Eight Principles of Strategic Wealth Management


Stuart E. Lucas is a fourth-generation heir to the Carnation fortune.Carnation was a family-owned business which made products like evaporated milk and non-dairy creamers before Nestle bought it in 1985.I was attracted to his book ‘ Wealth: Grow It, Protect It, Spend It and Share It’ ,because it was written by an unusual sort of financial adviser: a wealthy man with experience of managing his family’s wealth.

Personally,I’m not just interested in wealth building,but also in the ways of passing it down the generations.I was looking for some ideas on how to manage a family fortune that would hopefully grow over generations . I was looking for ideas on how to deal with family politics and the complexities arising from different temperaments and inclinations. I was looking for advice on  choosing investment managers, thinking about tax strategy,goal setting in the family etc.

Here’s a summary of what I culled from the book:-

Principle #1: Take Charge and Do It Early

The first step  is to articulate a set of values that will be the foundation of future wealth management planning.Naturally all family members have to be engaged in articulating these values so that all are on the same page.After these values are defined, there will be a basic template in place to develop a long-term strategy for the family’s wealth. The time horizon  for this strategy may be a single lifetime, a single generation, or multiple generations. Making a few good decisions early on can have an impact for decades, building a culture of stewardship within the family. If a family simply waits for financial advisors to guide them, they may wind up with good products but without an integrated strategy or the resources to implement it over time.Its best to start early even before the family has acquired a lot of assets because taxes, fees, and inflation  can accelerate wealth erosion.

Principle #2: Align Family and Business Interests around Wealth-Building Goals and Strategies

Creating a strong alignment of family members around common goals is critical to ensuring successful implementation of wealth management strategies and goals — especially when they are multi – generational. It helps to reinforce common purposes and creates economies of scale. If a family is united around wealth management goals, for example, it has collectively more power and focus in business, philanthropy, or even politics, than would individual family members alone.To align family members around wealth management goals, a person must establish a legitimate rationale for people to want to work together. It helps if he or she is also an adept facilitator who’s able to mediate conflicts, drive consensus, and ensure regular review of wealth management goals and results. The person has to be a lightning rod for vigorous and lively family discourse at times because family members don’t always see eye to eye. He / she must focus constructively on surfacing and resolving contentious issues and highlighting the universal benefits of cooperation, consensus, and unanimity at other times. The person must be able to frame family conversations around critical objectives. He or she must ask powerful questions, recognize the psychological and financial positions from which different family members come, and be adept at focusing wealth management discussions not only on a family’s history and values but also on its vision for the future. Sometimes this latter challenge is the hardest task. To shift discussions from a focus on the past (nostalgia, history, memories, heritage, and values) to the opportunities and challenges presented by the future (social and business entrepreneurship, community involvement, legacy building, and a shift from professional success to “personal/life significance”) can be daunting. But families that make this shift, go on to be successful for multiple generations because the family and its individual members are able to reinvent themselves.

Alignment also means structuring professional relationships with advisers so that everyone benefits or suffers proportionately from the financial decisions make together. Wealth managers and their firms have their own internal measures of success that may or may not include customer service and high rates of return for clients. While selecting advisors and money managers make “alignment of interests” a key element of the hiring process.The more closely advisor interests are aligned with the family’s, the more likely the relationship is to succeed long term.

Principle #3: Create a Culture of Accountability

Putting in place  accountability systems and performance metrics helps drive the implementation of wealth-creation strategies and provides a reliable benchmark to judge the performance of the family members in charge of managing the family’s wealth  and their team of wealth management advisors, including accountants, lawyers, investment managers, and others.Using objective performance measures helps depersonalize criticism of individuals in cases where family members are not performing. In other words, a good system of accountability makes the message, “I love you, but you are not performing,” more palatable for all parties involved.It’s important to establish a timeline for regular review of the job performance of  the family wealth managers as well as the financial performance of investment portfolios, trusts, and other components of the family’s financial portfolio. Achieving good accountability is tough to do. Even highly sophisticated family offices that manage hundreds of millions of dollars complain about the inadequacy of the available performance measurement systems.

Principle #4: Capitalize on Your Family’s Combined Resources

In families of any size, resources become distributed across the membership with the passage of time. The challenge is to figure out how — and how much — to reassemble these distributed resources so they function more effectively. The tools for reversing this tread of families disintrigating are capitalizing on the family’s financial scale and the combined strength of family members’ personalities, experience, skills, affiliations, and networks, all within a meritocratic culture. In order to mobilize these weapons, empathic but disciplined family leadership is key.

Principle #5: Delegate, Empower, and Respect Independence

Members of a healthy family group learn how to row together and row separately. There are advantages of a family working together, but it is also important to respect the individual ambitions and values of each family member and, over generations, each family unit. The challenge is to balance the two and reinforce the strengths of each.

