At a time of rising complexity in wealthy families, Julius Baer is working alongside its intermediary advisors to build governance structures designed to instil a shared purpose.
The Chinese have a saying, “wealth never survives three generations.” America has its own version, “from shirtsleeves to shirtsleeves in three generations”. As with most traditional proverbs, there is some truth in them – but there are also ways to limit this transience of wealth.
When Maria Eugenia Mosquera, Julius Baer’s Head of Wealth Planning Americas, was working as a trainee in the Buenos Aires civil court 20 years ago, she saw just why family wealth often dissipates so quickly. After the patriarch of a family died, his heirs spent 11 years squabbling over probate.
The lesson was not lost on Maria Eugenia. “It is not state taxes that is the main reason why wealth generation fails, it is more family conflict,” she explains. “So, having a proper framework for family governance is essential to ensure the preservation of family wealth for future generations.”
Often working alongside financial intermediaries, asset managers or financial advisors, Maria Eugenia believes that the combination of a looming wealth handover to the millennial generation and greater complexity within families means there is greater need than ever for family governance structures that avoid conflict.
It is better for the investment strategy when there is a shared family culture and values, compared with an ad hoc investment approach to cover the needs of only one generation.
In the next 25 years, an estimated USD 68 trillion will be transferred between generations in the US alone, the greatest wealth transfer in history, according to Julius Baer’s Global Families 2020 Special Report. At the same time, families are becoming more complex as the elder generations live longer, the younger generations develop different attitudes to many things and ultra-high net worth families often live further apart geographically.
The heart of the matter
Family governance is a term describing the structures and methods of communication used to make sure that families act in harmony. As defined by Harvard Business School, there are three components to family governance: periodic assemblies of the family, a family council taking decisions and a family constitution describing its values and vision. Taken together, these are designed to introduce good communication, transparency and joint decision making.
If a family owns a business, it may have a more elaborate governance framework, with a formal structure for interaction between the family, the shareholders and the managers of the business. In this way, the family and the business understand how to interact and support each other.
“This is something that we see as especially important for the financial intermediary working with a family: it is better for the investment strategy when there is a shared family culture and values, compared with a simple ad hoc investment approach designed to cover the needs of only one generation,” notes Maria Eugenia.
“Also, controlling the way that wealth will be transferred can professionalise and align the family’s approach to investment. While the current generation might have created the wealth and be more conservative, the next generation might be more interested in responsible or sustainable investments. Good family governance can plan for this as well as integrate financial intermediaries even more into the families’ mission and visions, helping them to cover the needs of multiple generations.”
Six building blocks
Julius Baer regularly works alongside a family’s asset manager or financial advisor, such as family offices, helping to establish family governance structures. Everything starts with a fact-finding meeting looking into the family’s goals, needs, composition, the structure of the wealth and so on.
The bank sees family governance as having six main elements, going beyond Harvard’s three:
- Family policy and constitution
A strategic document that defines rules for organisation, succession planning, and conflict resolution, as well as a guideline for asset management and family values.
- Family council and assembly
Striking a balance between family, owners and external specialists. Fostering communication between family members.
- Family education
Teaching family members the skills needed to fulfil their responsibilities relating to the business or managing wealth.
- Family or business succession
Supporting the family in finding the right solutions and timing for succession.
- Family purpose
Designing a clear family strategy for philanthropy and responsible investing.
- Family office services needs
Helping families to set up a family office or finding them the right external partners.
For Maria Eugenia, a family governance structure above all helps to instil wisdom – a characteristic that will be much in demand over the coming years as the potential for conflict within families increases.
“Aristotle defined three elements of human intelligence: intellect, craft and practical wisdom/ethical values,” she says. “For many years, business schools have taught and placed emphasis on the first two elements. However, research from IMD Global Family Business Center¹ confirmed that the most highly effective families show that the third element should be given equal or even more importance in family governance in the 21st century. This is especially the case considering that an effective family governance framework needs to reflect not only the culture, dynamics and objectives of every particular family but also their values.”
- Seek to establish governance structures that introduce a common purpose
- Establish forums for open communication
- Set up a formal structure for interaction between the family and any connected business