Family Office Exchange supports wealthy families and their advisors in mastering the unique challenges of managing family wealth, operating family offices, and planning for future generations. Stronger families through learning and trusted relationships. Family Office Exchange (FOX) focuses on wealth management and family education for wealthy and business-owning families.
There can be immense pressure surrounding the college application and acceptance process. For students, this decision is concentrated on the right school, the right academic program, and a desire for the right “fit.” For many well-meaning parents it’s important that your child is in the best possible environment that will ensure success, appropriate developmental growth and catapult them into a lifetime of personal and career success. These are weighty issues. It’s the genesis of adult life, independent of parents.
As we have all read, some parents took that duty too far. We’ve graduated from helicopter parents, to snowplow parents, to the parent that guarantees college acceptance through bribery. This recent scandal, ensuring that students from prominent families get into elite schools and research universities, strengthens an unfortunate rhetoric around wealthy families using money to influence.
While the notion of “in loco parentis” (in place of the parent) began with the early American universities, today’s effective student success models require that students take responsibility for their own behavior. Nowadays, the way educational institutions act in the best interests of students looks quite different. Through empowered choices, young adults can become good decision makers who feel personally responsible for the choices that will affect their future.
At FOX, we believe that knowledge is key to empower future family leaders and are excited to present a strong curriculum and multi-faceted engagement model to the rising generation population. As a result, we’re designing courses for a FOX Family Learning program that is rooted in strong personal identity and growth modules as well as strong leadership practices. We plan to assist emerging leaders to rise independently.
As parents, mentors, and guides it is important to identify how we can help young people travel down an informed and ethical path. What are the best resources? Where should you seek help and how do you know you have enlisted a trusted advisor?
CollegeWise is reputable company that employs counselors and consultants with wide areas of expertise from finding the right college fit to writing college essays.
This newly released book Countdown to College: The Essential Steps to Your Child's Successful Launch written by Monique Rinere. Rinere was the founding dean of Harvard College's Advising Programs Office at Harvard University, has a long college advisory career and is a three-time Ivy League dean. She currently serves as the Associate Vice President at The New School in the heart of Greenwich Village.
Make the most of your networks. Most guidance counselors are well-connected to coaches. Connect with the counselors at your schools. Connect with your alma-mater. Legacy admissions based on alumni status are a safe way to utilize your university connections.
Don’t forget the valuable resources that exist in FOXChat and FOX Networks. Members can pose a question that hundreds of other members can see, and get their guidance and resources. Remember, many others have gone through, or may be going through, the same issues.
Use common sense. Good old-fashioned meetings, phone calls, thank you notes, and campus visits help applicants stand out, on their own. This teaches valuable life skills, ensures personal satisfaction, and a sense of achievement that money can’t buy. Use your moral compass if you are asked to do something that feels dishonest, or to excessively contribute financially.
In tandem with the college admission search, consider aptitude testing to help the student learn more about themselves before jumping into a major life decision. Johnson O’Connor Research Foundation “is a nonprofit scientific research and educational organization with two primary commitments: to study human abilities and to provide people with a knowledge of their aptitudes that will help them derive more satisfaction from their lives by discovering their natural potential.” Knowing Thyself – will serve a young freshman well during a key transformational life stage.
Other Questions to Consider:
Are you allowing your child to begin to make adult choices, independent of you?
Are you accepting of the school your child would like to attend? Or are you placing unnecessary stress on getting into the “right” school?
Have you set high expectations, and left your student to meet them? According to a blog post by EAB “…high parental expectations can be linked to better academic performance.
How are you “letting go” and helping your child thrive separate from the family name or family money?
How can you allow your child to spearhead this process, demonstrate leadership, organization and determination?
FOX Councils provide an exclusive, small-group setting to share knowledge, discuss experiences, and gain insights. Our FOX Financial Executive Council, consisting of CFOs, controllers, and tax managers who work in family offices, met in January. We asked one of the Council Chairs, Jane Flanagan, to share what’s top of mind for these members.
Q: One of the great benefits of the council is that members have the opportunity to share their challenges and what’s top of mind for them. Can you share some of the top concerns?
The councils are very much a safe, confidential space, but I can share some very high-level themes. Tax reform is top of mind for everyone. Other topics that we discussed were strategies for onboarding family office board directors, client satisfaction surveys, and advice for training older family members on technology.
Q: You curate the topics for the council agenda based on feedback from the group. What topics did you discuss in January?
We covered a number of topics, hearing from both industry experts and council members sharing their knowledge and experience:
One of our council members shared a case study about how their family office conducted a best practice insurance review with an independent consultant,
An industry expert shared an overview of how tax season will be affected by tax reform,
FOX provided an overview of our proprietary research on compensation and benefits, and
An industry expert discussed how automation can improve efficiency and free up staff to focus on high value activities.
Q: What were the key insights on these topics?
There were a few items that were noteworthy:
The case study on the insurance review was very informative. One thing that stood out for me is that, while family members may have personal relationships with their providers, looking at coverage across the broader family allowed them to identify coverage gaps and secure better coverage for a better price. I think this is a great reminder for families that periodic insurance reviews are a good idea.
The bad news from the tax discussion is that reform didn’t actually make the process easier. A key takeaway is that you can expect to spend more time preparing and, as a result, will likely see higher accounting fees.
A key takeaway from the Compensation and Benefits Survey is that family offices benefit from long-tenured staff. However, leaders need to focus on the future and how they will attract new talent as more executives get closer to retirement.
While many families are still in the early stages of thinking about automation for their offices, our expert predicts that by 2025 bots will be as common as excel. This is definitely something worth thinking about now.
Q: If someone in a financial executive role is interested in networking with other true peers at FOX, what would you recommend?
I’d suggest a couple of things:
This council provides a unique opportunity to build relationships with peers who understand what you do every day and share your challenges. Our next meeting is July 15-16 in Chicago.
The season for entertaining is here — Thanksgiving, Christmas, Hanukah, New Year’s Eve, the Super Bowl, all great reasons to get together with family and friends. In addition to the excitement of planning, organizing and hosting a social event, the importance of managing risks associated with entertaining, especially at home, is essential.
