INTRODUCTION
Families are complex entities. They are an interconnected web of personal relationships and economic interests that result in affection, bargaining, and sometimes hostility often in equal measure and sometimes simultaneously. Many family discussions take place within a background touching upon legal rights and responsibilities, but often in a vacuum of legal advice. This is why often families avoid talking about the things that matter most.
Missed conversations are missed opportunities. Not addressing key conversations can over time create challenging issues that provoke conflict and foment risk.
We believe that now is the time to challenge this dynamic and for families to have, between themselves and with their advisers, those conversations previously consigned to the 'too difficult' pile. Indeed, this mission was at the heart of the establishment of the Russell-Cooke Family Office, and we hope this report will help families and act as a catalyst to increased transparency and openness.
It is key to recognise that it is not just the black swan event of Covid-19 driving this imperative for families. We are on the cusp of one of the largest intergenerational wealth transfers in history, with an estimated US$15.4 trillion of global wealth expected to be handed down in the next decade. This shift will see wealth pass increasingly to Generation X (those in their 40s and 50s) and, in some cases, Millennials (20s-30s). These demographic groups have different perspectives, priorities, and motivations to those of the previous generation - and different ideas about the management and deployment of wealth.
In this context, recent research by UBS indicates that as many as a third of family offices have no succession plan in place and only a fraction of the plans that exist have been formally ratified. If such a lacuna exists with families who have the support of family offices, those without in-house or external advisers are even more likely to have gaps in their understanding or planning. One of the reasons for this gap is that difficult conversations are often required in order to develop and agree on a strategy. According to UBS, the number one challenge to succession planning was conversational discomfort.
As wealth continues to be transferred down through generations, the challenges and opportunities families face are evolving, and at an increasingly fast pace.
With 2021 set to be a year of significant change, we interviewed a range of leading specialists to map the key issues for families in the 'new normal'.
This report draws on those interviews and the Russell-Cooke Family Office's legal expertise and experience of dealing with families. It reflects on the issues wealthy families face, the potentially difficult conversations which must be had to manage them effectively, and how the changing requirements and expectations families have of their advisers will lead to new approaches and services being developed by professionals.
One thing is clear - proactivity, openness, understanding and empathy - on all sides - are critical. We hope this report helps build an awareness of the issues, enabling families and their advisers to open discussions early and plan for a successful and resilient future.
EXECUTIVE SUMMARY
Following interviews conducted with a range of specialists we identified five key issues which will be central to conversations amongst families and their advisers as they prepare for the next great wealth transfer and the sustainable management of familial wealth for the future:
1. Shaping successful succession strategies
Almost all families will need to manage wealth transfer, succession and inheritance planning. This may be well-planned both in terms of legal and financial arrangements, but also in terms of expectation management. Yet where families avoid this planning, the fallout is often the cause of significant familial friction. What started off as 'too difficult' to discuss becomes far more difficult and must be handled with even greater care when the inevitable happens.
This isn't just about having the right documents filed away in the bottom drawer. Rather, careful attention needs to be paid to educating children (of all ages) about decision-making, wealth, value and how that wealth is sustained, while not overexposing them to privilege at too early a stage and for too long. This next generation of wealth inheritors can be misunderstood or mislabelled, and often face a distinct set of challenges and expectations of them that can lead to complexity, conflict and in some cases personal risk. Openness, honesty and empathy are key, as is a recognition that the goals of the next generation may differ to those of the previous wealth creators and guardians.
2. The new wealthy demography: a new paradigm for investing and giving?
Investment and ethics are not mutually exclusive. While there is an assumption that Millennials are the driving force behind the shift to sustainable investing and responsible capitalism, wealthy individuals have been central to philanthropic activity for generations, and are now ever more mindful that wealth comes with responsibility.
The long-term direction of travel is for greater alignment between social responsibility and economic return. Responsible and resilient investing and asset protection will by necessity mean a rebalancing of portfolios to prioritize assets that create a net positive impact for society and the environment. This will require an attitudinal change from advisers and clients who have traditionally focused on immediate financial return first and foremost, and this may be driven in some cases by pressure from, and dialogue with, the next generation who may have different values and motivations.
3. The ever-changing tax regime for cosmopolitan HNWIs
Aggressive tax avoidance has largely been consigned to the past, but public opinion and political rhetoric continue to fuel a narrative of widespread non-compliance that breeds distrust of wealth - and brings about public scrutiny.
The reality is that wealthy families' tax affairs are incredibly complex and are often international. Tax planning is essential and legitimate. It is the obligation of advisers to present the options, and for the family to select the most appropriate tax strategy for them. However, the next generation will have to tread an increasingly fine line to ensure tax strategy is aligned with broader reputational and social responsibility priorities.
4. Public scrutiny and reputational risk
Families and HNWIs are increasingly mindful of their public image, or brand, driven predominately by social media and the 24/7 international news cycle. This is true whether or not someone seeks a public profile.
This public scrutiny brings significant risk, including mental health risk as well as issues such as cyber and personal security. Families may need to curate a public reputation while at the same time managing and protecting the profile, wellbeing and business interests of family members.
5. The changing role of the trusted adviser
Advisers play a critical role in helping families navigate the challenges they face, but they must take steps to understand the motivations and values of the emerging wealthy.
Just as there needs to be openness within the family, so too there needs to be openness amongst and collaboration between a family's stable of advisers. Establishing working relationships with other advisers based on trust, openness and an understanding of the value that specialist skills and perspectives can bring is fundamental to delivering a quality client service and maintaining the confidence of families as they grow and change.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
