Timeless Solutions to Completely New Challenges for Family Wealth Transfer

As the Family Leader, what confidence do you place in your wealth transition plans?  Would you like to form greater, and more realistic, peace of mind?  Startlingly simple concepts may provide the knowledge to help you sleep easier and achieve hoped for success.

Most decision makers are likely fatigued of the oft-repeated research – as much as $68 trillion changing from owners to heirs in the next generation; 80% of heirs will change advisory relationships; and a projected 70% failure rate for Family wealth transfer estate plans.  That reality must be emphasized, while recognizing that was the situation facing Families prior to the 2020 Pandemic.  Today, inheritors are additionally faced with unprecedented change from historical political-economic constants and the accepted wealth management status quo.  Helicopter money, FED market interventions, zero or negative interest rate policy and real questions about economic performance and the proper role of government must be taken into account.

One way of helping conceptualize the challenge is looking at the wealth transfer challenge as one might a new business venture.  Entrepreneur magazine states that the Critical Factors Dictating Start-Up Success are: Idea; Team, Plan; and Capital.  In today’s environment, what enthusiasm can we have about any Idea sufficient to build a possible investment case?  The Team will be fielded by each Family from among heirs and advisors, the composition and quality of this likely varying widely from those of successful start-ups.  Following closely behind the Team is the Plan.  How many Family leaders would recommend deploying capital into a scenario utterly foreign to their experience and fraught with unprecedented risk, known and unknown, simply employing traditional strategies?  What rate of success would the disinterested observer expect?  As for Capital, estate plans commonly focus on distributions, timing and amounts – the sources of capital, with little consideration for the uses.

What can we know about the new 2020 Pandemic wealth management and transfer environment?

“Context is Everything. Data, data everywhere, yet so little fit to use.  We have more information than ever before, but that deluge often lacks critical context: Are we talking about the same definitions?  Do we have any shared assumptions?  Ask questions and understand the context around the data.”      Jennifer Mapes-Christ, Research Manager, Freedonia Group

Important questions might be, “How much do I trust the economy to successfully withstand unprecedented shutdowns due to the virus driven public policy?”  “What are realistic return on investment expectations given FED market interventions and ZIRP implementations?”  “How does a Family capture and enhance wealth preservation and management knowledge and experience while necessarily relying on an advisor-centric program?”

Many traditional definitions and assumptions about finance and investment may be obsolete, preventing any application in our new era.  The reader may self-survey regarding the degree to which a retained confidence is appropriate in consideration of once-common understandings of:

Moral Hazard; Federal Deficit & Debt; Price Discovery; Bond Real Returns & Credit Ratings; Purchasing Power Parity; Portfolio Diversification; Managed Accounts; Long Term Investment; Value, Growth, Income & Momentum; Holistic Approach

Prudent decision makers reevaluate current plans when expectations about the future change, and change they must given the unprecedented challenges now emerging.  For most Family leaders there is more to be done than assessing traditional assumptions about the practice of financial management.  Honest observers understand that we are now in a completely new world, featuring in addition to helicopter money, FED market intervention, and basic questions about economic performance, a legacy of provider strategies and systems the current utility of which is open to question:

“Developing a Global Ecosystem View is Critical. Vast technology changes have created a digital economy with a whole new set of requirements for survival. To sustain long-term competitive advantage, companies are on a journey to reinvent themselves as digital natives and redevelop the people, processes, and technologies they use to create value in the global market.”  Christina Kearney, Group Vice President, Worldwide Product Management, Marketing and Client Service, IDC

Globalization and digitization are trends of wide acceptance with continued momentum, but returning to context, how do they affect Family Plans?  Are they more about disintermediation, reduced labor cost and improving organizational profit margins than caring about client safety, security, control and service?  It is fair to say that stretching technical infrastructure across borders carrying mission critical Family information in bits and bytes presents data security challenges unseen by the prior generation.  Indeed, every year seems to record an increasing number of data network breaches of expanding scale.  A new environment of unknown challenges confronts us.

Whether the topic is economic promise, market environment, wealth management strategy, or system architecture, many observe that significant change has occurred and Change from the expected outcome is Risk.  Further, when past assumptions about economic and financial matters lose utility, it is right to question if the assumptions can be True.  And, without agreement on what is True, there is no foundation for Trust.

This then is the critical game changer for Family leaders:  unprecedented change has unbound incalculable risk, at the same time as we come to understand we cannot trust formerly accepted assumptions due to the lack of any understanding about what is now true.  What can comfort the Family decision maker seeking to successfully protect and transfer wealth to following generations?

Traditionally, Family Coaches advised two primary and complimentary approaches.  The first involved recognition that a Family’s wealth is much more than its financial capital, including also its social, human and intellectual capital.  This approach comprehends that financial statements, tax strategies and legal contracts cannot, by themselves, accurately capture the essence of a Family’s wealth – accentuating the head while ignoring the heart.  A typical example is noting the presence of two CEO’s in the Family – the Chief Executive Officer and the Chief Empathy Officer.  This practice seeks to construct a whole family understanding of wealth, its meaning and purpose.  Resulting estate plans reflect desires beyond heir selection, timing, amounts and tax avoidance.

The second approach of Family Coaches focuses on the preparation of heirs, and observes that a Family’s financial wealth cannot be successfully transferred unless there is an effectively functioning next-generation-of-the-Family to receive it.   Lengthy and in-depth programs audit preparedness, identify specific deficiencies, promote responsibility, self-improvement, competence and confidence.  Research shows that better prepared heirs yield impressive results in improving the success rate of the transfer of Family wealth.

Importantly, those common approaches speak very little to the current environment.  Traditional understandings about economics, financial markets, wealth management strategies, roles and outcomes are called into question with no definitive substitutes.  What is necessary is a return to fundamentals, a return to known truths, confident trust, preparedness for any change and reduced and managed risk.  

Aside from the new venture, a different way of conceptualizing today’s estate planning and wealth transfer challenge is imaging the voyage of an escape and survival vessel sent from a chaotic world into uncharted and unknown space, commonly, the great unknown.

Consider that in common with our situation today, sojourners will have no confident knowledge about the distance they will traverse or a workable Plan for where they arrive – they best not be externally directed.  Their optimal opportunity for success is internal direction – to prepare themselves for self-reliance with their highest confidence. 

Christian traditions speak directly to the critical issues of truth and trust, change and risk. When faced with the unknown, what is the best one can do? In what can one place their confidence and trust?  One school advocates to, Get right with yourself, right with your family, get right with the world and get right with your Maker.  Go out into that world, as the missionaries of Icolmkill and pioneers building His Kingdom have done, for the betterment of mankind, for two millennia.

Among the first Christians outside the Holy Land, there were families led by chiefs among the Gaelic fringe in the islands and highlands of Scotland that honored ancestors and inspired descendants, whose first responsibility was to protect and then to provide.  The Chiefs guided their Clans, endured and succeeded amidst pestilence, natural disaster, invasion, war, climate change, currency collapse and steady abuses from State and Church.  Returning to the Critical Factors that Dictate Success, their Idea, Team, Plan and Family Capital realized a durability across a millennia.   Is this again an age wherein it can profit a Clan Chief to recall the counsel of eternal truths?  In such matters, does the temporal ever command the eternal?

Sober decision makers will recognize the priorities of protection, provision, progress, prosperity and charity.  Arrange your activities and assets for maximum protection.  Plan for the provision of your needs.  Instill progress as an operational prerogative and leverage your prosperity for its highest charitable value.  

Scotus

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photo credit:  Unknown Man in Highland Dress, National Galleries of Scotland