Families must invest in their people. As someone raised with the benefit of my family investing in me, I can personally attest to the power of investing in potential.
The most valuable resource invested into harnessing your family’s potential is time, yet time is a pure gift, freely given with love.
There is, of course, another important resource, more fickle and tricky to harness, that all wealthy families must learn to effectively deploy. The trickiest resource to manage is your money.
Capital deployment requires more governance than the gift of time.
The concept of the Family Bank offers a way for families to govern capital deployment into business and non-business opportunities. It helps families govern situations where money will be spent on increasing all their “family wealth pools” (discussed below) and not just their financial worth.
What’s the difference?
Money is the fuel that ignites your business ecosystems and helps you grow. So, of course, deploying your money effectively into further growing your net worth is a strategy that family advisors can quite effectively advise on. Investment decisions into business are usually fairly straightforward.
Yet growing one’s financial resources is not the entirety of the task at hand for wealth stewards. Financial resources are only one component of a family’s wealth.
How can a family’s wealth differ from its financial resources?
We have all met families of lesser means with amazing cultures and enduring legacies. The quality of their ecosystem persists even without vast financial resources to support growing their people and nourishing their relationships. Yet those families are certainly wealthy.
Conversely, we all know families who have vast financial resources, yet we expect that it is only a matter of time before their culture atrophies and they make no more valuable contributions to their world. These families have zero wealth and weak legacies regardless of their financial holdings.
The family wealth equation
I designed this family wealth equation as an estimate (and guide) for how likely you are to build a successful multi-generational family:
FW = R(HC + FC)
Put to words, your Family Wealth is your Resources multiplied by the total of your Human Capital and Family Culture pools.
The hardest balancing act of the family members in control of capital deployment involves creating the space for family members to struggle, to find their own paths and their own ways to serve the world and find self-worth, confidence and agency.
Your Resources are principally time and money. Your Human Capital is a measure of the quality of the people in the family, and your Family Culture is a measure of the quality of your relationships. I often describe Human Capital as “fulfillment” or “successful people.”
All families should ponder and uniquely resolve the answer to this question: “What is all this money good for?” Managing the complexity of wealth is a difficult journey. Among the many challenges are aligning incentives with your trusted advisors, managing difficult emotions surrounding family dynamics, and communicating issues and executing solutions.
Overcome the complexity and wealth is an incredible resource. Good fortune is like power. As Winston Churchill said, “With great power comes great responsibility.” A responsibility not just to grow the family money, but grow the family wealth.
Family governance tools and the Family Bank
A few examples of common governance tools are education policies, distribution policies, family constitutions and traditional investment policy statements. Yet the most important tool serves the most important family topic: the Family Bank. I credit the Family Bank tool to James E. Hughes, an incredible resource for family governance advice.
These financial decisions seem quite different. Yet with one (properly developed) governance tool, they can be addressed using one set of policies and procedures. This tool ensures the decision reached will best serve the growth of the family’s wealth. This is the role of the Family Bank.
The ‘bank of mum and dad’ vs. the Family Bank
Without the Family Bank, the hardest decisions to reach are “no’s.” This is because saying “no” to a capital deployment idea without due process feels a lot like the decision was reached emotionally. And to the family member being denied the capital, that “no” can easily be misconstrued as a lack of love and commitment.
Indeed, the hardest balancing act of the family members in control of capital deployment involves creating the space for family members to struggle, to find their own paths and their own ways to serve the world and find self-worth, confidence and agency. Sometimes the “no” is the loving and caring response.
Only a fair governance tool creates the space for the “no” to be received effectively. This is one of many reasons why I’ve come to focus on the Family Bank as the key governance tool and the focus of this series of articles for Canadian Family Offices.
Summary
Future articles will explore more aspects of the Family Bank. I hope you enjoy reading about the Family Bank as much as I enjoy writing about it. To the journey.
Adam Hoffman is an advisor with Vesta Wealth Partners Ltd., a single family office, and an Investment Fund Manager democratizing access to private equity. He is based in Calgary. His mission is to empower entrepreneurial families to thrive for generations. His newsletter Family Office Perspectives can be found at adamhoffman.net.
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