PERSPECTIVE3-5 min to read

Approaches to family wealth: changing with the times

During periods of significant change, effective stewardship of family wealth is all the more important. But, getting it right "doesn’t just happen", explains Alex Scott, Chairman of Schroders Family Office Service.

21/11/2023
Approaching family wealth-hero

Authors

Alex Scott
Chairman of Schroders Global Family Offices Services

The early years of the 2020s have come with more than their fair share of upheaval. We have lived through a global pandemic and are in the midst of the most significant geopolitical realignment in decades. Climate change and the adoption of artificial intelligence are already causing further disruption.

From the vantage point of late-2023, long-term investment portfolios have, perhaps surprisingly, performed reasonably well over the past few years – recalling the old adage that markets “climb a wall of worry”. This by no means suggests that families can afford to take investment management for granted: it is critical that their managers have a coherent strategy for navigating changes to come.

However, the relative resilience of financial markets may well understate the true impact of recent developments on individuals, companies, governments – and wealthy families. The events of the last few years are prompting many to review long-standing assumptions and plans.

From our conversations with families around the world, we see this arising in response to several shifts:

  • Sales of family-owned businesses have significantly increased as industries consolidate and private equity firms and companies become more acquisitive. This has created significant liquid wealth. If families want to continue managing their assets collectively, and not all do, this transition must be carefully managed.

  • Families are more likely to take a stance on environmental and social issues. This allows them to reflect their values in investment portfolios, but can have much broader scope. A deeper understanding of environmental and social impact allows for a more strategic approach to philanthropy. It can influence the management of land, property and operating businesses. Environmental and social considerations may also help protect a family’s legacy and make the stewardship of family assets more attractive to the next generation.

  • Political and geopolitical developments are prompting international families to review how and where they hold assets. This is more urgent where there is risk from war, instability or economic conflict. But it may also be a more considered response to the increasing complexity of dealing with tax and reporting requirements across multiple jurisdictions.

Aligning the strategy with the family

These shifts may or may not require changes to a family’s investment strategy. In general, however, they can be far more effectively managed when a family has thought about the long-term strategy for its wealth and the alignment of that strategy with the evolution of the family and its values.

These issues may be relatively straightforward when the family is small or wealth concentrated in a single operating business. As the family grows and wealth builds outside that business, or it is sold, there are likely to be competing demands over the direction of travel. Who will ultimately make decisions on the family’s behalf? What happens when there is a disagreement?

I encourage all families to think through these “governance” questions early on, before they have the potential to cause rifts. This maximises the chances of keeping family wealth intact over the years – and through periods of significant change, whether it comes from within or outside the family.

From personal experience, and from conversations with other families, I know that these arrangements don’t just fall into place. Agreeing on a process may involve difficult conversations and a formality that feels unnatural in a family context. Very often, families benefit from third-party involvement. This can help bring a degree of objectivity and transparency into decision-making. When families become large, it is unlikely that everyone will agree with every decision. However, there is a much better chance of avoiding conflict if the process is considered fair. To achieve this, it is crucial that there is two-way communication between decision-makers and the broader family and that all family members feel they are heard. Such interaction will work most effectively if the family creates a structure or forum where sensitive issues can be addressed in an objective, de-personalised setting. A family council is often the result.

As a means of executing investment and associated strategies, some families create a family office. The resource and focus that comes from having a specialist team dedicated to your family can be hugely valuable. However, cost and the need to manage what is effectively another business mean a single family office will not be appropriate in all cases. It is now possible to access many of the benefits more flexibly and at lower cost through established providers, such as Schroders Family Office Service.

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Pablo Picasso’s “Femme dans un rocking-chair”, auctioned in February 2023: family members often have to grapple with differences in taste and opinions on art when passing collections down generations.

Different skills for different times

Succession planning is the other critical part of long-term family strategy. The passage of time has allowed me to see this process from both ends: I succeeded my cousin as head of a family business in the early 1990s and passed on leadership of a more diversified portfolio of family assets three years ago to a member of the next generation of my family.

Succession should be viewed as a process rather than a one-off event – and families should think about it sooner rather than later. There are two key elements to get right. Firstly, families need to understand what skills they have available or can develop – and when they may need to bring in expertise. This is especially important when a family has sold a business and is diversifying into areas where it has little previous experience. But it also holds true when there is no plan to sell. Members of the next generation may not have the appetite or ability to manage a business. Even if they do, the business may need a different kind of leader.

The second critical element is making succession attractive to the next generation. We are living in a period of incredible change – but also incredible opportunity. It will not always be the case that managing family assets compares favourably to other possibilities. It is likely to look a lot more appealing if those assets are already effectively managed and do not come with tension and conflict and there are opportunities for successors to make a meaningful contribution. An openness to newer areas – such as impact investing – may also help.

When talking about succession, it can be hard to avoid discussion of the television show Succession. This unhappy story of a business-owning family is, most obviously, a cautionary tale of how not to manage both succession and family governance. But there is perhaps a more inspiring message. Even when individual family members can go their own way, the connection to a family enterprise – whether it is a business or other activity – remains strong. This connection touches on fundamental issues of identity, purpose and self-worth. Getting it right could not be more important.

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US President Franklin Roosevelts’ family home, Springwood, became a national park rather than being passed on to his family.

Authors

Alex Scott
Chairman of Schroders Global Family Offices Services

Topics

The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.