Creating a Platform for Building and Sustaining Family Wealth

This paper describes the process and the components needed to turn your family’s wealth into a Family Enterprise.  The Family Enterprise offers an abundance of opportunities to convert the family’s human and financial capital into productive, wealth building investments and operating assets.  These assets will position the family to be a leader in the community and create enormous wealth building initiatives for the generations to come.

A Letter from Our Principal

Let’s face it; wealth can provide the fuel for families to grow intellectually, economically, and even spiritually, while offering family members the ability to shape their community and the world around them.

Over the past three decades, we have observed that families who manage their personal wealth as they would a business endeavor tend to make better financial decisions.  By pooling their financial and intellectual resources for the sake of a unified common purpose, these families have had far more success in preserving their family unit over time, overcoming the challenges of inter-generational wealth transfer, and achieving their long-term goals. 

By creating a Family Enterprise, we can help you ensure the “business of the family” has purpose, is intelligently structured, and is designed to manage risks while preparing and perpetuating future generations.

In this Executive Summary we will share with you our insights into the importance of building a Family Enterprise, the core components of constructing a Family Enterprise, and how The Abernathy Group II Family Office can help facilitate the effective creation and management of your Family’s Enterprise.

Steven Abernathy

Founder & Chairman

The Abernathy Group II Family Office

Defining the Family Enterprise 

A Family Enterprise combines a family’s human and intellectual capital with its monetary capital in order to create an operational structure that produces and preserves multi-generational wealth. 

By conceptualizing one’s assets as an enterprise, families begin to understand the power their resources can have in shaping their lifestyle, the personal development of their heirs, and their community at large.  As we discuss the actions required to first set up, then to implement and monitor a Family Enterprise, the need for professional management will become evident as most family heads are too busy running their business to devote the time needed to achieve this worthy goal.  

In this respect, a Family Enterprise is put together to create lasting, generational wealth.  When structured correctly, it acts as glue for family members interested in perpetuating the name of the family and its unity. 

The Family Enterprise places the needs of the family, and wealth creation, on equal footing.  It is structured in stark opposition to that of traditional wealth management organizations.  In fact, unlike traditional wealth management organizations, where advisors are legally obligated to provide advice that is in the best interest of their employer, a Family Enterprise actually has employees who work for the family.  Their sole obligation is to provide intelligent advice and offer objective information which enables the family’s decision-makers to make well-informed decisions that are consistent with the best interests of the family. 

At the center of the Family Enterprise is the family itself, supported by a Chief Financial Officer (CFO), who ensures the family’s affairs are being planned, managed, and executed efficiently, and in accordance with the family’s strategic goals and objectives.

The family CFO, while responsible for managing and implementing the day to day affairs of the family, reports directly to the family CEO.  The day-to-day operation is structured to be similar to a corporation where the corporate management team reports to its Board of Directors.  Thus, ultimate control always remains in the hands of the senior family members.

The CFO in turn, oversees a group of experts from various legal, tax, and investment disciplines, and integrates their advice so recommendations to the senior family members are consistent with their strategic goals and objectives.

Is a Family Enterprise Right for Me?

A Family Enterprise is typically created when:

1. A family’s liquid net worth has grown to such a size that it is clear professional management is required, yet cannot be adequately provided by family members or the family’s business professionals.
2. The family experiences a significant liquidity event that requires professional management, such as the sale of a family business, or the receipt of a large legal settlement, inheritance, or other non-recurring award.
3. The family can no longer dedicate adequate resources towards managing their own personal financial affairs without compromising the integrity of their business.

Following any of these events, a family matriarch/patriarch will typically recognize the importance of integrating experts from the fields of asset protection, estate and tax planning, investment management, risk management, and financial planning into their family’s long-term strategic planning and decision-making process. 

If the steward of the family’s capital cannot dedicate their full attention to, or if they are not adequately proficient in these disciplines, the family steward must assign the day-to-day responsibilities to a personal Chief Financial Officer who will pursue activities that are consistent with the family’s best interests. 