Supporting family members to identify and pursue challenges that they can call their own, away from the family’s immediate influence, encourages self-reliance and risk-taking. This is an excellent way to encourage the personal growth of young adults, who, if supported by their family in their personal interests or business pursuits, learn to embrace responsibility for their life choices and to develop a sturdy sense of self-confidence. Supporting the exploration of passions by one’s children (whether as young people or adults) is more than sharing in successes. Importantly, support strategies should leave room for failure: It is through failure that a person develops resilience and often learns the most. Independence, resolve, periods of trial, and ultimate success within the youngest generation can be of tremendous benefit to the family later on, especially if these individuals take on responsible positions of leadership within the family.

It is also important for family members to understand and experience the benefits of working together to reinforce the connection with the family core. The person(s) who serves as family wealth manager must create and make the case for encouraging other family members to willingly work together. Ideally, especially in families that manage wealth across generations, all family members can be involved to one degree or another, including in-laws. Sometimes involvement means a day-to-day commitment to the family business. But this is clearly not the correct recipe for every family member. For many, the responsibility is to remain informed, respond promptly to administrative requirements, and to participate constructively in family discussions and meetings. As the arbiter and facilitator of family discussions about wealth, the family wealth manager must listen, broker, offer incentives, and encourage family members to collaborate on common goals.

The principle of “Delegate, Empower, and Respect Independence” applies not only to family members, but also to members of the family wealth management advisory team. After establishing clear performance expectations for the team and an accountability system that aligns their interests with the family’s interests, it’s important to step back and delegate many day-to-day functions of wealth management to these competent professionals. Doing so creates highly productive client-advisor relationships.

Principle #6: Diversify but Focus

Diversification and focus combine the best of both worlds. With diversification you achieve risk mitigation, and with focus comes the laser intensity that most people need to succeed in life. Wealth is created most quickly and most often through success in a single business. (If you can do it, birthright, marriage, and adoption are even quicker!) However, wealth is also most quickly lost by concentrating it on only one or a few investments. So, in order to protect wealth, it’s best to diversify it.

The principle of diversification applies in other ways as well. Most individuals have both taxable and tax-deferred investment portfolios Because tax rates don’t all rise and fall at the same time, it makes sense to diversify the tax treatment of  assets.

Think about diversification in terms having  a backup plan in place for all your key people, including yourself.

Focus and experience improves judgment. While its important to make decisions based on fact, there are also times when you have to go with your gut and go with your values because you rarely have all the facts you need at your disposal. To this end, family wealth managers should always be on the lookout for ways to stimulate and pursue their own focused interests and those of their children so that they learn to trust their gut when they need to rely on it.

Principle #7: Err on the Side of Simplicity When Possible

Stick to simple wealth management strategies and products. It might be best to peg most of your investments to financial indices or to other simple, low-cost, and proven wealth management products.Before choosing complex solutions to wealth management issues, evaluate the simple ones. Simple solutions may offer most of the benefits of more complicated plans, a higher degree of certainty, easier implementation, and greater flexibility in the face of changing personal or financial circumstances. If you evaluate the simple solutions first, at the very least you can quantify the relative benefit and costs associated with more complex approaches.

The more complex the wealth management strategy, the more variables you have to worry about managing, and the more difficult it is to reverse course. Don’t buy into complex wealth management schemes because they seem sophisticated. Instead, question why an advisor is proposing a particular course of action and why it is sufficiently better than simpler alternatives. Remember many complex strategies are quite remunerative to advisers.

There are occasions when a simple approach to wealth management isn’t appropriate. Some families actively manage complexity to gain competitive advantage .In such cases err on the side of transparency. Because wealth management discussions are likely to be both complex and lengthy, not every family member will need or want to be involved in every conversation. However, you’ll still need to communicate regularly with everyone about what is happening and gather input and ideas from people as appropriate.Above all, avoid secrecy.Keeping secrets from responsible family members, advisers, or the government has a propensity to backfires. Keeping secrets to avoid disagreements among family members will make matters worse especially when the matter leaks out,as often happens.

Principle #8: Develop Future Family Leaders with Strong Wealth Management Skills

As a prerequisite to successfully building wealth over multiple generations, the family wealth manager must develop future family leaders. Every family has a potential reservoir of talent, energy, contacts, and business experience that can be tapped into to lay the groundwork for the future. For example, the family wealth manager can nurture individuals within the family who demonstrate specific interests and aptitudes, giving them progressively more responsible positions of informal leadership for wealth building activities. The family wealth manager can also expose such individuals to substantive family discussions of wealth-building goals and strategies, as well as to the corrosive power (and hollow rewards) of excessive spending. Doing so helps to instill values of accountability and financial stewardship in young family members, instead of attitudes of arrogance or entitlement. Involvement in such discussions, which can begin at a relatively early age, can provide a powerful learning ground for those members of a family who will eventually bear key responsibilities for ongoing wealth stewardship. It affords them the opportunity to see the wealth management process upfront, to become comfortable and conversant with wealth management issues, and to observe how family members and wealth management professionals should interact with one another to achieve specific goals.

Additionally young people  should be encouraged to succeed outside the family business preferably in a related field. When the time comes to return to the family business, that person will have so much more to offer than if he or she hadn’t had the outside experience. Of course, this approach will lead the next generation to challenge and possibly threaten existing management practices and even the authority of the senior generation but on the other hand this will prevent the family from fossilizing.


About Keerthika Singaravel

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