When hiring vendors — from event planners to decorators, caterers, servers, entertainers, and cleaners, it is important to properly vet each person who will be involved in the event and coming into your home. References from friends and families are a good place to start, but the process shouldn’t end there. Background checks can identify potential issues, such as criminal history, incarceration, security risk, and sex offender information. In the event of an accident or injury caused by a vendor, your assets may be at risk if the vendor does not carry proper insurance protection.
Vendors, including entertainers, who will have access to your home or the venue should carry their own liability insurance and be required to provide a certificate of insurance reflecting their general liability, automobile liability, and workers’ compensation coverage, if applicable. Vendors who use subcontractors should provide confirmation that they only use insured subcontractors. Taking these steps before the event can prevent issues that may otherwise take years of litigation to resolve.
Specialty Coverage Needed for Dynamic Pyrotechnic Performance
The following story is about a holiday party that included entertainment with dramatic pyrotechnic elements to delight the guests. The host rented out all of the meeting space in a luxury hotel and worked with the catering manager and a party planner to create a party for friends and family with separate entertainment areas around the hotel property for dancing, children’s play, and quiet areas for conversation. The party theme was highlighted in the invitations, decorations, and food choices, all culminating in a performance by a troupe of entertainers that were being flown in from outside the country.
The hotel required that the host provide event insurance and the client turned to me for assistance. I asked for details about the event and learned that the entertainers were being flown in from another country, did not have their own insurance, and would be incorporating pyrotechnics in their performance. All of these made this a high-risk event for everyone involved. I was able to secure coverage through a specialty insurer who required that a local pyro technician inspect and certify the equipment, and the hotel required the approval of the fire marshal before the event.
Effective Risk Management Practices Creates a Safe Celebration
The host, who was unaware of the hotel’s requirements and had planned his entire event around the entertainment, became very concerned that his party would not go as planned. Everyone met the morning before the event, and as the entertainers removed their equipment from their vehicle, the pyrotechnician shook his head and advised the host that the tubing being used in the drums and costumes was not rated for the type of gas being used. As a result, the fire marshal could not approve the performance. I discussed the issue with the pyrotechnician and we arrived at a solution. The pyrotechnician agreed to take the equipment back to his shop, replace the tubing, and train the entertainers on how to use it.
Later that day, and just hours before the event, the pyrotechnician certified the equipment, and the fire marshal approved the event. The party went on as planned and the guests enjoyed the elaborate event and spectacular entertainment.
Because this event was being held at a hotel, the host was required to focus on risk management, and the proper precautions were taken to ensure the safety of the guests and the hotel property. However, had this event taken place at his home instead of the hotel, the outcome could have been very different if he did not think to include risk management considerations in his party planning.
Not all parties involve the degree of risk that this event presented, but this story highlights the need to incorporate a knowledgeable insurance advisor into your party-planning process so you and your guests can enjoy a fun, festive, and safe celebration.
Paulina Cromwell, CFA, Manager, Knowledge Center, Family Office Exchange
Everyone these days is talking about “impact investing”. A Google search returns over 150 million results for the phrase. There are hundreds of investment managers managing over 1,000 sustainable or impact investment funds.1 But is impact investing here to stay or just a fleeting fad?
Spoiler alert: Value-aligned investing is the future.
How it manifests itself will evolve over time and may depend on the role of each of us play in the ecosystem (as a family member/private investor, family office executive, or advisor). But it’s safe to say that impact investing is here to stay and impacts all of us.
A quick reference on key terms:
ESG: Environmental, social, and governance issues; often, an additional layer of screens added to investments (ex: "do no harm" by eliminating investments that have low ESG scores or "seek those who do good" by investing in companies with high ESG scores)
Impact Investments: Investments that intentionally seek financial returns and social / environmental returns; expectations for both types of return may vary but are not mutually exclusive (ex: some investments will offer slightly lower investment returns relative to market and/or lower social return relative to philanthropy)
1. Investors want it
In a recent survey by U.S. Trust, ultra-high-net-worth individuals and families indicated that living true to their values is their #1 life goal. They also shared that after ensuring financial security for self/family, their primary motivation for creating and building wealth is to help others – through philanthropy and creating economic opportunity.
Six in ten people said that a company’s track record on environmental, social, and governance (ESG) issues was a key factor in their investment decision-making process. It was especially crucial for nine in ten millennials,2 who are committed to aligning their investments with their values.
Why is this important? Well, 69% of Family Offices expect to undergo a wealth transfer in the next 15 years.3 And according to research by Oppenheimer Funds, the first thing millennials are going to do with the family portfolio is increase impact & ESG investments and incorporate ESG factors into the overall benchmark.4
Family Office executives, investment advisors, and businesses seeking investment need to understand investor preferences and decision-making or they will be left behind. Not to worry – we are here to help (and even working on a “How To” guide).
2. Transparency is raising the bar across the board
We live in a time where the internet, social media, and 24/7 news coverage means that information travels wide and fast. Just the other day, Elon Musk smoked marijuana during an interview on a live late-night video podcast. The following morning, Tesla stock dropped almost 10% at the market open, costing investors over $3 billion in a day.
It only took two weeks for Volkswagen to lose nearly half of its market value following the admission of cheating carbon emission tests. Three years later, they have yet to recover.
Today’s increased transparency and speed of information delivery is raising the ethical bar for companies across the board. You better believe that no other organization wants to experience that kind of public humiliation or spend years earning back the trust of its investors.
Additionally, the SEC now requires that every company report set metrics on environmental impact, social issues, and governance practices in their annual filings. This additional information gives investors and others in the business community an objective way to assess and compare public companies.
3. It’s good for business
The legal obligation of a business is to pursue the interests of shareholders (which are typically to generate a profit). So should they be worried about impact even if shareholders aren’t demanding it? Absolutely – it’s good for business.