Often it is difficult for business owners to accept the need to delegate these responsibilities to a trusted advisor.  However, all wealthy families must ultimately come to this realization, or risk falling victim to the age-old proverb – from shirtsleeves to shirtsleeves in three generations – whereby over 90% of wealthy families lose their wealth in three generations or less due to lack of attention, purpose, and strategic planning regarding their personal wealth.

The Family Office vs. Traditional Wealth Management

A family enterprise is structurally different from the traditional wealth management model propagated by the large broker dealers and insurance companies in three key ways. 

Family Offices Uphold the Fiduciary Standard

The Family Office’s advisors work directly for the family.  They do not work for a large brokerage firm focused on profiting from the relationship.  The Family Office is held to the Fiduciary Standard.  This means the family’s advisors are legally obligated to provide advice that is in the best interest of their client only.  The traditional brokerage model is just the opposite.  It mandates that advisors provide advice which is in their employer’s best interests. 

While this may be intuitive, it is a significant differentiator.  One of the reasons the wealthiest families abandoned the traditional wealth management model is because they needed to trust those providing advice, and the traditional “brokerage” model was based on a “sales” culture, which promoted products and services that generated fees and commissions for the advisors and the financial institutions they represent.  The “brokerage” model was and to this day is not a model where trust comes first and foremost.  We believe most families of wealth will abandon the “brokerage” firm model in the future for this very reason. 

Family Offices Integrate Advisors from Multiple Disciplines

A second stark differentiator is the collaborative dimension of a Family Office.  Family Office advice is coordinated and conferred upon from multiple disciplines so the advice given by one advisor does not disrupt the family’s long-term planning objectives by countering the plans laid out by another advisor. 

Consider the potential pitfalls that can arise in purchasing a real estate investment.  If the investment manager did not first consult with the family’s trust and estate attorney to put in place the appropriate legal asset protection structures, the investment might create unplanned risks or could trigger gifting violations.  And if the family’s tax attorney wasn’t consulted before the investment was made, income generated could negatively affect the family’s tax bracket.

Family Offices Consist of Multidisciplinary Experts

A third factor separating the Family Office from the traditional wealth management model is access to proven experts.  The Family Office ensures the family is receiving advice from experts in their respective disciplines, rather than from product salesmen who are compensated based on your buying their product or service.

The Family Office must consist of a network of professional investors with audited track records, attorneys, and CPAs to manage the family’s day-to-day activities and there must be no conflicts of interest.  Ever.

Figure 1: Traditional Wealth Management Paradigm

Figure 2: The Family Office Paradigm

From the Family Unit to the Family Enterprise

Successful families of wealth have many attributes in common.  One of the most prevalent is that each successful family has planned and built a strategy to pass their knowledge, network, and wealth on to the next generation… and for the next generation to pass it on to their heirs. 

This process may seem complicated.  It is not.  However, it does require some upfront work, creativity, and organization.  Below we will take you through the first steps towards creating a Family Enterprise.

• Asses your Family’s Current Condition
• Construct a Family Mission Statement
• Identify Challenges and Prioritize Opportunities
• Build Your Family Infrastructure
• Plan for Succession

Assess Your Family’s Current Condition

The first step is to take stock of your assets.  Create a diagram which lists all of the important people inside and outside the family which have a role in the family’s future.  This diagram should list each person’s strengths and weaknesses and the role you believe they will play in the family’s efforts.  This diagram should include any legal structures or corporate entities that were put in place to protect or preserve assets from creditors, litigators, ex-spouses, and the “tax-man.”  It will also include a balance sheet, an income statement, and a cash flow statement, as well as projections for each future period.  A similar diagram should be made to list those entities or actions which may thwart your family’s goals if there are any.  Once you know exactly what your assets and liabilities are with respect to human and financial capital, you are in a better position to make solid, well-informed decisions.  This process should be exhaustive as it not only provides an inventory of your family’s financial and human assets, it provides the basis for determining progress in the years to come as well as a complete repository of information desperately needed when the head of the family changes.

