Family and Wealth Sustainability:Integrating Family Virtues with Wealth Planning for a Lasting Legacy
April 1, 2010
Thomas C. RogersonSenior Director, Wealth StrategistBNY Mellon Wealth Management
2
Normal Family Wealth SituationA WEALTHY FAMILY’S DILEMMA
Estate Plan(Death Plan)
Partner-ships
A/B/GSTTrusts
DelawareTrusts
EducationTrusts
Founda-tions
Wills
LivingTrusts
Retire-ment Plans
Tactics by Interest(or by Necessity)
Inter-national
FixedIncome
Small, Mid Cap
RealEstate
PrivateEquity
Emerg.Markets
Private Banking
LargeCap
Insurance
Products by Defaultand Relationships
Index Funds Manager #3
Investment Broker #1
Manager of Managers #2
HedgeFunds
Consult- ant
Account-ant
Insu.Pro.
Men
tal B
arri
ers
Men
tal B
arri
ers
Concerns About Money and
Heirs
Family Charities
Family Retreats
EthicalWills Family
Mediation
Family Vision
Educationre. $$
FamilyBusiness Success-
ion
Career Counsel
Missed Family Opportunities
Attorney
Consolidated Return??Risk? Taxes? Fees??
Conflicts of Interest
Largely Funded at Death
Separated ConceptsSeparate Advisors
Informally Discussed Or Never
Done
Investments
3
Integrated Family Wealth SolutionA WEALTHY FAMILY’S OPPORTUNITY
Process • Risk Tolerance• Investor Goals• Asset Allocation• Invest. Selection• Oversight• Reporting
Process• $ Education• Communication• Family Values• Philanthropy• Governance
Charities
Family RetreatsInter-
national
FixedIncome
Small, Mid Cap
RealEstate
Family Medi-ation
Family Vision
FamilyBusiness
Career Counsel
PrivateEquity
Private Banking
LargeCap
Insu-rance
Process • Family Profile• Wealth Goals• Jurisdictions• Structures • Implement
Partner-ships
A/B/GSTTrusts
DelawareTrusts
EducationTrusts
Founda-tions
CRTsCLTs
LivingTrusts
Retire-ment Plans
TrusteePartner
Coordinated Advisory Team Helps All of Us
WealthManagement
Preparing Your Money for Your Family
Strategic Investment Management
Protect and Grow Your Money
Family Education And Governance
Preparing Your Family for the Money
Asset Location
EthicalWills
Edu-cationre. $$Hedge
Funds
Emerg.Markets
4
Family Dynamics
5
The Three Big Questions
How Much is Enough? 1. When do we tell them?
2. How do we break the paradigm?
• “Shirtsleeves to shirtsleeves in three generations?”
6
Client Study - Wealth“SHIRTSLEEVES TO SHIRTSLEEVES?”
$
TIME
1st Generation Creation
2nd Generation Assimilation
3rd+ Generation Enjoyment
4th Generation Lamentation(Genealogy)
?Generation Creation
70% 90%
7
Client Study - Wealth“SHIRTSLEEVES TO SHIRTSLEEVES?”
Careers: Entrepreneur,R/E Developer,CEO, ...
Careers: Attorneys, Accountants, Investment Advisors, ...
Careers: Actors, Musicians, Park Rangers,Ski Patrol, ...
$
TIME
1st Generation Creation
2nd Generation Assimilation
3rd+ Generation Enjoyment
4th Generation Lamentation(Genealogy)
?Generation Creation
8
37% Investment Specific Risks
• Portfolio risk, manager risk, timing risks, style risks, business risks…
26% Economy and Financial Markets Risk
• Economic downturn, inflation, deflation, energy costs, and availability…
16% Political and Tax Risks
• Higher personal income taxes and estate taxes, legal liability risks, government
intervention…
Only 7% of the perceived risk is family dynamics and relationship problems!
• Poor family communication and relationships, educating next generation issues,
governance issues…
Source: Family Office Exchange
Risk Perception “WHAT DO I THINK WILL BITE ME?”
9
60% of the failure is due to a lack of communication and trust.
25% of the failure is due to unprepared heirs.
Only 3% of the failure is due to failures in financial planning, taxes and investments!
Risk Perception – “What Bit Me?” WHY DO 90% FAIL?
Source: Williams and Pressier
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“If that factory burned down, it would be tough, but we’d get through it. However, If the family
fell apart, we wouldn’t get through it. This is important to us; it’s a line item on our business
budget every year. We spend money and time on this every year, just like we do with our
management team!”