Several studies have shown that the best-performing public companies have better ESG ratings than the worst performers. The jury is still out on which specific metrics are best indicators of future performance, but in general, companies that treat their employees, communities, and investors well should do better in the long run. If you’re still not sold, Larry Fink (founder and CEO of the largest investment firm in the world) wrote a letter to CEOs of public companies earlier this year, reminding them to include impact as part of their business strategy if they wanted to remain competitive and relevant. This was a huge step for the investment and business community – bravo, Larry! (Also, be on the lookout for a deeper dive from us on this topic, coming soon).
But what about private businesses and new ventures? it turns out, “impact-themed” businesses are almost inherent in modern entrepreneurship. Why? It can be partially attributed to the demographics of up-and-coming entrepreneurs – many are millennials with a dual impact and business agenda.
But more importantly, successful ventures solve a problem or fill a gap that others have not yet. Where are those gaps in products or services? We are certainly not short on designer cat sweaters or scented candles. What the world is short of however is clean water, accessible healthcare, and reliable infrastructure. An entrepreneur who can find a way to fill one of those gaps in a profitable way is going to make a lot of money – for themselves and their investors. The bonus happens to be that those products/services enhance the lives of people all over the planet.
4. The industry is maturing
Let’s go back to those investors who are actively seeking dual returns (remember, an impact investment intentionally seeks both financial AND social/environmental return). Many of these investments do succeed, but sometimes only on one front (as in, “congratulations, we achieved a 20% return but aren’t much closer to eliminating child homelessness”). Despite their best intentions, many investors end up settling for success on an OR basis, not AND.
But how does one measure AND? Financial return is straightforward, but what about the rest? In the past, many philanthropists and “impact investors” relied on blind faith that their dollars were in fact making a tangible impact. They’d periodically get a postcard with a child’s smiling face on it and have to hope that was representative of the truth.
Over the last several years, there has been an increased focus on measuring the social and environmental impact in a quantitative, analytical way. Experts in the philanthropy and investment fields are working together to apply the same rigor of investment analysis to the impact side. As this continues to develop and the ability to accurately and quantitatively evaluate both types of return becomes achievable and comparable across investments, these factors will become an integral part of the due diligence process.
So, have I convinced you yet?
Some things may vary – the definition of impact, opinions on the subject, and the role they play in the investment ecosystem. But one thing is for certain – impact investing is here to stay.
Be on the lookout for upcoming publications on value-aligned investing across the family enterprise.
US SIF Foundation: Report on US Sustainable, Responsible and Impact Investing Trends 2016
2018 U.S. TRUST Insights on Wealth and Worth®
Lenok, D. (2017, September 15). Charitable Giving. Family Offices Anticipate Change. Retrieved from www.wealthmanagement.com
OppenheimerFunds and Campden Wealth - Coming of Age: The Investment Behaviors of Ultra-High-Net-Worth Millennials
We brought together industry experts to discuss three key areas of security: personal, physical, and cyber. Each presenter flagged examples of security risks and how criminals continue to evolve and improve their techniques. Currently, cyber-crime alone is a trillion-dollar industry. As one attendee commented, “be prepared to be scared.”
While there is much out there to be wary of -- the good news is that it’s not all doom and gloom. Being aware of the threats is the first step in preparing a robust risk management plan. The workshop provided ideas for developing security policies and best practices that can be the first step in protecting the safety of the family. Here are three key items to consider:
1. Plan Ahead
Take the time to create a protection plan that touches on all aspects of security for the family. It’s important not to wait until a crisis happens to put a plan in place. A security process should be approached just like the process for evaluating business and investment risks. A thorough, objective, professional risk assessment will identify real and relevant risks based on each family’s mix of assets, lifestyle choices, and other factors such as public profile.
Once there is a good understanding of risk, urgent items should be addressed, and mitigation strategies can be put into place for others. Always get buy-in from family members and review on a regular basis, especially as there are lifestyle changes such as children getting older, families growing, marriages, and divorces. One key part of the plan is to cultivate a list of security partners in case of an emergency. It’s easier to pick up the phone during a crisis if you have already developed relationships with your vendors.
2. Use Your Best First Defense
When it comes to security, families and employees are the key to success. The best way to fight a security issue is to avoid it. Families and employees should be trained to be part of their own protection. Training in situational awareness and how to avoid threats can be extremely valuable.
It’s also important to create a culture of security with employees. Go beyond annual security awareness training and focus on establishing an understanding with employees of how to manage security risks. Also, train household staff to participate in security – from the gardener to the nanny. They’re in a strong position to see things that other family members may not, and they should be trained to look for patterns and unusual activity and know that “if they see something, they should say something.”
Common Security Scams
Phishing – emails aimed at luring recipients to click on an embedded link (which could trigger a malware installation) or surrendering confidential information such as passwords or credit card numbers.
Spear-Phishing – attackers gather specific personal data and often impersonate friends or business associates (including mimicking their email addresses, a tactic called “spoofing”) in order to craft an especially realistic message.
Vishing – telephone-based phishing scams to gain access to confidential information.
Smishing – text-based phishing scams to gain access to confidential information.
Social Engineering – manipulation to gain access to secure areas using psychological tactics either to avoid appearing as a security risk or to convince people not to enforce security procedures.
3. Be Vigilant with Technology
As our homes and offices become cluttered with network-connected devices ranging from televisions to smoke alarms to smartwatches and refrigerators, the number of potential entry points for hackers proliferates. As a safeguard, keep a list of all network-connected devices and make sure to check periodically that each device is patched with the latest available firmware.
Unsecured public Wi-Fi networks can be very handy – but also very dangerous if there’s a cyber-criminal on the network. As a safeguard, use a Virtual Private Network (VPN) to access the web. A VPN acts as a protective, encrypted buffer between your device and the rest of the people using the network.
To best mitigate damage from a future attack, consider encrypting and backing up your data, as well as instituting strong application- and device-level security. Encrypting your sensitive data means that even an attacker who gains access to the network will struggle to get their hands on the most valuable information. Backing up your data provides a strong defense against a ransom-based attack and means that your data is safe in case you lose control of a device.
As for login and password management, there are several tips that can both help protect your accounts from an attack and limit the damage of a breached account.
