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Investing for the long haul, or tomorrow?

Friction over a family's investment strategy can expose fault lines and generation gaps

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There’s no use in arguing, the matriarch and patriarch just want to be understood.

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Picture the scene: They are sitting at the dining room table with their adult children, discussing the family’s wealth and investments.

Mom and dad, who built the family business, have a lot to say. They worked to the bone, took huge risks and ultimately created a strong business and solid family wealth. Now they want to preserve that money, at all costs, for the grandkids. They don’t want to take any more risks.

The adult children have a different view. They love mom and dad but feel that the family must take at least some investment risks for the wealth to grow enough to last for the grandkids.

How can the family get beyond this kind of friction? First off, it may require a change in mindset.

As Scott Hayman, president of Northwood Family Office in Toronto, says, the heads of the family may have for decades poured their heart and soul — and life savings — into the family business. They are used to having a great deal of control.

So it can feel uncomfortable placing that fortune into stocks, bonds, real estate and other assets outside of their direct, immediate control. In effect, it’s changing the family business from an operating company to an asset-investing business. That’s a big change.

Yet, it can be an important, if not critical, transition. Not diversifying the family portfolio enough and tying the family wealth too closely to just one or two assets could be disastrous if that asset plummets in value or is subject to dizzying price swings at the wrong time, Hayman says.

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“People who have accumulated a certain level of wealth don’t want to have those swings anymore,” Hayman says, “largely because the older you are, the less time you have to recover from them.”

‘I’ve got enough money’

Also, the heads of the family must decide their ultimate goal for the money. This of course affects their investment options. If the goal is to maintain wealth for the grandkids, that entails an investment plan with obviously a much longer time horizon.

“They’ll say, ‘I’ve got enough money. All of this extra money is not just for my kids, but for my grandkids and great-grandkids. When I look at that timeline, that’s 100 years. So, I’m still willing to take levels of risk, [but] it’s more calculated risk than it was before,’” Hayman says. And those risks can be minimized if the investments are diversified.

As Rob Harder, portfolio manager at Family Wealth Group in Winnipeg, notes, a family looking to preserve wealth for future generations may have a portfolio that looks skewed, with more stocks, private equity and other relatively riskier investments than is the norm for people late in life.

“Obviously we spend our time making sure they have enough secure, safe investments to meet their income needs,” Harder says. Yet, the rest of their portfolio might divert from traditional investing rules, such as the number 100 minus your age as the percentage of the portfolio that should be in stocks.

“People will look at that and think, they’re way offside. But they are managing their portfolio not for themselves. They are managing it for the second or third or fourth generation down the line. … The risk tolerances and timeline are beyond their life expectancy,” Harder says.

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Generational divide emerges

Once this risk strategy is understood, there’s then the problem of picking investments that everyone can agree on. Analysts often see a generational divide between the adult kids wanting to put the money in more ethical and socially responsible investments that might not be on their parents’ radar.

There’s also the problem of different levels of investment literacy within the family, and sometimes even the case of the adult kids not knowing the full extent of the family’s wealth. (Think of a classic Hollywood scene showing the reading of a will, the adult kids sitting in shock.)

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“You want them to all have a base level of knowledge and language, so that they all can feel that they are participating in the conversation together,” says Mindy Mayman, partner at Richter Family Office in Montreal. “And then you can start to bring them into the fold from an investment perspective. And I think that’s where you start to see the goals and objectives of that next generation. That’s often where you see more differences.”

Those differences, again, may result when the adult children lean toward socially responsible assets, and when the patriarch and matriarch are still adapting to not having the same control over their fortune.

“I would say that the wealth creators suffer from that certainly far more than the next generation, unless the next generation was intimately involved in the business,” Mayman says.

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Set up a governance body

Yet, even if family members are generally on the same page, some differences large or small inevitably occur. It’s only natural.

That’s where establishing a governance body helps, Mayman says.

The classic structure is the three-circle model, with one circle representing the owners’ interests (with the owners meeting when needed), another slightly overlapping circle representing the family interests (which, in this case, may involve more family members than just the owners), and a third overlapping circle representing the ongoing business (whether that means managing the family’s investment portfolio, or maintaining the family company, or starting a philanthropic organization, or whatever the family has decided to do with the money).

Setting up a governance structure like this is intended to make the family’s oversight of its wealth and the decision-making process that much clearer — and ultimately to aid communication. The ownership circle, for instance, is where investment decisions typically take place, Mayman says.

“We actually recommend, in this day and age, a lot more open and transparent communication. It isn’t ideal to do that at every Sunday dinner around the table. You want to have the right space and time to foster those types of communications,” Mayman says.

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