Third Generation Business Leader
Risk Perception “WHAT DO WE THINK WILL BITE US?”
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Net Worth = ? (Giving the wrong impression can be devastating)
Client Study “WEALTH”
12
Wealth in Families DEFINITION
1. Human Capital – Me
2. Intellectual Capital – We
3. Social Capital – World
4. Financial Capital – Wealth Wisdom
• Cash, stocks, bonds, real estate, “things”
• Family business?
James E. Hughes Jr.
13
Wealth in Families DEFINITION
James E. Hughes Jr.
1. Human Capital – Me
2. Intellectual Capital – We
3. Social Capital – World
4. Financial Capital – Wealth Wisdom
Family Annual Report
14
Wealth in Families MISSION/VISION
1. Human Capital – Love of Self
2. Intellectual Capital – Love of Family
3. Social Capital – Love of Others
4. Spiritual Capital – Love of God
5. Financial Capital* – Love of Creation
*The purpose of financial capital is to enhance human, intellectual, social, and
spiritual capital.
15
Wealth in Families MISSION/VISION
1. Human Capital – Love of Self
2. Intellectual Capital – Love of Family
3. Social Capital – Love of Others
4. Financial Capital* – Love of Creation
5. Spiritual Capital – Love of God
*The purpose of financial capital is to enhance human, intellectual, social, and
spiritual capital, all based on the family spiritual capital
17
Preserving Wealth in Families ACTIVITY AND COMMUNICATION AROUND WEALTH CAN BE DIFFERENT
1. Governance Procedures
• Family bank, family office, good dysfunction?
James E. Hughes Jr.
19
Preserving Wealth in Families ACTIVITY AND COMMUNICATION AROUND WEALTH CAN BE DIFFERENT
James E. Hughes Jr.
1. Governance Procedures
• Family bank, family office, good dysfunction?
2. Horizontal vs. Vertical Structures
• Rothschild vs. Vanderbilt
22
Preserving Wealth in Families ACTIVITY AND COMMUNICATION AROUND WEALTH CAN BE DIFFERENT
Charlie Collier
1. Governance Procedures
• Family bank, family office, good dysfunction?
2. Horizontal vs. Vertical Structures
• Rothschild vs. Vanderbilt
3. Family Philanthropy
• Philanthropy day? Aunt adoption?
23
Philanthropy
“Paradoxically, families often learn more about long-term wealth preservation through the
process of learning to give away than by the process of learning to accumulate and spend.”
James E. Hughes Jr.
24
Preserving Wealth in Families ACTIVITY AND COMMUNICATION AROUND WEALTH CAN BE DIFFERENT
1. Governance Procedures
• Family bank, family office, good dysfunction?
2. Horizontal vs. Vertical Structures
• Rothschild vs. Vanderbilt
3. Family Philanthropy
• Philanthropy day?
4. Caring Motivational vs. Caretaking
• “Invest in you” vs. “Distribute to you”
− Loans vs. gifts?
26
Vision of Family Future
Controlling Leaders
Sibling Rivalry
Unknown Cousins
27
Vision of Family Future
Enlightened, Successful
Leaders
Sibling Partnership
Cousin Consortium
28
Five Steps to Healthy Family Governance
5. Healthy Family Governance
• Putting into action, horizontal thinking
4. Philanthropy• A test drive with someone else’s money but our values
3. Family Values and Experiences• Mission/vision – history and future
2. Communication • Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education • Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
29
Five Steps to Healthy Family Governance
5. Healthy Family Governance• Putting into action, horizontal thinking
4. Philanthropy• A test drive with someone else’s money but our values
3. Family Values and Experiences• Mission/vision – history and future
2. Communication • Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education • Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
30
Education STEP ONE: RESOURCES
Younger Children
• Raising Financially Fit Kids – Joline Godfrey
• www.Allowance-Plus.com – Ned Hentz
• The Financially Intelligent Parent – Gallo & Gallo
Teenagers and Older
• This Presentation to the Family
• The Ultimate Gift – Jim Stovall
• The Born Rich Video – Jamie Johnson
• Outliers and The Tipping Point – Malcolm Gladwell
• Children of Paradise – Lee Hausner
• The Five Dysfunctions Of A Team – Patrick Lencioni
• Family Wars – Gordon & Nicholson – etc.
