A few months ago, I wrote about the role of family in business – the pros and cons of involving family members in your professional enterprises. But what about the flip side, which is the role of business in family – should you approach your family affairs like a business?
Obviously, relationships are more complex when it comes to families, but this might be precisely why it can help to introduce a business element to approaching family finances. After all, the challenge of sustaining wealth over multiple generations deserves all the organizational discipline and management skills that an entrepreneur would apply to a business venture.
This goes beyond making responsible, immediate decisions about your finances. It extends to involving family members in those decisions much in the way you would a team of senior employees, both leaning on that team for insights and cultivating the ability of that team to make decisions for itself.
The Risk to Family Wealth
An important element of managing any enterprise is to accurately identify and assess the risks to the success of that enterprise. The problem is, people tend to overlook some of the risks most critical to family wealth.
Speaking at last year’s TIGER 21 Annual Conference, Tom Rogerson, Senior Managing Director and Family Wealth Strategist at Wilmington Trust, pointed out that when asked to identify threats to their family’s wealth, people tend to focus on purely financial risks such as taxation, inflation, the reliability of advisors, and recession. What they often don’t recognize are the management risks that may be even more of a danger than those financial risks.
Rogerson cited some sobering facts about the difficulty of sustaining family wealth, and most of us have probably seen some version of these numbers: 70 percent of significant wealth accumulated by one generation is dissipated by the next generation, and 90 percent is dissipated by the generation after that. What is especially striking, though, are the causes Rogerson cited for these setbacks. He pointed to a study showing that 60 percent of such failures are attributable to a lack of trust and communication within families with respect to financial affairs, and another 25 percent are attributable to unprepared heirs.
While the direct financial threats to family wealth are very real and must be accounted for with sound investment and tax decisions, it seems that there is an overarching management risk that is often overlooked. Entrepreneurs who successfully manage their businesses need to approach their family finances with some of those same organizational skills.
Business Solutions for Family Matters
Another thing Rogerson pointed out was that successful people with take-charge personalities tend to dominate family decision-making. This is understandable, but it may also be part of the problem.
It’s only natural that the person who created the wealth for a family should take the lead in managing that wealth. However, in the long run, it is important that no one person should retain exclusive responsibility for these decisions. Think about it this way – there are organizational elements in business that distinguish between those firms that are essentially one-man operations and those that are built to grow and last beyond the personal efforts of the founder. Making family wealth sustainable requires some of the same type of organizational elements.
In developing this kind of sustainable business model, an entrepreneur has to employ some management techniques designed to build a team capable of operating as well as, if not better than, the entrepreneur would individually. Some of the same techniques can be used to prepare your family for the responsibility of managing wealth. Here are some examples:
Formal communication. Rogerson pointed out that heads of families tend to take communication for granted, and when they do discuss financial matters with their heirs, it tends to be in one-on-one conversations. The result of this one-on-one and often ad hoc approach to communication is the benefit of this wisdom is not shared more widely throughout the family, and individual family members working in isolation tend to duplicate each other’s mistakes rather than everyone benefiting from the accumulated experience of the family. Organizations learn to formalize communications on levels ranging from broad mission statements to specific training programs. Applying this management approach to your family’s financial knowledge could accelerate the learning curve for the group as a whole.
Succession development. Entrepreneurs tend to want to do everything for themselves; heads of families often take a similar approach. They mean well by taking on full responsibility for family finances, but this can leave the next generation unprepared. In business, when seeking to make an organization’s efforts sustainable, management focuses on succession planning, and family decision-making could benefit from the same process. As younger generations come of age, they need to be given increasing amounts of responsibility. This creates a controlled environment in which they can learn, and an opportunity for the head of the family to assess how capable the various members of the next generation are turning out to be.
Cultivating true buy-in. Both of the above methods, formal communication and the measured empowerment of the next generation, should help foster true buy-in from family members. As Rogerson pointed out, wealth without responsibility and authority is a formula for low self-esteem. It also leads to the type of poor decision-making which can quickly dissipate wealth. A head of household who takes a CEO’s approach to family wealth should be able to look with pride at a team of family members that has been developing the knowledge and experience to operate successfully on its own.
A good business model should not be dependent on the talents of any one person. In managing family wealth, heads of families should strive to follow this same sort of model.
President & CEO of TIGER 21