Be inconsistent - don’t reuse a login name or password. Password management programs such as 1Password, Dashlane and LastPass are a good way to generate complex passwords that are unique for each of your online accounts. As an alternative, use long sentences with slight variations, such as “I like summer because it’s hot and baseball.” Long passwords are much more difficult to crack than short ones, even when the short ones appear more complex.
Whether you use a password manager or make your own, it’s crucial to change them regularly—and not to store them in an unencrypted document with obvious names such as “Passwords—2018.”
Don’t telegraph your location on social media. For criminals, knowing you’re away on vacation alerts them to opportunities. There’s always the option to post the photos when you return (#latergram). For high-level cybercriminals, social media can be a gold-mine for social-engineering and spear-phishing attacks. Limit what you disclose and apply strong privacy filters to accounts.
Ultimately, a security program that is strong enough to prove resilient against attacks must rely on established security best practices and the education of the families and employees. Breaches may continue to grow in volume and sophistication, however, it’s possible to safeguard the family.
Miguel López de Silanes, Managing Director - Europe and Latin America, Family Office Exchange
Latin America has been one of the most dynamic regions of the world in the last two decades, experiencing strong GDP growth and wealth. During this time, many of the region's family owned firms have also become strong and innovative global firms.
Family Office Exchange has been working with many families from Latin America who are seeking connections with families from other regions in an effort to exchange best practices for operating and sustaining their family enterprises in the future. From our work with these families, we have identified a series of trends that should be of interest to families around the world.
The following are excerpts from the original article that appeared in the Summer 2018 edition of Family Office Magazine, the leading UK magazine on the Family Office and the Wealth Management space.
1. Development of a Family Enterprise Mindset
Many of Latin America´s leading business families have evolved into Enterprise Families over the last 2 decades. An enterprise family is defined as a family whose holdings have grown beyond the core family business and now include liquid investment capital (often managed by a family office), family capital (the talent and human capital within the family), and philanthropic capital. Becoming an “enterprise family” implies managing a much higher degree of complexity and at the same time, provides an opportunity to become a more solid and enduring entity, as it requires spending more effort and time on issues like the joint values and the shared vision, fostering family unity, developing human capital and creating a governance system that is aligned with the shared vision and the higher complexity. This model implies the family enterprise leadership and the Family Office must focus on the more strategic issues.
2. Improved Governance Systems
The higher complexity mentioned before as well as the changes in regulation and in society have led to much more professionalized family governance systems. In Latin America, most families have separated the family assets from the business assets and have created a family office to manage their financial assets. In addition, most families have formalized a family assembly and a family council comprised of the more active family leaders. Most family firms also have a board of directors for the family holding company and many of them also have a board at the family office level. All of these boards are increasingly becoming more formal and professionalized, with a growing number of external non-family board members. Finally, a great number of families also have a family charter in place. The key issues that still need improvement in the region are formalizing governance further, moving away from the monarchical style of decision making, aligning the interests of all stakeholders and increasing the number of external board members.
3. Increased Engagement by the Next Generation
The key priority and concern of Latin American families is preparing the next generation and managing succession issues. As a result, families are starting to implement ways to engage the next generation, ranging from including them in the development of the family enterprise vision, participating in management in the family business or direct investment ventures, serving on governing boards, and taking a lead role at family assemblies. Most Latin families are also starting to realize the importance of the need for additional training programs tailored for the development of specific skills, behaviors, and attitudes – including developing the purpose, the values, and the family vision needed to become a responsible owner.
4. Increased Focus on Risk Management
Even though risk management was always at the heart of every Latin American family, given the region´s long history of inflation, currency devaluations, political instability and even physical security concerns, families have realized in recent years that the world – even in its apparent balance – is a much riskier place. Hence, they are increasingly managing risks holistically. The major risks identified by the families in the region are financial, next gen related, market conditions, other family risks and geopolitical events. Families are working on mitigating these risks through measures such as thinking in terms of goal-based asset allocation, diversifying their businesses in terms of geographies and market sectors, increasing their cash, working early on successions, improving governance, nurturing human capital, and making sure family structures are fully compliant.
Many parts of Latin America developed isolated from the rest of the world over the last two centuries. In the last years, however, the region´s families have globalized their businesses and investments and overcome their historic home bias. These families have also started interacting much more and co-investing with the other global families. Some family offices have also opened small satellites in the U.S. and Europe while others have completely moved their headquarters abroad, realizing that their home countries are now too small for their new global scope.
6. Increased Transparency and Compliance
Latin American business families are becoming increasingly transparent and compliant given multilateral agreements aimed at sharing tax and financial information, new rules requiring the identification of the ultimate beneficial owners, various cases of data leaks and society´s changing attitude towards businesses that are regarded as not contributing a fair share of their profits in the form of taxes. All of these trends have created significant reputational risks, and as a result Latin America´s families are reducing complexity in their structures, changing domicile countries, using insurance-based solutions and executing successions early on.
7. Increased Commitment to Society
Latin families have stepped up and started taking their commitment to a higher level by launching Impact Investing efforts and becoming “impact business” or “impact families”, which entails embedding the impact goal into each of the phases of the enterprise value chain. In this respect, B Corps are becoming increasingly popular, with initiatives throughout the region. Some families have moved a step beyond, taking part in joint public/private initiatives aimed at fully tackling key social issues.
Overall, Latin America´s business families have progressed enormously in the last few years, paving the way for an increased likelihood of success and survival over the long run, and for an increased impact in their societies.
Emily Bouchard, Strategic Wealth Coach, Ascent Private Capital Management
Families that have accumulated significant assets want to know how to best prepare the “rising generation” to help them maximize the benefits available to them, while also minimizing the unique challenges that occur when navigating the world of wealth.
Younger family members may have different approaches when it comes to family wealth. Understanding where these approaches come from is essential when creating an effective family education program. Consider these family members to be on a continuum with engaged learning in the middle. People who fall in the middle are interested and eager to learn how to be excellent stewards of wealth.