Construct a Family Mission Statement

Once a family has had the opportunity to take stock of their estate, the subject arises as to what to do with the resources available to them.  This is a critical time for self reflection.  Questions must be asked, such as:

• What is the purpose of maintaining and growing our wealth?
• What is our family hoping to achieve over the short-term and long-term?
• How do we prioritize our financial and non-financial goals?
• Are there any charitable or moral ideals we would like to transfer to our successors?

The answers to these questions should be articulated and memorialized in the form of a Family Mission Statement.  This process requires collaboration between the senior and junior family members, but ultimately is the responsibility of the family patriarch and matriarch, or other governing family members. Over time, this Mission Statement may evolve as control of the estate transfers to future heirs; however, all family members should understand the Family Mission Statement, and its fundamentals should serve as a guide for future family decisions and actions. 

Identify Challenges & Prioritize Opportunities

After the mission statement is formulated and adopted, it’s time to craft a strategy to realize the family’s ambitions.  This plan must outline specific near-term and long-term goals, the actions and parties responsible for these goals, and an expected time period for achieving these goals.  Accountability is key.  Every thoughtful strategy must include contingency plans, as life has many twists and turns that are completely outside of your family’s control. 

Part of the strategy is to determine who will make decisions and the process surrounding those decisions.  This not only requires the participation of family members, but also those important partners that serve them – asset managers, attorneys, accountants, and the family CFO.  Clearly defining each person’s role in the family decision-making process will create order and accountability inside the Family Enterprise.

Build Your Family Infrastructure

After the family’s mission and strategy are in place, the next step is to build a framework of governance to formalize the family’s decision-making process.  This may involve the bifurcation of senior family members into those responsible for decision-making and those not responsible for decision-making today.  The governance framework also identifies the role of non-family decision-makers and advisors and what role they will play.  

Determining whether the family will incorporate a Board of Directors to preside over the family’s business affairs, how frequently they will meet, the limitations of their powers, and the responsibilities of each member, are important decisions for this segment of building the Family Enterprise.  

Understanding who will be the final decision-maker, whether the decision-making process will be democratic, and whether non-family members will be involved in the decision-making process, is also important.

Since the goal is to ensure the decision-making process is solid, it must involve the aggregation of the data necessary to make well-informed decisions.  Likewise, decisions must be based on logic, not emotion, with the focus always on achieving the family’s mission.

Plan for Succession

Understanding early on that senior family members will not be around forever is critical in preventing multi-generational destruction of resources. But there is only so much time one can give toward educating the next generation.  Therefore, it is imperative for a thoughtful succession plan to be in place that not only handles the tax efficient transfer and control of assets, but also accounts for the transfer of knowledge and responsibility to the next generation. 

This process must include formal education, empowerment, and experience for junior family members.  This can include “shadowing” senior family members, employment within and outside of the family business, workshops with outside experts specializing in inter-generational wealth transfer, and many other more novel approaches.  This process must be designed to promote leadership skills and imbue the family’s culture and values to the next generation of leaders, ultimately ensuring they are capable of making well-informed decisions to perpetuate the family’s future.

Wealth Management

Once the family’s inventory of assets and liabilities, both human and financial, has been listed, their mission statement and plan formulated, and governance procedures adopted, the family’s efforts start to focus on managing their assets most efficiently to accomplish their goals. 

Wealth management involves legal asset protection, strategic tax & estate planning, asset allocation, charitable giving, and budgeting.  Unfortunately, most traditional offerings by the nation’s major financial institutions are not well structured to offer this spectrum of services.  And they are even less well structured to ensure these services are coordinated to deliver the best set of solutions for each family after taking into account a family’s mission. 

