Making money is hard. Hanging onto a family nest egg is harder

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The creation of family wealth takes years of dedication, sacrifice and hard work. Because of this, no family wants to be in a position where they need to create their wealth twice.

Instead, they are desperately seeking the financial peace of mind that comes from knowing that their interests are being placed ahead of their professional advisors’, and that their hard-earned wealth is being prudently stewarded in a manner that makes it sustainable for their lifestyle, family legacy and philanthropic aspirations.

The challenge for many affluent families, though, is that wealth is not self-perpetuating. Without proper advice, planning and communication, family wealth is often eroded within two to three generations. The British proverb “Clogs to clogs in three generations” is a global phenomenon that appears in every culture.

Research by an independent U.S. family advisory firm surveyed approximately 2,500 U.S. families over a 20-year period who had owned, sold a business and gone through a generational wealth transition. The results showed that 70 per cent of family wealth transitions failed primarily due to a combination of trust and communications breakdown, inadequate preparation of heirs, and poor governance for the guidance of decision making.

Given that the resolutions to these issues are all teachable, I’ve always held the view that deficient mentoring is the root cause of failures in the transition of family wealth.

Mentoring is the answer

In the trade industries, such as carpentry and plumbing, mentoring has been a prudent approach to teaching the next generation. To solve the behavioural issues in family wealth succession, I believe the same mentoring approach needs to be adopted.

A mentor is someone who has “travelled the path before” who builds and educates people by helping to shape their philosophies, including their beliefs and values, in a positive way, often in a longer-term relationship.

Family wealth mentoring pyramid

As with any profession, knowledge and skills need to be learned; the family wealth management industry is no different. The goal in mentoring family members is to not to turn them into wealth management experts but to make them highly effective stewards of their family’s hard-earned wealth.

The concept of stewardship dates back to ancient times. The role of a steward was to guard what was entrusted to their care by making wise decisions and protecting from harm. Almost every business concern had a steward who served like a chief operating officer, running the daily affairs of the master of the house. Effective stewardship means adopting a set of life principles and processes that help eliminate their greatest dangers, capture their largest opportunities and maximize their biggest strengths.

For this reason, when mentoring families, I’ve used the Family Wealth Mentoring Pyramid as a highly effective framework for coaching and mentoring:

Each member of an affluent family has unique aspirations, knowledge, skills and abilities that first need to be assessed, with the result being a tailored Family Wealth Mentoring Program for each relevant family member.

Typically, though, upwards of five areas need to be mentored:

Life purpose: Although not a wealth management issue, this is a critical “family wealth succession” issue, as I don’t believe that members of affluent families can be effective stewards of their wealth if they don’t have a defined and established purpose for their lives. With 30-plus years of industry experience, I strongly believe that everyone needs to have a purpose to their lives. Without purpose, life can lose its meaning, and in its absence, people – especially those who have considerable financial resources – can easily wander through life and become distracted by costly, unproductive and sometimes unhealthy life choices. An effective mentor can assist affluent family members to identify a purpose to their lives through a combination of in-depth discussions and various assessment tools.

Wealth theory: Family members need to understand the basics of wealth management concerning three core areas: investments, insurance and financial planning. As mentioned above, the goal is to not create wealth management experts but to develop future family wealth stewards who have a solid understanding of wealth management fundamentals and know which questions to ask.

Wealth operations: The global wealth management industry tends to be a complex one. To be an effective steward, family members need to understand how the wealth management industry is structured, who the various participants are, what each one offers and how they all fit together in the administration of wealth.

Communication practices: Effective stewardship of family wealth requires regular communication among both family members and various wealth professionals such as experts in investment, insurance, planning, accounting and legal. For this reason, family members who don’t have experience dealing in these complex topics often need to be mentored on how best to manage their communication, both written and verbal. Given the complexities of the global wealth management industry, ineffective or misunderstood communication can often result in costly consequences.

Wealth governance: The final area to be mentored is organization of the “collective oversight” of wealth, so that the family achieves its long-term aspirations through the intellectual and experiential contributions of the appropriate family members as well as its professional advisors in investment, insurance, planning, accounting, legal and other areas. Increasingly, many affluent families are establishing Family Wealth Boards as a mechanism to ensure effective and efficient governance that can significantly increase the probability that hard-earned family wealth will be sustained for multiple generations.

You reap what you sow: As with many professions, success is not achieved in a day or even a month. The positive results of effective mentoring – prudent stewards of family wealth – take time to evolve and are primarily a function of each mentee’s commitment to the mentoring process.

Investing time and money into such mentoring, though, is worthwhile. The result can be the preservation of the family wealth for many generations rather than the typical erosion of family wealth within 2 to 3 generations.

“A family can successfully preserve wealth for more than one hundred years if the system of representative governance it creates and practices is founded on a set of shared values that express that family’s differentness.” – James E. Hughes Jr.

Mark Barnicutt is president, chief executive officer and co-founder of HighView Financial Group in Toronto.

More from Canadian Family Offices:

• Five smart ways to transfer wealth to your children, grandchildren
• Paying the absolute lowest in tax no longer top priority for today’s families
• Recent changes to Canada’s tax laws could be costly to family businesses
• Money-related disorders are proof that wealth can’t fix everything

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