. The parents therefore made money from their child. What the owner has recently started to do is to invite his own children for tours of the office, where the investment managers explain briefly what they do. Some of it attracted quite a bit of interest, although some of it seemed much too complicated.

TW: What I've learned is that it's important to teach children about business rather than investing because investing is more complex. They can learn from their parent's business or perhaps from a relative or a friend. As far as introducing them to the complexity of investing, yes, if they are interested, but some of them will never develop an interest. So the training has to be tailored to the individual. I think it's very important to be flexible.

NI: If the children I work with want to invest in something then they have to approach me with a business proposal. There is a lot of experience around to help them, and the family advisory committee will decide whether to approve the proposal or not.

EA: I think it's only in the past few years that European families have started to discuss these topics. American families are much more advanced at bringing their children into the idea of preserving and creating wealth. European families seem to be a little more sensitive about discussing how to pass on wealth, rather than introducing openness in the family from day one.

Filippo Noseda (FN): It also has something to do with control structures. It is much easier in a common law environment to tie the family into a trust structure that survives generations. In continental Europe, wealth is usually passed down to the children so that when you receive your share of the wealth there is fragmentation and it's difficult to keep families together. This is starting to change, but families still don't have the culture of dealing with multigenerational issues in the way they do in the US or the UK.

TW: An important question is, "Does the family want to create the glue that binds a family business together?" It's a big commitment and doesn't happen naturally, especially when people move thousands of miles apart. If you find value in maintaining the glue I think they can do it, but it requires effort.

FN: In the US, where it's supposed to be a very individualistic society, it's a question of creating dynasty trusts. In Europe, families tend to go their own way.

MC: I don't believe it's a good idea to have dynasty trusts that last forever. There are too many unintended consequences of trying to predict the future.

BG: I worked for a famous German industrialist who had a completely different approach. On selling his company he gave DM10 million to each of his sons and the rest to his foundation. He said: "Do whatever you want, become entrepreneurs, but you won't get any more money from me." It was a completely contrary approach to "let's stay together and keep it all in the family". He wanted to give them an entrepreneurial incentive. Both are currently successful with their own companies.
 
TW: It proves the advice from Warren Buffet: "Give them enough that they feel they can do anything, but not enough that they can do nothing."

Today increased wealth also means increased security and risk management, and the last 30–40 years have seen the importance of these issues grow exponentially. What are the best ways of managing these risks?

NI: As people of wealth assume a profile in the business community there are inherent risks that people can be oblivious to, and which can cause problems. As individuals of wealth, that risk is as inherent in your life as it is in your business. It needs to become part of your mentality, without becoming a "Fort Knox" mentality and the family hiding behind closed doors. For example, the people you engage in your household may not be very high up the pecking order, such as a maid or a cook, but you need to realise that they are going to spend the most time with your children. That is where your children are going to be most vulnerable if anything untoward was to occur. On the positive side, I think multigenerational families, where there are large numbers of cousins, certainly share their experiences, which can be helpful.

MC: I agree. We find that cousins rely on each other and talk about things they are thinking and feeling. Once they develop strong bonds, they feel comfortable discussing tough questions and emotional issues related to wealth. Fortunately, we haven't had to deal with serious security issues.

Philanthropy can be a great way of bringing the family together. This is particularly true, for example, when compared to simply giving family members an inheritance or a seat on the board …

FN: A family I deal with has just sold the business they established in the 1980s for $3 billion. They are a bit concerned with what to do with it, the responsibility of it. The head of the family is thinking of setting up a charity as a way of keeping the family together because certain members of the family are not interested in the business.

NI: I think philanthropy is an absolutely vital learning experience for all members of the family to engage in. It's a good idea to give people a lump sum to manage and make sure it's used properly. This helps them to learn the business and do some real good.

MC: We integrate philanthropy and volunteerism into almost every programme that we do with our younger generation. In general we find the family foundation is a rallying point.

FN: You haven't got selfishness as a trigger of dispute with philanthropy. By taking away the element of personal gain there is much more consensus.

TW: It's a great tool, but I've seen it turn into "who gets the most glory". You need strong family values and a strong governance structure to help you through the bumps on the road. Philanthropy teaches so much: there's the teamwork aspect; the benefit of taking the emphasis off oneself; and, for the younger members, learning about family values.

NI: I think that most families of wealth feel that philanthropy is an obligation.

TW: Yes, particularly if they are beyond the first generation.

Justine Markovitz (JM): Having made the money, the first generation can be desperate to try and lock it into the family. The last thing they want is an outside pressure, such as a charity, coming into the family. The most important thing to remember is that whatever structure you set up should be flexible enough to change with the circumstances. You just need to make sure that things can change with the changing circumstances of the family.

What are the key points for families to think about in 2007?

EA: I think flexibility is key, simply because family members continue to reside in different countries, while investing may take place in other jurisdictions. There is a need to cover different permutations.

BG: From an investment point of view, it's the geo-political environment. Although things look controllable, I believe there is trouble ahead because of the situation in the Middle East and central Asia. Another issue is the increasing scarcity of critical resouces such as water. Investors should adapt their investment strategy accordingly.

TW: From a psychological perspective, families are becoming more aware of the importance of addressing the psychological challenges in their own family. Many families do have someone who knows that there will be a lot more trouble down the line if they allow family tensions to fester.
 
FN: There are increasing levels of sophistication in the legal tools that can be used. I think one of the challenges will be – as lawyers increasingly become technicians – to try and use these complexities effectively, without losing sight of the family.

NI: I think what we'll see over the next year or two is a greater sense of the importance in managing family wealth like a business.
 
JM: Advisors are going to have to be more holistic in their approach to the family. We are all trying to help the family stay together, and retain the family wealth, for future generations. We need to have more understanding of what each of us has got to offer the family. It's not just about the legal structure or the psychological side of it – it's everything together.

Wealth is becoming more transparent around the world. That leads to a number of implications, not least security risks and confidentiality issues, and we need to make sure that the structures that we put in place for families not only do what they want them to do today, but also take into account future issues like transparency.

MC: I think that a major focus will be understanding evolving family governance, as opposed to governance of a family business. Families who are successful in sticking together will be the ones with the best governance and who find ways to balance individual needs with the business needs. 

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