Members of the rising generation who are proud of the family’s accomplishments and related wealth resulting in a positive relationship with the family’s financial means, can be empowered through education to be in a better position to help the wealth endure and even to grow it for future generations. For those further away from center on one extreme, their identification with being wealthy can result in them becoming overly generous with their friends (or to be overzealous or imprudent in making new friends). If left without redirection and guidance, they can end up moving from enjoying their purchasing power to carelessly over-spending and running up debt. They tend to believe that the money is theirs and will always be theirs: they are in danger of falling into the trap of entitlement.
"By starting with values— the most important driver of human capital—the family will have greater ease of relating and discussing all that is involved in learning how to be excellent stewards of their financial capital."
On the other end of the continuum, family members may be conflicted about family wealth and will need support to understand their love/ hate relationship with it. They often want to hide the fact that they are from a wealthy family. Although they might enjoy elaborate family trips and staying at luxurious resorts, they do not want their friends or coworkers to know that they flew on a private jet or attended a family financial meeting. For them, being associated with the word “wealthy” can make them feel anything from awkward, to personally slighted, to the extreme of being downright offended. They want to avoid being associated with anything related to money and can become susceptible to being taken advantage of or of being blithely unaware of how much they are giving away to charity.
How do you engage family members with a spectrum of beliefs, feelings and attitudes about money and wealth?
To engage family members of all ages, with their disparate beliefs and approaches to money, the best place to start is with what matters most: values. Our behaviors are guided by underlying core values. We become easily offended when our core values are not respected, and yet we may not always be living up to our expressed values ourselves. Since our core values are often subconscious, we do not readily access them or articulate them when making decisions or taking actions.
If someone is conflicted about money and has a negative reaction to being known as wealthy, they have a core value that is at stake. Before you can begin to talk about or instruct about money with them in a meaningful way, you need to know what that value is. The same holds true for someone who overspends and does not make good decisions for saving or investing. Clarifying which of their values are driving their uncontrolled spending, or a lack of understanding the importance of saving, is essential before you can begin a conversation about budgeting and wealth stewardship.
Engaging a multigenerational family in activities designed to reveal their shared core values helps everyone understand what drives the family in terms of making money, investing money, saving money and giving money away. As a wealth sustainability coach, I work with an interdisciplinary team to help families elucidate their values through a number of engaging activities. I highlight three favorites below.
1. Family History Cards – designed and curated by Karen McNeill, our family historian, with fascinating images on one side and questions on the other to elicit conversation and exploration of where family values originated.
In one family, using the cards gave a daughter an opportunity to ask her mother questions about her mother’s childhood growing up in three different countries – something her mother had never talked about in any detail.
In another family, a father shared stories about his experience of growing up destitute, and how he vowed to make sure there would always be more than enough money for his family so they would never lack anything.
Activities like this facilitate meaningful storytelling that helps family members understand what motivated past behaviors. These activities also provide families the ability to step away from a “don’t ask, don’t tell” approach toward more open dialogue about what has shaped the family’s current values.
2. Money Paths – various versions of this exercise have been developed by several organizations, including our team at Ascent. During this activity, family members each draw a map of their most impactful experiences with money—from their earliest memory to the present day. They then share their money-story with the rest of the family through guided facilitation. As the stories unfold, connections are revealed between the choices made and the values that generated the initial behaviors, allowing individuals to see how their core beliefs and values relating to money were formulated.
For instance, a woman remembered how, when she was nine years old, she would sneak an additional thirty-five cents from her mother’s change purse along with her twenty-five cents for milk so that she could buy her favorite treat at school. She recalled how hurt and upset her mother was after discovering that she had been knowingly taking more money than her mother had allowed. She saw how that breach of trust affected her mother, and that caused her to develop a belief that it was wrong to not only take from others, but that it was also wrong to ever want more for herself at all. She realized how her conflicted relationship with money started at that young age; however, after the facilitator reassured her that ninety-nine percent of children engage in similar acts of petty theft as part of normal child development, she was ultimately able to overcome the guilt she had felt for decades. Once free of the negative emotions stemming from her childhood experience she subsequently had greater comfort addressing issues of wealth.
“Wealth needs to be addressed not only in financial terms, but also in social, intellectual and human terms.” – James Hughes, Jr.
3. Values Clarification – using a color-coded system of cards and stickers, family members from multiple generations experience an easy and enjoyable way to clarify and articulate their personal values while delighting in the visual representation of groupings of shared values. They get to view the colorful ‘values pyramid’ each family member creates for a vivid snapshot of what themes and priorities matter most in the family.
The values-clarification process often surprises families with how transformative it can be for relationships with each other and with money. For example, in one family where the mother had a contentious relationship with her adopted daughter, they discovered that they shared many values with similar priorities: they just had different ways of expressing those values.
In another family, a mother’s top core value of ‘beauty’ gave her family members a better understanding of what drove her relentless desire for order and tidiness and how unnerving even a little clutter could be for her. There was a new respect for her value that helped her family members be less reactive and helped them articulate their boundaries and needs in relationship to hers. Their overarching value of ‘family first’ made it possible for them to change their way of relating to one another to allow for greater ease of self-expression while remaining mutually respectful.
By first defining and articulating individual values and then clarifying and aligning family values, families establish the foundational cornerstone of their communication and education plan. Once this is achieved, the family can be assisted in connecting their family values with the family “valuables,” while also developing a shared framework for learning about finance and building skills to make shared financial decisions. As James Hughes, Jr. writes in his seminal book, “Family Wealth: Keeping it in the Family,” wealth needs to be addressed not only in financial terms, but also in social, intellectual and human terms. By starting with values—the most important driver of human capital—the family will have greater ease of relating and discussing all that is involved in learning how to be excellent stewards of their financial capital.
A family vacation home is meant for families to spend time together, create new memories, and watch their children, grandchildren, and possibly great grandchildren grow. The home may also be a wise investment. But for most families, it’s first and foremost a place for enjoyment. Yet as many families find out, the very space designed to serve as a family sanctuary can quickly become stressful as disagreements over the specifics of how it will be enjoyed arise. When first generation owners begin to create a succession plan for the home, these disagreements often intensify.
