Families face an uphill battle when passing down their wealth. One oft-cited study conducted by Roy Williams and Vic Preisser has shown that 70 percent of family estate transfers fail as a result of family squabbles and disagreement. To paraphrase noted author James E. Hughes, Jr., families that are truly successful are united in finding purpose and meaning in their financial wealth and using it intentionally as a tool to create a lasting legacy.
Most planners spend an inordinate amount of time only on the financial aspect of family wealth management. They sometimes overlook the family’s emotional health and don’t dig into family relationships and how the members view complex issues such as governance and financial management.
Families that want to preserve their wealth for future generations should take a holistic approach by blending proven financial planning strategies with best practices in managing a healthy company culture. This approach to wealth management, which I call “Smart & Heart,” can help families prepare for the eventual transfer of wealth so assets are managed in a meaningful, purpose-driven manner.
“Smart & Heart” goes beyond managing financial capital. It also involves managing a family’s human, intellectual, spiritual and social capital. Here’s how it’s done:
How to be “smart” managing your family’s wealth.
Start with a financial inventory: One of the most important steps in building a wealth management plan is to conduct an inventory of financial assets and liabilities. This inventory includes assets such as retirement savings, real estate holdings, education and health savings accounts, trusts and life insurance. Liabilities include a home mortgage, personal loans and any other debts. It’s also crucial to review all income (salary and dividend income, if applicable) and all household and living expenses.
The primary goal is to assess what you own and what it’s worth so you have an accurate snapshot of your overall financial health. Additionally, the inventory will serve as a benchmark to measure progress toward achieving your financial goals. It will also serve as the foundation to building a sound financial plan for your family and future generations.
Create a family mission statement: Families who are serious about the stewardship of their wealth should create a clearly defined and written mission statement. It’s important to take this seriously and invest the time to create a statement that is true to your family’s vision and mission.
Be sure to include input from all family members and be as specific as possible when writing your mission statement. Think of it as the framework for your roadmap to success. Your mission statement will play a seminal role in defining how your family will manage its wealth for the years, decades and generations ahead.
It’s also important to revisit your mission statement on a regular basis. All families undergo changes over the years (births or deaths in the family; marriage or divorce), so regularly reviewing the statement will help ensure it remains relevant.
How to have a “heart” when managing family wealth.
Use personality tests to assess family dynamics: Financial advisors rely on questionnaires to assess risk tolerance when determining how they should invest their clients’ assets. These questionnaires are essential, but only tell part of the story. The surveys do not provide any insight into the underlying personal or psychological reasons about how individuals assess risk.
Personality tests – such as the Myers-Briggs Type Indicator, DISC Profile, 5 Voices and 5 Love Languages – allow advisors to better understand an individual’s decision-making process and communication style. These tests, when shared among the family, can transform how the group communicates with each other and help family members find common ground when managing their wealth.
The importance of core values to guide decision-making: A hallmark of families who have successfully transferred wealth over multiple generations is their ability to align family values with long-term financial goals. Core values highlight what a family stands for – the beliefs and philosophy that guide their actions.
Just as a family should have a written mission statement, it should also have written core values. Identifying exactly what’s most important to your family isn’t easy because each family member will have differing views. But when everyone gets on the same page, you will be amazed at how core values can galvanize the family and bring purpose to how their wealth is managed.
Many families don’t realize the true potential of their wealth. But if you take a “Smart & Heart” approach you can position your family’s wealth to bring security and joy now, while also benefiting future generations.
Mark Hartnett founded the predecessor to AFWS, Family Wealth Practices, LLC, in 2008, with the goal of helping families overcome the “shirtsleeves to shirtsleeves in three generations” proverb. Previously, Mark practiced corporate law at Southern Farm Bureau Casualty Insurance Company. His expertise in fiduciary law and financial planning allowed him the opportunity to lead several bank trust departments in the southeast from 1999 to 2008. Mark has also participated in numerous disputes regarding trustee issues as both an institutional defendant and as an expert witness.