No family business owner ever thinks it can happen to them.
You spend decades building the business, nose to the proverbial grindstone day after day to create a legacy you can be proud of. Finally, the time comes to reap the fruits of your labors through a carefully planned exit, resulting in a substantial influx of wealth. You’re now on easy street. Not a care in the world. At last…..
Not so fast.
The reality is with wealth comes complexity in many forms. Without careful planning and ongoing attention, that wealth can dissipate quickly, often referred to as going from “shirtsleeves to shirtsleeves.” In fact, 70% of successful families will lose their wealth by the second generation; 90% will lose it by the third.1
One of the most legendary examples of this fate is the Vanderbilt family, who infamously went from “America’s royalty” to squandering their vast fortune. Sadly, this is a phenomenon that still plays out every day for successful families who falsely believe they are immune to such a fate.
The truth is no family is immune, with the greatest risk factor being complacency. Going from running a family business to managing a family enterprise requires a mindset shift, one that is every bit as structured and disciplined as when operating a business. The biggest risk to a family’s wealth and legacy is not having a dedication to “formalism” in managing wealth and putting the family’s wealth on “cruise control.” That is a recipe for disaster.
Thankfully, successfully managing a family enterprise does not have to be as time consuming as building a business and accumulating wealth in the first place. What it does require is focus and an action plan to “keep yourself honest” when no one is holding you accountable.
At Geller, we work with many first-generation wealth creators to develop plans and processes to ensure that effectively managing the family’s wealth doesn’t fall down the list of competing priorities. Below are five things to consider:
Set Achievable Goals
It seems so obvious, but surprisingly few families take the time to define what they want their wealth to accomplish, with a roadmap of how to get there … and more importantly stay there. Gather the family and trusted advisors together to ask questions such as, “What matters most to us? How will our wealth help preserve that or endanger it? What keeps us up at night in relation to the wealth? What do we want our wealth to accomplish for ourselves and future generations? What trappings of wealth do we want to avoid?” Have a robust conversation on these goals and create a safe environment for everyone to share their perspectives. Not only will that help to align everyone with the purpose and expectations of your good fortune, but it will likely get them excited about the good in the world the wealth can engender.
Track Your Progress
Even the most detailed goals don’t mean much if you don’t track your progress toward their completion. Without a plan and infrastructure in place to revisit and refine your goals as needed, they can quickly fall by the wayside and be forgotten. So, create repeatable and ongoing processes to track your goals, with opportunities for the family and your advisors to discuss what’s going well, what’s not going well, and where you need to pivot. However, don’t focus myopically on absolute returns at any one point in time. Investments go up and down; market conditions ebb and flow. Keep the attention on your long-term goals and whether you are on track to meet them. Just because the market is down 5% one year doesn’t necessarily mean you are not making progress toward meeting your ultimate objectives. Maintain a long-term perspective and don’t be derailed by short-term blips.
Make a commitment to research and development
Just as with any business, a family should be continually striving to improve its “operations” and its “product,” which in this case is the wealth itself. What I’m talking about is essentially R&D for the family enterprise. That requires research via a comprehensive assessment of your current state and needs, at least annually, to ensure there are no gaps or blind spots that need addressing. This type of assessment is essentially a comprehensive wealth diagnostic and should include an evaluation of your tax returns, existing tax structure, investment portfolio and estate plan. It can also include estate-flow considerations in relation to tax planning and your long-term financial goals, as well as philanthropic and family governance strategies.
Taking a pause to consider your objectives, evaluate your current state, and assess performance compared to benchmarks can be an immensely beneficial exercise. It’s also important to meet with tax and investment advisors on a regular basis to stay informed of developing legislation and investment trends that may impact your family. Be sure to work with attorneys, family offices, and investment professionals who take a proactive stance on communication of these vital topics. Explore best practices the family might want to adopt, including new investing strategies, expanded philanthropic endeavors or educational initiatives for the next generation.
Don’t neglect succession planning
Industry studies have shown that companies spend hundreds of billions of dollars on leadership development every year2, yet barely half of Fortune 500 companies have a designated
succession plan for their company’s top executives3. This uncertainty is a major source of stress for investors, owners, and stakeholders, particularly in business environments where competition is fierce and time is precious.
When it comes to family wealth, it doesn’t have to be this way….
Your family enterprise will inevitably someday be in the hands of future leaders. Are your heirs prepared for the responsibilities of managing long-term legacies? Have you identified potential successors and communicated expectations with them? Heirs will oftentimes fall off the ascending ladder of wealth simply because they’ve run out of rungs to climb – having no form of support as they make their way up. Sadly, this lack of succession planning is often the result of neglect or intentional avoidance of potentially awkward situations. Don’t let your family’s wealth become a casualty of inertia or the unwillingness to have (possibly) uncomfortable conversations. There’s simply too much at stake.
Prepare contingencies
There is no shortage of risks that can threaten the long-term financial wellbeing of even the most successful families: financial fraud and cyber attacks, serious medical issues and deaths in the family, lack of liquidity and adequate insurance, and those are just the most obvious scenarios.
The point is protecting your financial health encompasses more than just thoughtful investment and tax strategies. For example, are internal controls and financial oversight in place for you and your family members to detect and mitigate financial fraud? Do you have systems in place to lessen the likelihood of a cyberattack, or to stop one in progress? Those two areas alone can be blind spots for many families of significant wealth.
Also, have you evaluated whether you need supplemental life and property insurance? Are you self-insured? Is that sufficient to meet your long-term goals, particularly if some unforeseen event were to happen?
Finally, make sure your wealth is not tied to just one source of income or concentrated in a single stock position or private business investment. Diversification is key.
The point is to plan for any and all contingencies and ensure you have the plans and processes in place to deal with them.
Unlocking the full potential of your wealth in a way that is both sustainable and aligned with your desired legacy requires diligently analyzing where the greatest risks and opportunities lie. By partnering with trusted advisors who have helped families like yours navigate this transition, you and your loved ones will be best positioned for long-term success.
This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.