Vacation homes and other shared properties present a unique challenge for families looking to successfully transition the home from one generation to the next. Most inheritance items either don’t carry emotional value or are physical heirlooms, such as jewelry, furniture, or even cars, that can’t be divided among children or other family members. A family vacation home is a considerable asset that carries significant emotional value as well. It’s also one of the few assets that can be shared and used by multiple inheritors.
What’s more, the family vacation home virtually always incurs ongoing expenses, including taxes, maintenance, insurance, and mortgage costs. These expenses create additional complications for family members who may have different priorities and financial situations. What happens when one family member wants to renovate the kitchen, but another either doesn’t want to or doesn’t have the resources to do so?
In most families, first generation owners play a crucial role in setting up the framework for how the home will pass to subsequent generations.
There are many different techniques and ownership structures that may be appropriate for a family given the unique attributes of the property, current owners, value, tax basis, and goals. These structures often need to be flexible so they can be adjusted to meet the needs of future generations.
Facilitating a Discussion on the Family Vacation Home
Family leaders are often best suited to initiate and lead discussions surrounding a family vacation home succession plan and its ongoing use, particularly if they were involved in purchasing the home. However, sometimes using a third-party facilitator may be more appropriate. Whenever possible, it’s best to conduct these conversations with all concerned family members present – perhaps at the beginning or close of the vacation season or during Thanksgiving. To maximize the effectiveness of the meeting, family leaders should also follow these best practices:
Schedule a time – Selecting a specific date and time gives family members a chance to prepare for the meeting and creates a structure for the meeting
Create an agenda – Establish issues to discuss with talking points in mind to keep the conversation from getting derailed
Establish goals and a timeline – Clear objectives and a timeframe for next steps will keep family members focused on identifying solutions that all family members can agree to
Be good communicators
Allow only one person to speak at a time
Give all family members enough time to express their viewpoints
Respect others’ opinions even if yours is different
Be fully engaged. Eliminate outside distractions during your conversations
Pay attention to other people’s body language for a better understanding of how they feel
Tips for family leaders
Know what your involvement in the home is going to be. Depending on where you are in the cycle of succession planning, make sure you state how you want to be involved going forward
Clearly explain your hopes and expectations for how the home will be used in the future, but be open to the input and suggestions from other family members. Understand you cannot force closer relationships through shared ownership. In fact, sometimes shared ownership can have the opposite effect. Make it clear to family members which aspects of any agreement are final and which are up for discussion
Lead the discussion to make sure the conversation stays on point and everyone has a chance to contribute
Tips for family members
Prepare for the meeting by identifying the issues that are most important to you and be prepared to discuss those topics in depth
Limit the amount of pre-meeting dialogue that may impact the perception that an honest discussion is not desired as decisions have already been made
Recognize the value of compromise in finding solutions that work for all family members
Questions Your Family Should Discuss
Who will inherit the home?
Will Generation 1 allocate funds for taxes, upkeep, and other ongoing expenses?
Will each owner have an equal share?
What is the process if family members want to sell their portion of the property?
What happens if a family member cannot afford to pay ongoing costs related to their share of the home?
Will the home be rented out or just used by family members?
If it is rented, will income go toward maintenance?
How will additional money be distributed?
How will future disputes be resolved (majority vote, outside arbitration, etc.)?
How will family members decide on maintenance and improvement projects?
How will decisions be made about decorating, design, and landscaping?
How will the family select lawyers, accountants, insurance representatives, real estate agents, and other professionals for services related to the home?
Will family members who take on additional responsibilities (coordinating with family members, point person for rentals, etc.) be compensated in some way (monetary, increased use of home, etc.)?
How will taxes be prepared and paid?
How will insurance be procured and paid?
How will major repairs be paid for?
How will maintenance be paid for?
How will landscaping, cleaning, and upkeep be paid for?
Are family members allowed to bring their pets?
Are guests permitted?
Will the home be in use all year or just during a vacation season?
Who will “open” the home at the start of the season?
What will “closing” procedures include? Who is responsible for those activities?
Will stays be scheduled on a master calendar for the season?
Will stays be bi-weekly, weekly, weekends, etc.?
How will “prime” weekends (Memorial Day, July 4, Labor Day, etc.) be handled?
Who will pay to replace broken items?
Are family friends allowed to use the home?
Must a family member also be at the home?
Can children bring their friends?
What condition must the home be left in after a stay?
KC Forsythe (FOX) and Steve Herlihy, Senior Partner, Wellspring Associates
What is the difference between a life insurance review and a life insurance audit? In this episode, Steve Herlihy at Wellspring Associates sheds some light on why it might be time for your family to consider a life insurance audit, and outlines some life insurance basics that younger-generation family members should know.
KC: So, life insurance. I know a recent conversation that FOX had with Wellspring touched on the difference between a life insurance review and a life insurance audit, and that families should know the difference. So it's great that we have you here to shed some light. I wasn't aware until recently that there was a difference. So please tell us, what is the difference between a life insurance review and a life insurance audit?
Steve Herlihy: Well, certainly. You know, it's funny because we work in the family office space, have for years, and we have lots of conversations with family office executives and family members. And what we find is that most of them are completely unfamiliar that there even is a difference. And so, let's just define them. Obviously, a life insurance review is simply performed by the person who placed the coverage. And they mainly focus on the performance of the policy or the carrier and it's completely life-insurance focused, as you would expect.
But differently, a life insurance audit is actually performed by somebody that has dual experience in both advanced planning and life insurance. So, it's kind of like if the person who crafted all of your complex planning was also the most knowledgeable life insurance expert in the country. And they were reviewing your life insurance plan with the knowledge that they have from a planning perspective. That gives them an opportunity to look for missed opportunities. It also gives them a way to look for ways to simplify how it fit in to the overall planning. And so what we find is that they’re just completely different and most people weren't even aware there was a difference.
"People thought that just reviewing it was enough. And I think it was kind of that old adage of 'what you don't know can hurt you.' I think people just didn't know there was a difference."
