Setting up a clearly defined set of values can help families avoid the pitfalls that lead to so much family wealth drifting away over the course of generations.
Numerous studies have shown that, unless precautions are taken, the majority of family wealth can disappear by the third generation. So why are only a few families successful at preserving their wealth, and how do they manage it?
Those who succeed invest time in building up not only their financial capital, but also the social capital between family members. “In my experience, happy, successful families are not created by accident,” says Caroline Piraud, who is responsible for Global Philanthropy Services at Julius Baer, “and the starting point for this is establishing a set of shared values.”
Wealthy families today are increasingly global and multi-generational in nature, with younger members more independent than before. This often leads to a greater disparity between the experiences and values of individual family members than would have been found half a century ago. It is therefore more important than ever for families to grow their social capital and invest time in establishing a set of guiding principles to help them thrive in future generations.
Long term goal
The values that each family defines can serve as their compass – one which helps guide their decision making, whether it is of a financial, business, or philanthropic nature, or even to do with raising children. These values then serve to shape the family’s purpose. This is a long-term goal that is shared across generations, and is something that becomes meaningful to younger family members as they educate themselves, begin taking decisions, and start thinking about the world beyond themselves.
But how do families define their values and, ultimately, their purpose? And once they have been established, how can it be ensured they live on?
“The first step is to engage an independent moderator,” explains Piraud. “It is vitally important to have a neutral party to facilitate the discussions between family members.” Before discussions begin, individual family members should take the time to define their own values. These can then be shared and, with the help of the moderator, refined within the family group to find those that resonate with everyone.
Establishing values that are supported by family members from different generations make them even more powerful, increasing their longevity and relevance. Yet everyone knows that finding agreement within families is not necessarily an easy task.
The governance itself provides the vehicle that allows the values to be translated into tangible actions.
A governance structure
“Each family is different,” Piraud continues. “Some are very egalitarian, some have more dominant characters, which is why it is important to ensure a platform is provided where everyone can have their say and be heard.” A governance structure can provide such a platform. It is a framework that allows individuals’ voices to be heard, involves them in the decision-making process, and helps everyone feel responsible and proud to be part of the family. Without a governance structure, the values of a family would likely be forgotten or lost, and the exercise would probably end in failure.
Values and purpose
“A family’s shared values form the basis for its governance,” explains Guy Simonius, Head of Family Office Services at Julius Baer. The values and purpose of the family are the fuel that powers the vehicle of the governance structure, and one doesn’t work without the other.
I see a lot of families who express their values through their purpose and philanthropy, although their investments are not aligned with their values or mission.
These two symbiotic elements form a powerful tie that can help families to thrive for generations to come. Once in place, a governance structure leads to alignment and informed decision-making about how a family manages its wealth progressively, while allowing and supporting individual family members to flourish. By establishing a family governance structure, families are agreeing to evolve together and to leverage the family’s position to everyone’s mutual benefit.
“Money is time, and establishing a good family governance system based on values allows you to spend your time wisely,” says Simonius. “The governance structure also helps to make sure the values and purpose remain valid for all members of the family. If they no longer seem to match, they can always be reassessed as and when the need arises.”
The governance structure
- Demystifying family governance
Family governance is concerned with the running of a family; who makes the decisions for a family and how they make them. It can take many forms. Some families like to define everything in writing by compiling and signing a family charter, while others prefer formal or informal get-togethers to discuss plans for the next year. Another approach is to establish a ‘family council’ made up of key family members who can discuss strategies and make decisions. No matter what shape it takes, a family governance structure provides the framework that allows family members’ voices to be heard and involves them in the decision-making process. In this way, everyone can feel responsible and proud to be a part of the family.
- Learning the ropes
Philanthropy can serve as an ideal tool for realising a family’s purpose, but it is also a great way to involve the next generation in family governance. Through philanthropy they can learn about financial matters, sharing, and responsibility, even if they are too young to become a member of the family governance structure or board at the time. Involving the next generation of a family at a young age instils pride, responsibility, and identification with the family brand.
- Aligning your wealth with your values
“I see a lot of families who express their values through their purpose and philanthropy, although while their investments are not aligned with their values or mission,” says Caroline Piraud. “This approach simply does not make sense. Luckily, the younger generation are more aware of this contradiction and are more interested in aligning their investments with their values. In the years to come, I expect to see much more cohesion between actions and values, which will lead to more mission-aligned investing.”
Julius Baer Family Barometer 2021
Our Family Barometer examines the key findings of a yearly survey of private clients’ services experts who work with wealthy families. It explores the most pressing concerns and challenges faced by wealthy families, as well as their current needs. Please download a copy of the report to learn more.
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