New research from Stonehage Fleming, one of the world’s leading international family offices, indicates that changes in family values and technology are putting distance between generations. It was found that family disputes or break-ups are the biggest risk to long-term family wealth. Surprisingly, this risk has trumped traditional financial risks such as poor investment management and tax increases. The research, titled ‘Four Pillars of Capital: Practical Wisdom and Leadership for Changing Times’, 2018, is an exclusive review and commentary based on consultation with 150 multigenerational members of different families and advisers. Participants were asked to rate what they thought were the top risks to long-term family wealth. Family disputes or break-ups came in first, which is related to failure to appropriately engage the next generation and provide them with appropriate training. On the investment side, risks mentioned include ill-advised entrepreneurial investments, poor investment management, and increases in taxation. Political risks were also mentioned more often than three years ago, when the last report was published.
“The speed of change in the economic, political and especially technological arenas has meant that family businesses are continually vulnerable to new developments,” says Johan van Zyl, CEO of Stonehage Fleming South Africa. “Businesses and financial assets can quickly become vulnerable to new developments. This requires astute leaders, able to adapt and sometimes reinvent the core drivers of family wealth.” The values of the younger generation of wealthy families are also changing. They tend to have much greater concern about the environment and social inequality than their parents and grandparents, and are also far more comfortable with technology and able to see its potential for their businesses. “This creates a risk that the strategies developed by one generation may not be fully accepted by the next,” adds van Zyl.
Despite ranking non-financial risks highly, wealthy families spend far more time, money and effort monitoring and addressing financial risks, even though non-financial risks could have severe financial consequences. This is partly because financial risks are easier to quantify and tools for managing financial risk are readily available and actively marketed by asset managers and other professional advisers. Addressing the risks of family issues is a far more complex and sensitive process for which there are few ready-made solutions. However, an increasing numbers of families are making significant efforts in this direction, addressing the need for risks to be managed across the spectrum of their affairs. Some families have developed formal risk management tools to suit their own specific circumstances which ensure all key risks are discussed on a regular basis.
The firm’s previous research report, ‘Four Pillars of Capital for the Twenty First Century’ (2015), found that a family’s tangible assets are just one part of a broader legacy. No financial legacy can survive through the generations without addressing other key issues around a family’s culture, values and the purpose of wealth. The firm identified four pillars of capital that are key to the long-term sustainability of family wealth:
Financial capital, which comprises those tangible assets, business and intellectual property of the family that have quantifiable financial value.
Intellectual capital. This is the accumulated skill, knowledge, experience and wisdom a family has accumulated, which it can apply to the management of its wealth, its contribution to society, the individual fulfilment of family members and the collective wellbeing of the family. Social capital is the way in which families relate to and engage with society and the communities in which they live and operate. Finally, cultural capital is what brings families together by identifying shared perspectives and themes in the way family members conduct their lives, their approach to business, the way they treat others, the way they contribute to society, their attitude to wealth and the things they value. “Significantly, since our 2015 report, several families have invested considerable resources into converting some of the ideas around the Four Pillars concept into practical management tools,” van Zyl concludes