Preparing your heirs
Making a fortune is not easy; conserving it for multiple generations seems to be even more difficult. Some families, like the Rothschild, seem to have found their way to preserve wealth over multiple generations. But if we look more closely, such cases seem to be more the exception than the rule. Why is that? What challenges are so important that they limit so much the ability of families to pass on the wealth created by the first generation? What are the steps and tools available to help families who want to be successful in preserving their heritage? The Intelligent Owner meets in London with Emily Griffiths-Hamilton, once co-owner of NBA and NHL teams and member of a highly regarded business family in Canada, to discuss her experience and explain the approach she uses with her family and the families she advises through her financial advisory business.Emily shares her insight in her book “Build your Family Bank”.
How do you define transition success?
Inheriting wealth can be overwhelming, it can create conflicts. A successful transition is all about the process of limiting those risks; which often materialize by a power struggle following the loss of the family leader. Success is about doing no harm to children, preparing heirs and managing their expectations.
A successful transition is a process that enables families to articulate, align and regroup around their shared values and vision. Success is not set in stone though, and the process needs to be revisited and adapted to changes in the environment, evolving as the family itself, and the environment in which the family operates. Hence, it is important to have clarity, and governance policies that are flexible enough to adapt to a world that is changing fast.
Families in general seem to have a lot of difficulties in successfully planning one or multiple transitions. Do you confirm?
Until recently there was very limited research available and the proverbial saying “from shirt sleeves to shirt sleeves in three generations” was our main reference point. But a recent study changed that. It was conducted over a 20 year period on 3250 families (‘Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values’ by Roy Williams and Vic Preisser) and it found that “70% of inter generational wealth transfers fail”. Furthermore, their research showed that the primary reasons for these failures are: 60% due to a breakdown in communication and trust within the family, 25% due to unprepared heirs, 12% due to a lack of shared vision and 3% due to other factors like legal structures. So yes, I confirm that success is not a given and that there is a problem with approaches that rely essentially on legal structures and don’t address the real causes of failures.
Although, they are an important element of transition planning, legal structures cannot be the sole central piece. Structures alone do not lead to success, and in most cases, failures occur in spite of having the most sophisticated structures in place. What this legally and financially driven approach brings is a wrong focus and starting point. Ultimately, when transition failures are evidenced by the loss of financial wealth, the root causes are often factors that lie within the family itself like inattention, miscommunication, mismanagement, foolish expenditures and family feuding.
You have developed your own approach for your family and your clients. How did you develop it and what are the major steps?
I am a third generation inheritor and a Chartered Accountant by training; I have experienced the process personally, having learned from my parents and grandparents, studied not only the failures but more importantly the successes and work directly with families as they create successful multi-generational succession plans. The result is what I refer to as ‘The Family Bank Approach’ which addresses not only the financial aspects of transition planning but also the human and intellectual factors. I have also been inspired by the work of others in the field such as James E. Hughes Jr.
The family bank concept was something that has always existed in my family where each new generation was prepared by the old one; but our approach wasn’t clearly articulated, and because of that, at times, the differing expectations did create conflicts.
I have formalized the family bank approach with a five step process that any family can use to successfully transition all forms of wealth – human, intellectual and financial. It turns the traditional process upside down. With this process we do not start with legal structures. They are important but only at the last step.
First of all, a family needs to articulate its shared values; thereby starting with a positive perspective of what the family stands for or believes in. This first step also enables them to identify and gauge the strength of communication and trust within the family and conflicts that could arise between family members.
The second step is to draft a shared vision, to identify a common goal in order to have the family members pulling in the same direction and not against one another.
Now that the family knows who they are and what they want to achieve together (their shared values and vision), the third step is to assess what they have and don’t have, to reach their desired destination. This step involves the family honestly assessing its human, intellectual and financial capital. The family bank approach is not focused on financial assets alone and recognizes that wealth has to be multi-dimensional to be sustainable across multiple generations.
The fourth step is to establish clearly articulated, largely agreed to, governance structures or policies, which includes defining a decision making process. This includes setting today, clear guidelines on some of tomorrow’s predictable events, like compensation, loans, how a new family member will be involved in the family bank, etc.
The last step is to revisit the legal structures (e.g. will, trust), with the support of financial and tax experts, when an event changes the configuration or the needs of the family.
What is your advice to a family leader who would like to implement such a strategy?
It is important to not jump the sequence of these steps, as they go a long way in assisting families to find common ground, to work together as stewards of the family’s wealth for many generations to come. It is also important to realize, especially for large families, that not every family member will necessarily want to be involved in the family bank from the beginning. When involved, family members must accept the guidelines that have been set, if they want to benefit from the family bank; but sometimes conflicts cannot be solved instantly and some members will choose to join at a later stage when those conflicts are solved.
Be prepared to act as a facilitator, be a clear gentle communicator and a kind active listener, and do not stay stuck on internal conflicts. Because what triggers many conflicts is a lack of clarity around family member expectations when a family leader is gone, your focus should be to create largely agreed to patterns from the beginning, and to facilitate communication between family members.
When looking for external help to set up a family bank, what is your advice to a family leader?
Be wary of advisors who want to make you dependent on them. They should want to give you independence and only be there to get you and your family going.
In terms of skill set, you should be looking for someone who has both mediation and financial skills.
The advisor should also have a network of experts to tap into when needs be, as no individual can cover all the needs that you will encounter when setting up your own family bank.