KC: Oh man, yeah. That seems really important. So have you found that this is a big deal? Are families surprised?
SC: You know? Yes. It's interesting because most families, going in, they’re not even sure there really is much of a difference, so they're not even sure what to expect. But maybe, I could just give you a couple of quick examples that might sort of illustrate what we're talking about.
KC: Yeah, that’d be great.
SH: I was working with the family and we were actually hired to do all their advanced planning, and so in the course of that we were reviewing their life insurance. And the family had three policies and they added up to $70 million. And so, there was a $30 million second-to-die policy of mom and dad and it was owned in her trust. And it was a non-generation skipping trust. And then they had $20 million policies on their children, and those were owned in generation-skipping trusts. So, why did this really matter?
So the first thing we did look at, just like a life insurance agent would do in a review, we looked at the policies and they were the best. They had premier companies, they had a premier product—they were just fantastic and there was really no opportunity to help them improve the life insurance policies. But, based on the net worth of the family, what we figured out is that when you have $30 million in a non-generation skipping trust, that's $30 million that's going to be taxed in the kids’ taxable estate. And with a 40% tax rate, that's a $12 million tax that's completely avoidable. And also, which is even more interesting to me, is that it sounded like the kids had gotten it right because they put their $40 million of insurance in a generation-skipping trust.
"What you find is that for a lot of folks, what you uncover clearly just dwarfs the nominal cost to have somebody really drill down and look at it."
But again, because as an audit, we’re looking at all the details. So, I had asked the family to let me talk to the CPA to get a copy of the gift-tax return so I could make sure the proper allocations were made so that everything was done properly. And, KC, you probably won't be surprised, but the reason we're giving this as an example is that there was no allocation of generation-skipping exemption. So, the long and the short of it is, that was $40 million that was also going to be taxed at 40%. So, you take $12 million and $16 million—that's $28 million of tax savings on a $70 million portfolio that had nothing to do with the life insurance policies. So that’s just one example, but it is a big deal.
Imagine being the trustee of a trust, and let's just say it had $30 million of insurance in it, just to pick a number. And imagine that you’ve been doing reviews every year. And 20 years later, people pass away and the policy pays out and the beneficiary is going, “golly, KC, I thought we had a lot more coverage than that.”
“No, no that’s what your mom and dad bought. They bought $30 million of coverage.”
“See, I was talking to a friend of mine and they found out that their parents doubled their insurance for no more premium. I mean, just because policies have changed. Did you ever look at that?"
You know, that's the kind of thing … you wouldn't want to be in that position. There's a lot of liability that people just aren't even aware of.
The second thing I would say is that, everyone that I deal with, they always wants to maximize their investment. Just like I do when I invest. You know, whatever money I put in, I'd like if I could get twice as much out. I mean, obviously. That's a pretty obvious thing. And so, it's not uncommon for policies that are 10-years or older, when people still have relatively the same health, that they could have significantly more coverage or lower their premiums for the same coverage.
KC: How many years have you been working with Wellspring and doing these life insurance audits?
SH: This is my 26th year in the business and our firm was founded in ’81. So, I think that was about 38 years ago. So, we've been at this for quite a while.
KC: And after doing so many life insurance audits and working with families, what has surprised you the most?
SH: You know, I think it's probably two things. One, is I was surprised that people thought that just reviewing it was enough. And I think it was kind of that old adage of “what you don't know can hurt you.” I think people just didn't know there was a difference.
And then the second thing is, we literally have had opportunities to work with some of the wealthiest, most sophisticated families in the country over the last several years. And you always kind of wonder … You would think those families would have it all buttoned-up, but maybe not the other family. And after so many where that wasn't the case, I guess I'm to the point where I'm not really surprised anymore.
KC: Fair enough can, we zoom out a little bit and talk about life insurance more simply? I recently had a baby boy—he's 9 months old—and my husband and I purchased life insurance—definitely not as much as one of the families you work with need to get—but with that said, it's kind of a confusing process. What should people know, of any personal wealth level, that you find most people don't know?
SH: Sure, one of the things I find a lot of people don't know is that medical underwriting is actually a negotiated item. So, think about it this way: Your policy is going to get priced on your age, your gender, and your health—or somebody's opinion of your health is really a better way to say it. No one can help you with your age or your gender. But, medical underwriting is negotiated. And that's a really important point, because imagine if you're healthy and have a standard offer, that's really good. But if someone was able to negotiate a super-preferred offer for you, and lower your premium 17%, depending on how much you …. I guess it doesn't matter how much you're paying, everyone percentage-wise wants to save money. So, that's something that I find a lot of people don't know. I've had people tell me, “well, I have this or I have that, or I'm not insurable, or I'm not healthy …” And really, in reality, it's negotiated. And so, who you work with really matters in that way. And there's a lot of folks out there that do enough business to where they can actually help in that area, So, I would say that's really important. Which is kind of interesting.
And then there's one other thing which is kind of new, that some people just haven't heard about yet. Four years ago, one insurance company, John Hancock, just kind of flipped the industry on their head. And they decided that they would try to figure out a way to help people live longer and healthier lives, which sounds kind of interesting. You know, your life insurance provider should probably care about your health. But they partnered with the firm that really had a behavioral-change model that actually works. And a lot of their folks are living six to seven years longer and healthier. And, so that's kind of exciting. It's a little bit different. I think some people just haven't heard about that. But, a lot of the younger people that I talk to—some of the G 3’s in some of the families that I talk to—are kind of interested to know there's something a little more innovative and fun out there.
“The policy could be completely fine, but you might need to change the ownership or change something else, because the needs have changed.”
KC: Right, for such an old industry, that’s revolutionary.
SH: Not known for innovation. Never would be accused of being very innovative.
KC: OK, so zooming back in to the families that Wellspring works with, straight-up, what does a life-insurance audit cost?