31
Example of External Expertise Available
Stages Responsibilities Actions
Apprenticeship (5-18) • Develop financial vocabulary • Establish early financial habits and values • Practice saving, spending, earning, and philanthropy
• Manage allowance • Hold first job • Begin community involvement
Starting Out (19-30) • Establish identity and independent lifestyle • Experiment
• Acquire education and/or life/career experiences • Establish savings and a good credit record
Taking Charge (31-50) • Build assets • Establish a foundation for self and/or family
• Acquire assets • Build career and family • Explore life interests
Looking Ahead (51-65) • Take stock • Mentor • Contribute to next generation’s needs
• Reassess life choices/goals and energize plans
Third Wave (60+) • Relinquish some responsibilities • Plan for the next generation
• Live and give creatively
32
Five Steps to Healthy Family Governance
5. Healthy Family Governance
• Putting into action, horizontal thinking
4. Philanthropy
• A test drive with someone else’s money but our values
3. Family Values and Experiences
• Mission/vision – history and future
2. Communication
• Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education
• Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
33
Spontaneous
Disciplined
Challenging Supporting
Persuader Counselor
Director Analyzer
Family Communication Styles STEP TWO
Stratton Consulting Group
34
Communication STEP TWO (USE TESTS CAREFULLY, THEY ARE NOT PERFECT)
1. Stratton Consulting Group – www.strattonconsulting.com
2. Strengths Finder 2.0 – Tom Rath
3. Food For Talk – Great Family Conversation Cards
4. DISC Personality Test or Kolbe Test
5. Financial DNA – Hugh Massie
6. Magnificent Mind at Any Age – Daniel Amen M.D.
7. Family Outward Bound – outwardbound.org
8. Myers Briggs Tests – myersbriggs.org
35
Five Steps to Healthy Family Governance
5. Healthy Family Governance
• Putting into action, horizontal thinking
4. Philanthropy
• A test drive with someone else’s money but our values
3. Family Values and Experiences
• Mission/vision – history and future
2. Communication
• Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education
• Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
36
Individual and Family Values
Daughter
Family
Tolerance and Intolerance?
Mom
SonSon
Dad
37
Mission/Vision STEP THREE
1. Working With The Ones You Love – Dennis Jaffe
Relative Solutions “Values Cards” – www.relative-solutions.com
2. 21/64 “Values Cards” – www.2164.net
3. Ethical Wills – Susan Turnbull – www.yourethicalwill.com
4. The Ten Lenses – Mark A. Williams
5. Beyond Success – Randall J. Ottinger
6. Individual and Family Mission Statements?
7. www.theheritageinstitute.com
8. Halftime – Bob Buford, etc.
38
Five Steps to Healthy Family Governance
5. Healthy Family Governance
• Putting into action, horizontal thinking
4. Philanthropy
• A test drive with someone else’s money but our values
3. Family Values and Experiences
• Mission/vision – history and future
2. Communication
• Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education
• Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
39
PhilanthropySTEP FOUR
1. Wealth In Families – Charlie Collier
2. Philanthropy, Heirs and Values – Williams/Pressier
3. Can’t Take It With You – Lewis Cullman
4. New Process of Family Giving vs. Giving to “Past Pets”
5. Social Venture Partners?
6. Micro Finance – kiva.org?, etc.
40
Five Steps to Healthy Family Governance
5. Healthy Family Governance
• Putting into action, horizontal thinking
4. Philanthropy
• A test drive with someone else’s money but our values
3. Family Values and Experiences
• Mission/vision – history and future
2. Communication
• Evaluation and discussion in a safe family setting
– Parents make “The Call”
1. Education
• Giving the family an understanding of the possible problems and solutions - context
− BNY Mellon’s experience
41
GovernanceSTEP FIVE
1. Family Wealth : Keeping It in the Family – Jay Hughes
2. Family: The Compact Among Generations – Jay Hughes
3. For Love & Money – John Ambrecht, Howard Berens, Richard Goldwater, & Tom Gorman
4. Beyond Success – Randall Ottinger
5. Family Constitution?
6. Empowered Wealth – Brower/Thurber
7. Beating the Midas Curse – Cochell and Zeeb – etc.
42
Extra Resources
For Families in Business
1. Preserving The Legacy of a Family-Owned Business – Bachmeyer & Snyder
2. Perpetuating The Family Business – John L. Ward
3. Working With The Ones You Love – Dennis Jaffe
Other Family Wealth Books
1. CEO Dad – Tom Stern
2. Navigating The Dark Side of Wealth – Thayer Willis
3. The Golden Ghetto – Jessie O’Neill
4. Money Harmony – Olivia Mellan
43
The Hard Questions – Preparing the Family for the Money• When does a person become a member of the family?
− Prenuptial agreements; a “gate in,” or a “roadblock out?”• What does “equal” mean?• What is an appropriate lifestyle, and when should it start?
