How to plan and protect your family wealth

Wealth can mean many things to many people. It can be very empowering and enabling but, without careful wealth planning, it can also come with and create a lot of challenges. Quite often our quest to build wealth and success naturally leads us to focus on the financial side of wealth building. That is all well and good, but for many, attention will at some point turn to how best to make our wealth last and how to turn it into a resource that can serve your family for generations to come.

Framing the psychology of family wealth

To plan and protect wealth effectively, we first need to know where we are starting from. That is not just in the financial sense, although that will be helpful to know. Framing the psychology of family wealth planning starts with a high level, honest view of your family’s current situation across several areas, as follows:

1. Plan your financial assets

There can often be a lot of benefit in thinking about your wealth as though you are a small institution, not just a collection of individuals. Seeing the high-level view of everything can open efficiencies in the way you operate, economies of scale, and can allow you a great insight into the various investment strategies at play. Do they offset each other? Or are you very exposed to one market, style, or sector? Should you take more – or less – risk? Is the family asset base aligned to your longer-term vision? All of this can become clearer when the full picture is considered - request a call back if you'd like to speak to our wealth management team.

2. Understand your human capital

One of the most under-appreciated aspects of family wealth is to recognise and use your human capital. Think of this as the driver and creator of your financial capital. Human capital is what drives financial results. A unique dynamic to families is that this human capital element is constantly changing, as generations come and go, and families inevitably expand over time. Recognising this human capital is one thing, maximising the utility of it can be quite another.

For this part of the process, think about noting down the members of the family and their different strengths and experiences. What you are doing here is figuring out who you can call upon to add value in certain areas. This is not too dissimilar to a chief executive assembling an executive team – you are looking for talented, enthusiastic people with different views and experiences that can come together to create something larger than the sum of the parts.

Part of wealth planning for many generations is the acknowledgement that there will come a point where you will not be around to take the reins. As such, you might want to think about turning your attention to creating the infrastructure for decision making and governance that can enable the high-level and everyday decisions to be taken when you are no longer here.

3. Know where you are on the journey

One way I like to look at a wealth plan is to use the analogy of a mountain. Many wealthy families (but not all) tend to see their wealth in two phases, and this is where my metaphorical ‘mountain’ comes from. On the left-hand side is the wealth creation phase. This might be from the formation of a business, development of land, or perhaps some very high earnings that were well invested for many years.

Whatever the reason, there was likely some kind of wealth ‘creation’ event by one generation of the family. There comes a point, either in life or on death, when the baton is passed from the creator generation to the next generation. This is normally the summit of our mountain. What happens next? What does the other side look like? As any keen explorer will know, some mountains go straight down and some do not – they carry on across a range, with peaks and troughs for a long distance. Family wealth is not entirely dissimilar to this.

The difference is that when climbing a mountain, the terrain is already decided for you. In the case of family wealth, the future is very much in the hands of those making the decisions. Knowing where you are on this journey can be very helpful.

Are you the ‘creator’ on the ascent? Or are you the first generation after that? Or the third? What would you like your mountain range to look like, and for how long? Now you should be getting a good aerial view of your current family wealth situation. You should have a good grasp of what assets you have, the human and financial capital at your disposal and roughly where you are on your wealth journey.

Once we know our starting point, we can begin thinking about how your wealth plan could be successful and carry on to future generations.

4. Find out where your wealth came from

For wealth to last for more than a couple of generations, I firmly believe that it takes more than just a large asset base and some complicated estate planning. In my experience, wealth tends to fade away because it loses its meaning (note: not its utility). For example, for a family member to inherit a sizeable investment portfolio and take minimal drawings for many years, that takes some serious will power.

For them to compartmentalise the ‘family wealth’ versus their own earnings is a mental exercise that must have solid foundations, because there will be times in life when the easy route will be to use the family wealth to spend and pay for things that will be consumed in their lifetime. For wealth to truly ‘stick’, the family must understand and believe in the story of that wealth. Where did it come from? What were the risks taken? How long did it take to build up? What sacrifices were made so that this wealth could cascade down the generational line?

When wealth has meaning, it lasts. Otherwise, the danger is that it represents a sinking fund that will last a generation, or perhaps two. Want to see what your money can do?

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