SH: Oh, it's interesting, because generally what we do is we price it—and I think a lot of people do it this way—we generally price it per-policy. So, you know, it could be between $500 to $1000 per-policy, but that really depends on the facts and circumstances of the case. And so, what you find is that for a lot of folks, what you uncover clearly just dwarfs the nominal cost to have somebody really drill down and look at it. And it's interesting because, regardless of what somebody finds, you know that with the right process, and an in-depth process, you know you're going to reduce your liability. And that's something that most trustees, once they hear that, are very, very interested in figuring out what they need to do to make sure that they have done everything that they could to make sure the policies are doing exactly what they were designed to do. And that they’re going to be taxed properly or avoid tax properly. And that they've got the best situation for their family.
KC: How often do you recommend a life insurance audit?
SH: You know, every three to five years is probably a good rule of thumb. But then sometimes, think about major life changes. If there was a major change, maybe someone's net worth dramatically changed, or somebody had a divorce, or somebody had bought a couple of companies … If there's something dramatic that changes, obviously that's a trigger you ought to consider if it's appropriate. Because, what happens when there's life events, is that sometimes the need changes. And so when the need changes, potentially, that's an opportunity that should be reviewed. Because, potentially, ownership might need to be changed. The policy could be completely fine, but you might need to change the ownership or change something else, because the needs have changed. So, every three to five years is probably good rule of thumb, but when there's a major event and a need could have changed, that’s a good time to put another set of eyes on it.
KC: If somebody listening thinks that they need in audit, how could they get in touch with you?
SH: Pretty simply. Wellspring Associates, you know on the web, is pretty easy to find. For FOX members, you know, a lot of your listeners are probably FOX members and they probably know Karen Rush. We spend a lot of time back-and-forth and she could certainly help put us together.
SH: Wonderful. And so, between your website and our website, probably pretty easy to find.
KC: Are there any observations that we let fly by? Anything else about life insurance? I think this is a topic a lot of people really don't know enough about.
SH: Well, I would say that if they can really just kind of drill down and just kind of think about the difference between only looking at the policies themselves, but taking a broader look to how they fit into why they were purchased, I just think that is critical.
The last thing I would say is that the liability is real. Our society, unfortunately, is not getting any less litigious. Unfortunately, that's just what we live in. So, I just think people should really kind of think through making sure that they're very thoughtful and they have a very good process. Whoever they decide to partner with, that they can really have a very thoughtful way to look at everything that's involved around life insurance. So, it's not just the policies. It's really how it fits into the planning. And things do change. We all know that. Life changes, it’s fast. And so, just looking at revisiting the need: Is this exactly the same need? Did it change? Is the ownership doing exactly what we think we're going to do? Can someone go back and look at the details just make sure we dotted our “i’s” and crossed our “t’s?” That type of thing.
"The liability is real. Our society, unfortunately, is not getting any less litigious. Unfortunately, that's just what we live in."
And I think when people do that, KC, they'll be so happy. You know, one of two things are going to happen: (1) You're going to find nothing and just get confirmation that everything's great. That ought to be exciting. Or (2), you're going to find something, and then you can fix it. And that's the great thing about life insurance—just fix it before the policies pay out. You know, and then you're fine. That's the last thing that I would say is probably pretty important.
KC: Oh gosh, it's been so awesome just to learn a little bit today. I, for one, have learned a lot. Steve Herlihy, senior partner at Wellspring Associates, thank you so much again for joining us today.
SH: Well, thanks for having me. It's been a pleasure speaking with you, and hopefully some of this information will really help some families. That's the whole idea—to help families improve where they are.
Paulina Cromwell, CFA, Manager, Knowledge Center, Family Office Exchange
Earlier this year, we completed our 2019 FOX Survey on Values-Aligned Investing alongside our annual Global Investment Survey for the first time. We felt strongly that it was time to gather information on this growing trend - and share the findings with our members and their advisors – because there has been a fundamental shift in how families of wealth view capital deployment. Today’s families of wealth are increasingly focused on aligning their activities and dollars with their values. What was once a conversation held at the philanthropic table is now being discussed across the capital spectrum. The latest FOX research brings new insights about values-aligned investing and a fresh perspective – in terms of its depth, scope, and specificity to this unique group of private investors.
Families allocating capital are “all in.” Families with values-aligned investment programs in place are deeply committed to this philosophy, allocating an average of 60% of their total investable assets to these strategies. Many FOX families are already 100% values-aligned investment-wise or are on their way toward that stated goal. These families are implementing their “responsible” and “sustainable” strategies using public market vehicles and their more deliberate “impact” strategies through private investments.
Families plan to double their focus on direct investments. As market uncertainty looms, families are turning to direct investments in operating businesses to have more control of their investments compared to a private equity fund manager. Going forward, 64% of families currently making values-aligned investments plan to invest directly, compared to the 36% of families today, As the values-aligned market matures, families are also less concerned with diversifying concentration risk as they seek to make deeper, more personal connections with fewer recipients of their capital. It is important to note that the most significant challenge for experienced investors in this space is identifying high-quality and innovative investment opportunities (a quality, not quantity issue).
Opportunity #1 Families are allocating significant capital in meaningful ways when they find the right opportunities, and the market needs to prepare accordingly.
Investors are expecting market-rate returns and they are getting them. Market-rate return is by far the most common financial target among current investors across the full spectrum of values-aligned investments. Interestingly, families newer to these types of investments have meaningfully lower financial return expectations. As they gain experience, many come to realize that their values-aligned returns are not concessionary. It is noteworthy that when evaluating both financial targets and social/environmental targets, surveyed investors stated that over 80% of values-aligned investments have met or exceeded expectations.
Families need education and are asking for it. Those families not-yet making investments find educating decision makers (around financial returns, social impact, and common terminology) the primary challenge to getting buy-in within the family. This presents a tremendous opportunity for leaders in this industry (both families and their advisors) to provide these families with the educational and research tools to mitigate their concerns and move them toward the deployment of capital in a more integrated and values-aligned way.
Opportunity #2 There is a significant gap between the perceived challenges in the values-aligned investment market and the actual challenges that investors face. This is an important opportunity for families and advisors to bridge that gap so families can better unleash the power of their capital.