− Should trusts pay for “lifestyle?” or: invest into the beneficiaries?• Should we sell or keep the family business?• What do we do with the vacation house?• What consequences should family members be subject to?
− How should WE enforce these consequences?• What “types” of beneficiaries might we create?
− How should the trust handle each “type?”• Who should apologize, who’s “right” or who’s “wronged?” …• How do we create independence AND interdependence?
The Easy Questions – Preparing the Money for the Family• How do we minimize taxes?• How do we invest the family money?
Governance Questions to AnswerSTEP FIVE
44
The Three Big Questions
1. How Much is Enough?
• The amount for which you prepare them. Preparing them for nothing is as hard as
preparing them for millions
2. When Do We Tell Them?
• When they are ready to hear it. Use “little train” opportunities to challenge them.
3. How Do We Break the Paradigm, “Shirtsleeves to Shirtsleeves in Three Generations?”
• Build flexible family teams and empower them.
46
Client Study - Wealth“SHIRTSLEEVES TO SHIRTSLEEVES?”
$
TIME
1st Generation Creation
2nd Generation Assimilation
3rd+ Generation Enjoyment
4th Generation Lamentation(Genealogy)
?Generation Creation
225 Year History
47
Wealth in Families DEFINITION
1. Human Capital – Strong Me
2. Intellectual Capital – Strong We
3. Social Capital – World Perspective
4. Financial Capital – Wealth Wisdom
James E. Hughes Jr.
48
Preserving Wealth in Families ACTIVITY AND COMMUNICATION AROUND WEALTH CAN BE DIFFERENT
1. Governance Procedures
• Family bank, family office?
2. Horizontal vs. Vertical Structure
• Rothschild vs. Vanderbilt
3. Family Philanthropy
• Philanthropy day?
4. Caring Motivational vs. Caretaking
• “Invest in you” vs. “Distribute to you”
− Loans vs. gifts?
49
Normal Family Wealth SituationA WEALTHY FAMILY’S DILEMMA
Estate Plan(Death Plan)
Partner-ships
A/B/GSTTrusts
DelawareTrusts
EducationTrusts
Founda-tions
Wills
LivingTrusts
Retire-ment Plans
Tactics by Interest(or by Necessity)
Inter-national
FixedIncome
Small, Mid Cap
RealEstate
PrivateEquity
Emerg.Markets
Private Banking
LargeCap
Insurance
Products by Defaultand Relationships
Index Funds Manager #3
Investment Broker #1
Manager of Managers #2
HedgeFunds
Consult- ant
Account-ant
Insu.Pro.
Men
tal B
arri
ers
Men
tal B
arri
ers
Concerns About Money and
Heirs
Family Charities
Family Retreats
EthicalWills Family
Mediation
Family Vision
Educationre. $$
FamilyBusiness Success-
ion
Career Counsel
Missed Family Opportunities
Attorney
Consolidated Return??Risk? Taxes? Fees??
Conflicts of Interest
Largely Funded at Death
Separated ConceptsSeparate Advisors
Informally Discussed Or Never
Done
Investments
50
Integrated Family Wealth SolutionA WEALTHY FAMILY’S OPPORTUNITY
Process • Risk Tolerance• Investor Goals• Asset Allocation• Invest. Selection• Oversight• Reporting
Process• $ Education• Communication• Family Values• Philanthropy• Governance
Charities
Family RetreatsInter-
national
FixedIncome
HedgeFunds
Small, Mid Cap
RealEstate
EthicalWills
Family Medi-ation
Family Vision
Edu-cationre. $$
FamilyBusiness
Career Counsel
PrivateEquity
Emerg.Markets
Private Banking
LargeCap
Insu-rance
Process • Family Profile• Wealth Goals• Jurisdictions• Structures • Implement
Partner-ships
A/B/GSTTrusts
DelawareTrusts
EducationTrusts
Founda-tions
CRTsCLTs
LivingTrusts
Retire-ment Plans
TrusteePartner
Coordinated Advisory Team Helps All of Us
WealthManagement
Preparing Your Money for Your Family
Strategic Investment Management
Protect and Grow Your Money
Family Education And Governance
Preparing Your Family for the Money
Asset Location
51
The Bottom Line
Simplifies your life.
• “We sleep better”
Provides better investment results for you and your family.
• Even with the same investments
This communication is intended to provide general information that is believed to be accurate. It should not be construed as legal or tax advice. Please consult with your legal and tax advisor to determine whether the information in this communication may be appropriate for you.
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