When a Family’s Growth Outpaces Its Wealth
What happens to family offices when families expand but their wealth does not? Two Pitcairn executives — Andy Busser, president of family office, and Jen Proper, managing director of wealth strategies — discuss how they are seeing family offices tackle this challenge:
What are the pitfalls for family offices as the number of households in the family grows?
Busser: The family office may start out with a founder and spouse, and say they have three adult children. That’s pretty easy. But when those adult children have adult children, the number grows to 10 or 15 households — a lot more work. And the wealth often doesn’t expand anything like that. So the amount of wealth per household goes down, but the amount of services that need to be provided — for compliance, for tax returns, for investment management — goes up. You might go from four or five investment accounts to 20 or 30 or 50, and managing all of that is an enormous amount of work.
This is not a new problem. But there were a lot of single family offices formed in the 1990s and the first decade of the 2000s, and they are hitting a point now where their viability is in question.
What are the options when this happens?
Busser: On the investment side, you have got to do two things: You have to stay diversified, and you have to stay disciplined through market cycles. You will have up years and down years, but that is the best chance you have to grow wealth. We can say this with more than 100 years of experience: The family members that get off of the disciplined and diversified track wind up with less.
On the spending side, I think where a lot of families get off the tracks is they don’t budget. Maybe their parents never budgeted because their parents didn’t have to, but then the wealth gets depleted at the next generation and people don’t necessarily have good habits at that point. And then the problem is, they run out of money.
How can the estate planning process help?
Proper: The first way to preserve or protect the wealth from outside creditors — first on the list being divorcing spouses — is to create an irrevocable trust. The second is having a trustee — someone that you reasonably expect will act in a fiduciary capacity. Those are two of the ways within the trust that help protect the wealth, not just for current generations but for future generations.
How do you see families respond to the challenge of growth outpacing wealth?
Busser: They tend to fall into two different buckets. One is families who say, ‘We’re spending way too much on this family office. Let’s figure out what services we want to have in the family office and which ones we want to go outside to get more economically, but let’s keep the family office.’ At the end of the day, they’re keeping the entity and whatever shared assets they’ve got in that entity.
The second group, which has become much more common, is when people say, ‘Let us have individual investments, individual advisors, individual paths in our lives.’ The path to autonomy is really important in a family, because a lot of people can feel smothered by the family wealth and feel like they don’t have any agency in their own lives.
How do family dynamics play into this?
Busser: Talking about money can be really uncomfortable in any family, so most families avoid it. Then people are not prepared when they start inheriting, or when they start becoming stewards of the family’s wealth.
There’s almost an inverse bell curve of approaches to inherited wealth. On one end of the bell curve are people who say, ‘Well, we’ve just got tons of money, and I’m going to spend it and enjoy my life.’ And then at the other end you have a group of people who say, ‘I don’t think I would be able to make much money in my life, and so I’m afraid of it running out. So I’m not going to spend anything.’
How can families overcome these problems?
Busser: In general, the families that we have seen be successful across generations have done a couple things: They have very intentionally set up and written down clear governance structures, so the rules of the road are very clear. And trusts are generally disclosed earlier rather than later, so that people are prepared when they have distributions, or when they become a beneficiary.
So, the two fundamentals are: have clear governance that is written down and communicate it. Talk about it frequently — make sure everybody knows what the rules of the road are. Wealth rarely gets destroyed with the wrong investments. It gets destroyed with bad communication.
Why is communication so important in avoiding these issues?
Proper: Knowing the family history and understanding how the wealth was created could become muddled across multiple generations. It’s really important to wealth creators that their descendants understand how the wealth was created and why they set up the structures that they have in place so that there’s a lack of resentment.
Also, sometimes the younger generation, if they don’t understand the wealth and the trust structures, could look to their parents and say, ‘Well, you have been able to do X, Y and Z. Why can’t I?’
So, communicating with the rising generation is critical. They want to have transparency so they can understand trust structure, what they can expect and how that will impact their financial planning. Perhaps one of them wants to do something in the nonprofit world and wants to know if they could use one of the trust structures to supplement their income.
