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How to avoid conflict in family wealth planning

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How to avoid conflict in family wealth planning

When it comes to family wealth, the potential for conflict is always a possibility. However, as Executive Director, Richard Joynt explains, family offices and clarity around how they are established and operated can play a key role in reducing the risk of disagreement or miscommunication, starting by finding shared purpose.

If COVID-19 has had a striking impact on almost every facet of life today, family wealth is no exception. In the face of the pandemic, even the world’s most powerful patriarchs and matriarchs have suddenly had to face the issue of their mortality, and the effect this may have on the financial legacy they’ve worked so hard to create.

But the pandemic isn’t just a health issue. It has also sent shockwaves through the financial markets, bringing a volatility that further threatens this dynastic wealth.

While COVID-19 may have shone a spotlight on these issues, succession and investment have been considerations for family wealth planning for many decades. As have matters such as philanthropy, family businesses, and exactly how wealth is managed, structured and protected.

As global wealth has increased, it isn’t surprising that the provision of family office services has grown to assist with these matters. But family offices rarely just focus on the financial, they often have to deal with issues that are far more personal. Because where there is family and money, there is a potential for conflict.

Our recent webinar, ‘Family Offices – Avoiding Conflict’, in which I was joined by experts from Deloitte, Saranac Partners and Baker McKenzie, discussed the various potential causes of conflict in large wealthy families – from the different generations holding opposing values and world views, to the resentment that can brew among various branches of the family in everything from remuneration to risk appetite.

Avoiding conflict should always be at the forefront of the mind of advisers to wealthy families, but sometimes the really big issues that produce the potential for family conflict can often seem insurmountable.

Build on strong principles

David Bowen, Head of Private Office Consulting at Deloitte UK, stresses that to prevent potential conflict in family wealth affairs, the first thing to do when setting up a family office is to establish a clear understanding of the family’s culture and values, and its vision for its wealth. This can then inform everything that follows, from the structures needed, to the skillsets that already exist and those that need to be outsourced. This forms the foundation on which to deliver the family’s key objectives in the short, medium and long term – with conflict kept to a minimum.

“The biggest issue is a misunderstanding or lack of clarity from the family around what it is they actually want from the wealth itself,” says Bowen. And this can often come from lack of communication or making assumptions rather than listening.

Bowen shares the example of a client family that had gone through a major liquidity event. “What we found from sitting with the principal was she had absolutely no interest whatsoever in whether the money was there at the end of her life or not,” he says. “What she actually wanted was to enable the next generation to be as successful as they possibly could, in whatever field they wanted. That was the legacy.”

Had this vision for the family wealth not been established, there may have been conflict down the line. 

Phyllis Townsend, Associate at Baker & McKenzie, shared how she’s worked with one client to put in place a vision document for the family. This sets out the family code of conduct, how they're going to interact with the business, and how to keep any dispute resolution out of the public eye.

It’s worth noting, of course, that vision can easily change over time – especially at a time of succession. Townsend cites another example to illustrate how, to avoid conflict across future generations, flexibility can and should be built into family office structures.

“I’m currently involved in a restructuring of trusts, where we're splitting them for the three family branches, while trying to keep the business together,” she says. “It's a typical case of everything going fine while the founder was alive, and the family descending into in-fighting when he died.

“Structures should be flexible and adapt to the family through the generations. With most companies you'll have voting and non-voting shares and protections built into the articles. And similarly, trusts should be flexible, and the family should have the ability to amend them.”

Managing the next generation

Indeed, the involvement of the next generation can be a key source of tension when it comes to family wealth. The family may suddenly have many principals where there was just one, and they may each have a markedly different perspective to the original wealth generator.

Some family members will desire an active role in family wealth generation; some won’t. Others may be highly tuned to the family’s values but lack the key skills to serve the family constructively.

In order to avoid conflict, remuneration and support structures need to be put in place even for those not directly contributing to wealth or decision-making, in order to foster a sense of transparency and comfort. Likewise, listening to the next generation as early as possible, and educating them if required, can help ease the risk of future difficulty.

Many family offices offer frameworks designed to become self-sustaining, operating without any family involvement at all, should the subsequent generations lack the skills or desire to step into the fold. Supervisory structures are becoming increasingly common, approving decisions around strategy, budgets and remuneration made annually by the executive board, and arbitrating when conflict arises between family members.

As Bowen is keen to reiterate, however, much of that tension can be pre-empted before the first structure is even proposed. “In order to ensure families can make effective decisions, agreeing the principles that make them unique as a family up front can give them common ground, even though they have very different personal interests and objectives,” he says. “That’s a very sensible way of creating the platform through which they can start to discuss these differences.”

Outsourcing as a method of defusing conflict

Even the most engaged and able family will need to compensate for shortfalls in skills in certain areas. By turning to family office services, they can access a truly global pool of talent and expert advice – adding value to the operating business, bolstering its organisational governance, broadening the family’s investment base or overseeing different elements of the family office itself.

But as Giovanni Revedin di San Martino, Partner at Saranac, attests, conflict can even arise at this professional level. He cites the example of a family in the UK that recently suffered the death of its patriarch, who was until that point still driving most of the family’s key decisions. His death created “quite a lot of discord and a lot of conflict” among the family’s 87 members, who now span four generations. But tensions also arose over various professionals that the older generation had brought in years previously.

“The younger generation didn’t feel very in tune with these historical advisers,” says di San Martino. “They didn’t think their voices were being heard. There was also conflict between the risk-averse family and their existing investment manager, who was trying to convince them that they needed to think about investing in higher-risk strategies.”

Other issues can arise when families select outside advisers for the wrong reasons. Bowen highlights the problems that can come when large families are attracted to the industry’s big names, who tend to have equivalent egos. “If these are not aligned with the cultural requirements of the family, that can become an incredibly destructive force”.

Here, avoiding conflict comes down to choosing family office professionals and outside advisers who will take time to understand the culture of the family, and who will set up remuneration, investment and other structures that explicitly serve its vision and values. This is especially true as the move towards professionalised services is a major trend that will continue to define the family office space.

Ultimately, conflict is engendered by lack of communication and clarity, and by making assumptions. So this is about relationships – between family members, those working directly for them, and the advisers surrounding the family office. One may feel safer starting with governing documents, but that documentation needs to follow a lot of human capital conversations.

Watch our webinar ‘Family Offices – Avoiding Conflict’ on-demand here.

Introducing A Guide to Family Offices

An informative guide based upon the experiences of our award-winning family office team, A Guide to Family Offices demystifies family offices and acts as a useful reference point for wealth professionals to ensure that their client’s family office remains relevant, efficient and economically credible throughout its life cycle. Download the full guide here.

To find out more about our specialist family office services, please contact me via my profile below or visit our family office service page here.