FAMILY GOVERNANCE is how High-Net Worth Families (“HNWF”) and Family Offices (“FO”) converse, communicate and decide, and take collective responsibility and accountability for financial decisions regarding a Family’s wealth.

What Family Governance looks like depends on what stage/generation of wealth accumulation/maintenance/transfer a Family is at. The roles of financial advisors are ever-changing in this regard as well.

General stages:

1. Wealth accumulation and growth
2. Liquidity and/or succession events
3. Introduction of fiduciary management
4. Life-time transfer events
5. Post-death inheritance events
6. Legacy

WEALTH ACCUMULATION AND GROWTH stage is typically addressed with a vertical model.  Wealth is being accumulated through something like a family-owned business or a real estate enterprise. Decision making is frequently consolidated in the hands of one key family member.  Use of outside advisors/board is generally limited or not applicable. Use of a Mission Statement is at best limited to a business context.  Philanthropy is usually at best incorporated into the business model as a branding component. The role of advisors (CPA, attorney, wealth management) is typically limited to historical/compliance functions.

LIQUIDITY OR SUCCESSION EVENTS are only similar insofar as some wealth transfer prior to a liquidity event or prior to a change in control is frequently advisable; for estate tax planning reasons. Where SUCCESSION is the goal a progression from a vertical to a less vertical model hopefully happens.  This is an ideal time to incorporate the use of outside advisors/Board. Where a LIQUIDITY event happens is where a Family Office is normally created.  And challenges pop up in abundance.  Because running a family business is different than running a family wealth engine. Areas of possible friction are of course: Mission Statement, vertical versus horizontal decision making model, and appropriate use of resources (“in-house” v. “outsourced,” compliance v. forward-looking/advisory).

FIDUCIARY MANAGEMENT is frequently appropriate in this latter case.  Trusts may have been set up, or are about to be set up (see LIFE-TIME TRANSFER EVENTS next) so that independent parties are required to administer same. Even more important if a Family Foundation is a part of the equation.  Because trusts and Foundations cannot be administered the same way that the family business was run, due to regulatory issues involved with Foundations and fiduciary responsibilities associated with trusts. If a family has not created a Mission Statement and defined wealth by this point, funny things start to happen.  Further, if advisors are not connecting and collaborating in the best interests of the HNWF, then additional risk is being introduced.  By necessity a move to a more horizontal decision making model seems appropriate, because of the need for oversight and clearance. It is imperative that all advisors get on the same page at this point, not as to recommendations etc. but as to having a commitment to free discourse and collaboration so that the Family’s interests are best served.

LIFE-TIME TRANSFER EVENTS go hand-in-hand with the aforementioned. Use of techniques such as trusts, Family limited Partnership’s, Foundations, life insurance are frequently employed to shift assets away from taxing authorities and to the Family and/or Charities. Also for purposes of “asset protection.” So the same comments apply. But herein  lies the opportunity to create family bonding through making the philanthropic piece the centerpiece of a family’s continued financial involvement together. Also participation in the family’s community, given that resources typically are more than just $$$, such as talent, a network of resources, and some cases ample time to participate. Philanthropy is a perfect opportunity to facilitate the movement from vertical to horizontal decision  making.  And if advisors are not by now effectively collaborating then the HNWF is truly being underserved. This is frequently the result if an “in-house” model is being utilized by the FO, because of the private and insular nature of many FO’s, because the fear of solicitation usually means no access to/consideration of “best in brand” resources and/or exploitation of cost efficiencies. Also it is imperative that the structures and entities used to facilitate wealth transfer are clear and understandable to the MON-ADVISOR parties involved, otherwise too much risk and lack of satisfaction will probably result. Further, an important goal here is to align beneficiary expectations (of $$$, values, involvement, etc.) to reality before the patriarch/matriarch pass away. That is to say, getting one’s family reading for the family’s money is more important than getting one’s money reading for their family.

POST-DEATH INHERITANCE EVENTS seem to go better if LIFE-TIME TRANSFER planning is successfully implemented, because a “road map” has already been created. Keeping net worth, the transfer plan, the family’s Value/Mission Statement secret up to this point is usually a boon only for the attorneys. Because a gap between beneficiary expectations and reality always exists by this point. Great financial risk exists when assets are being passed to more and more beneficiaries, as loss of control over family wealth can quickly occur.

LEGACY is of course multi-generational, and can involve a multitude of issues:  philanthropy, community involvement, perpetuation of family values, a way to foster financial maturity in younger generations. Absent creation of the building blocks described above, legacy is probably impossible. Investment and wealth planning is not independent of issues such as family values, communication, and philanthropy, and to not incorporate this fact into family wealth continuation planning not only increases risk of loss of family wealth, it misses an opportunity to create family continuity and meaning. And here the FO can serve as a network to foster family “connection” and even “transcendence,” that is to say, where the Family’s involvement in the community and in philanthropic efforts is the key to family continuity and perhaps even harmony.

The salient keys to Family Governance are:A clear and concise family Mission and/or Values Statement:

1. A clear and concise family Mission and/or Values Statement;
2. Which includes a clear definition of “wealth” (which can be more than just $$$);
3. Which includes a clear definition of “risk” and how to measure/monitor it;
4. A progression from a Vertical to Horizontal decision-making model;
5. Use of clear and understandable structures and entities;
6. Community involvement and philanthropy as a part of the model;
7. Use of the FO as a network that facilitates “connecting” and “transcending.”

And for advisors the keys are:

1. The ability to grow from a compliance to an advisory capacity;
2. Creation of a large, safe network to foster…
3. Connection and collaboration…
4. Where both clients “wants” and “needs” are understood and addressed…
5. Where someone facilitates as the concierge or hub…
6. Using non-traditional pricing/compensation models (as opposed to hourly or AUM)…
7. Where understanding of “non-traditional” investment options is imperative…
8. So that objective and independent oversight and clearance or all recommendations occur…
9. Thus resulting in the “best of kind” and “in the best interests of” service to a HNWF.