Financial support for your artist brother could build family ‘wealth’

This is Part 2 of a series about a governance tool called the Family Bank. It is used to screen opportunities for families in both business and non-business pursuits. See Part 1 here.

When family members propose business ideas, generally speaking, families have a process for approving them. Some prefer to proceed informally, or they design a process for each review, whereas other families have a standard review procedure.

In my experience, families are best served when both business and non-business capital deployment require an equally fair process that compares both types of opportunities from a family wealth perspective. Family wealth is a defined term that values all of a family’s wealth, not just financial resources (as defined below).

Both business investments and non-financial pursuits are worthy of deploying a family’s resources into. But how can investments and pursuits fairly compete for resources? It’s difficult to create one set of policies to review both kinds of opportunities.

This is the role of the Family Bank.

The Family Bank is the governance tool I use to maximize family wealth when screening financial capital deployment opportunities both in business and non-business pursuits. It creates and uses a process that aligns the family’s goals and values with their actions, which is the goal of most governance tools.

When business is personal

Capital deployment into a business opportunity becomes a more complicated decision when considering non-financial rewards that benefit your family wealth.

Will family members participate in management? Will they participate in the success and failure of the business other than in a management role? In either case, are the family member’s personal development plan and goals facilitated by the investment? Is the idea more likely to fail than most business ideas? If so, can the family best ensure the capital lost is going toward the use of teaching important lessons from failure? And thus does the idea invest in the family’s future as the failure helps shape other future successes?

When pursuits need capital

If the idea is not within business, there is little possibility of financial reward, in which case the same analysis applies. Does the pursuit significantly support the family member’s personal development plan and goals? Does spending capital in the pursuit help shape the future success of the family? Often these activities do, particularly when the family remains intentional about the growth opportunity for its people and delivers similar love and support for all pursuits that increase the family’s wealth.

I believe both business and non-business pursuits can greatly amplify human potential and family culture. So how should families go about vetting opportunities?

Establishing clear policies as to what the family mutually agrees will advance family wealth is a good start. This is the first step in aligning capital deployment with the family’s goals and values.

It’s a tricky interplay, finding one’s own way to make an impact in the world and determining how that impact might be valued by the family.

Family governance circles often cite the importance of family values. These are shared values that have shaped the successes and (helpful) failures of the family over time. Values such as learning from successes and failures (“experience”), turning the privilege of available capital into stronger people (“growth”) and finding your own way to make your mark (“authenticity”) are all helpful to enumerate when determining what matters to the family when deploying capital. Values can be adapted, of course, and so putting time and resources into continually improving them is a consistently effective family-meeting agenda topic.

Sometimes the family’s goals are lost in each family member’s journey. I believe this occurs when each family member’s agency and self-determination are prioritized without consideration of the family’s goals. It’s a tricky interplay, finding one’s own way to make an impact in the world and determining how that impact might be valued by the family.

Rarely does de-prioritizing individual goals improve family culture, but aligning and clearly presenting family goals with an individual’s goals will increase the family wealth. Being aware of where individual goals align with family goals is empowering for wealth stewards (ask an heir if they “spark” when they know their interests align with family goals!).

‘So what do we stand for?’

Each family must thus decide what it prefers to accomplish. Not in the sense of specific goals but more so in the sense of guiding principles toward future actions. Future articles will address specific policies of the Family Bank, including the process (or “gates”) that lead from the capital deployment concept all the way to execution.

Yet the most important section of the Family Bank policy document is the guiding principles. Similar to a family constitution, these principles significantly and equally guide both those in control of capital deployment and those seeking it. They greatly assist in putting and keeping family members on the same page. Principles and well-enumerated values are pretty much the same in result.

In every family’s unique journey of answering the key question of family governance, “So what is all this money good for?” the question “So what do we stand for?” must be answered along the way.

The wealth equation

The family no doubt stands for more than making money, so when comparing business and non-business pursuits, a critical step is comparing how all efforts could potentially amplify family wealth. How do both business ideas and other pursuits help the family meet its goals?

It always comes back to the wealth equation: FW = R(HC + FC)

Put to words, your Family Wealth is the product of your Resources multiplied by the quality of your Human Capital and Family Culture.
Every family must uniquely decide which types of human potential should be prioritized for capital deployment, and specifically which pursuits (and how they are pursued) serve to amplify human potential.

Equally, every family must answer these questions: In what ways can money improve our family culture? And, specifically, which pursuits (and the way they are pursued) serve to amplify the family culture?

I will leave the examples of entrepreneurism and intrapreneurism (my personal favourite family values) to separate articles, so I will use non-business pursuits as examples here.

An example

If a family can best honour one of its core values, say “independent thought,” by supporting a family member who is an artist, the family will no doubt find ways to support that person’s craft. However, a blank-cheque approach might create too much comfort and end up dishonouring another family value of “eudaimonia” or “discipline.” So, the artist should apply regularly to the Family Bank to ensure that his or her capital deployment continues to maximize human potential and best serve the family’s goals. If the artist were held to stricter, lighter or even simply different policies to obtain capital than a fellow family member’s business pursuits, double standards will develop and negative ramifications likely will result.

 

Be proactive to avoid those ramifications and start your Family Bank. It need not be perfect, but a set of policies developed with the intent to love the human potential of all family members equally can only serve to improve family culture, compared to attempting to handle these capital deployment opportunities ad hoc. Ad hoc is the domain of the “bank of mum and dad,” and we all have stories of that bank’s loans ending in family disharmony.

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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