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Wealth In Motion: The Challenge Of Family Businesses, Succession
Harriet Davies
16 May 2012
About half of the world’s largest fortunes are run with family involvement, according to a recent Forbes Insights report called Global Wealth and Family Ties, and this tends to be correlated with factors such as the type of industry the fortune was made in as well as the maturity of the economy. For wealthy families, one of the greatest challenges of all is raising the next generation and addressing issues such as when and how to involve them in the family fortune, business or foundation. What’s more, many in the industry maintain it’s a challenge that wealth managers can and should get involved in. “Families who are using advisors to manage their wealth need to look beyond the numbers,” says Claudia Sangster, director of philanthropy at Harris MyCFO. “They need to prepare heirs.” Sangster has worked for many years with families of significant wealth and says one of the ideas that is catching on is , “I want to leave enough to my children so they can do anything but not enough so they can do nothing.” This concept ties in with the Bill Gates/Warren Buffett giving pledge, which invites the wealthiest Americans to leave significant proportions of their estate to charity and has been signed by such diverse and illustrious names as George Lucas, Michael Bloomberg, David Rockefeller and Mark Zuckerberg. The other side of wealth In terms of what is driving this shift in attitude, Sangster says that, while there’s not “one simple answer,” she has seen that “ultra high net worth clients are very concerned about the impact of wealth on their children.” “They don’t want to squelch initiative, or their ability to solve their own problems and make their own way in the world. Studies have shown…that if you give your children too much wealth and they are not prepared to handle the wealth, they are far less likely to be productive; their self-confidence and motivation are also compromised and they’re usually less satisfied.” She says that while people don’t like to talk about the “darker underside” to wealth, she has found this approach – encouraged by reading books such as Roy Williams and Vic Preisser’s Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values early in her career – very helpful. She frames the subject with clients as: what would you like to do to ameliorate the negative side and how can we structure an education program to help mitigate it? “The heirs lose their inheritance not because of poor tax or estate planning, which is done very well, but because of poor preparation,” says Sangster. David Lehn, a partner at Withers Bergman, who works with HNW families on the technical side of structuring wealth, says there is much more recognition nowadays of all the issues around wealth preservation. “I’m in my mid-fifties and there was always this saying when I started doing this – in three generations you would go from no wealth, to wealth, to no wealth again… because it was hard for people to keep the money,” says Lehn. “What I see now is that families that have developed money are much better at recognizing the importance of preserving that wealth, and making sure it’s there for future generations.” But – in addition to successful wealth planning – what else is linked to this success? “Successful families, we have found and studies have shown… are going to be intentional in making sure the next generation has a path to follow,” says Sangster. This may not be the path of the parents, because “it’s very hard – almost impossible – to duplicate that kind of motivation” and also because “it’s not necessarily their passion to be part of that family business,” for example. But there will be an educational program, a development path that will help them “identify what they care about.” It’s no easy feat. Just deciding on whether to follow in a parent’s footsteps, if that’s an option, or not, can be a sticking point. There’s no right or wrong answer to this, says Lehn, as “you never know” how either option will work out. Sometimes the future generations “have the same aptitude and really want to be in the business - and sometimes they don’t.” But, he adds, “the worst case scenario” is where the next generation doesn’t have the aptitude or desire to follow in the footsteps of the successful patent “and is forced to do it, and it doesn’t work for them.” Preservation versus risk Meanwhile, the next generation may have their own business ideas, in a whole new field, but how can you let them take some risks, as their predecessors did, while preserving the wealth? “The next gen have a certain level of security financially, they can take risk in other ways, with time or personal investment such as an internship, while not having to worry about paying bills” for example, says Lehn. “It depends on the amount of wealth too; you get to the point where there is so much that there will always be a diversified portfolio and some can be invested in long shots” on a family member’s idea without risking the fortune. But, he cautions, “If it was so easy to create wealth, everyone would be in this situation.” When it comes to making these difficult decisions, foundations and philanthropy can provide useful ways of communicating and giving children a say, says Sangster. Harris MyCFO works with families on the transition to the next generation of the foundation. She says that bringing the children on board with the grant-making process and giving them responsibility in this area can give them experience in a host of useful skills such as analyzing financial results and negotiating with non-profits. “As long as they felt they were a real part of the process, not merely a rubber stamping of the founders’ wishes, they got more engaged and more involved; it created better communication in the family,” she says. “Along the way…they’re learning about due diligence, how to be effective grant-makers, which is going to help them in all aspects of their lives because it creates discipline... It’s not always easy because we talk to our clients about changing from a founder’s foundation to a family foundation.” And indeed, parents have to overcome issues such as letting go of control. “One of my projects was to work with a very strong matriarch who had set up a foundation,” explains Sangster. “When two daughters resigned as they really didn’t have any say in the grant-making process she was upset because she thought ‘they don’t want to be a part of this’ but that wasn’t the problem – it was helping her to realize that it was a founder’s foundation not a family foundation.” It took a year of dialog for that situation to be resolved, but ultimately the matriarch was “thrilled” that her daughters came back on board, while the daughters gained the ability to include their passions in the grant-making process. More changes ahead? The nature of working with multi-generational families is that the goalposts are changing all the time. And just as a lot more awareness develops around how to prepare heirs for inherited wealth, the game may change as the wealth creators do if, as the Forbes Insights report proclaims, “Tech guys are different.” “Younger philanthropists, particularly out of Silicon Valley… are actually doing what Steve Kirsch recommended they do back in the late 90s…giving while living,” says Sangster. “It’s going to be interesting to see how things change with the very wealthy people who are amassing fortunes at an early age,” says Lehn. “We’re doing planning now for some of these who are so young…when we talk about these trusts that will go on for several generations…they’re not even thinking about that right now.” “Silicon Valley entrepreneurs haven’t even considered these things,” says Sangster. “The children, if they have them yet, are too young. It’ll be interesting to see how that evolves.”