Instead, most of America’s largest financial institutions focus on individual investment decisions because this leads to “transactions” that generate revenues for their organization.  However, legal asset ownership planning needs to be implemented long before intelligent individual investment decisions can be made.  As a case-in-point, it makes little sense to spend long hours on deep research to derive 2-3% in extra risk-adjusted returns on a $90M portfolio, if the government will take 55% of all assets over the current estate maximum of $13.99M.  So, while most institutions will eagerly offer investment advice which results in transactions as soon as possible, the intelligent alternative is to plan before taking action.

Financial and estate planning are amongst the most important first steps in the wealth management process.  A financial plan is an important tool to set up in the early stages of creating a Family Enterprise because the financial plan creates guidelines for implementing the strategy adopted to achieve the family’s mission.  It discusses budgets and expected incomes, offering the blueprints for moving the family from point “A” to point “B.” 

Although most families believe estate planning is best left to the end of life, nothing could be further from the truth.  Estate planning needs to be intelligently structured early in the wealth management process. It offers a family the ability to own assets inside legal structures which protect those assets from creditors, litigators, ex-spouses, and taxes.  Intelligent asset ownership allows assets to stay in the family, and provides the financing necessary to realize the family’s mission. 

There are other considerations in the wealth management process.  Risk management, tax planning, asset allocation, and portfolio construction of the family’s passive and active assets, are all among the decisions which demand professional advice and guidance.  And each of these actions should be coordinated and integrated with the other experts advising the family, to ensure their implementation is always working to accomplish the family’s mission.

Integration

The average family of wealth works with more than 15 vendors, each having their own self-interests, and few, if any, truly understanding your family’s short-term and long-term mission (it is not always appropriate to share the family’s mission with some vendors).  If progress is to be made, and intelligent decisions implemented, each of these vendors must work together and in tandem.  It may be possible for a family with a few million dollars to do this without outside help, as they need fewer vendors with less expertise.  However, it becomes a full-time job for families with wealth exceeding $10 million or more due to the need for custom strategies and creative alternatives demanded by the global financial markets’ increasing complexity. 

As an example, experienced advisors will help family decision-makers evaluate the “ripple” effect of each investment and sale decision before executing the transaction.  This will help the family’s decision-maker understand how each action will affect other areas of the family’s wealth.  The decision-maker must have a significant amount of knowledge about the considered action, while also having considerable knowledge about other aspects of the family’s assets and how they will be affected. 

While the process of turning the family unit into the Family Enterprise involves work at the early stages, it is critically important to compare this philosophical and organizational work to its benefits over the generations to come.  At some point in the not-so-distant future, the Family Enterprise becomes self-sustaining and may begin to out-earn the family’s primary business.  And in many cases, the organizational work needs to be done to ensure the estate planning can be realized.  Remember, a family of wealth moving forward in life without a mission and a purpose is as senseless as a family going on vacation without a destination in mind.

The peripheral benefits to the family have not been discussed in this short paper because each family will have a unique purpose and different goals.  The peripheral benefits will become a product of the Family Enterprise’s structure and operation.  However, these benefits may be incredibly valuable, and in some cases equal and could dwarf the initial benefits.  When a peripheral benefit keeps the family unit together due to a mutually endorsed mission and purpose, the peripheral benefit becomes the primary benefit.

If you would like to discuss any of the topics in this paper, please give us a call. 

Taking Control of Your Family Enterprise

The thought of turning your family unit into a Family Enterprise can be quite intimidating.  And the cost sounds like it is quite expensive.  Fortunately, it is not.  In fact, the cost of a Family Enterprise is often less than the costs associated with working with a traditional wealth management firm.

We have created a series of questions to help your family begin to think about whether a Family Enterprise is right for you.  Have fun.  What will emerge from this exercise is a clearer understanding of the gaps which need to be filled, and the partnerships you will need to bring into the family in order to ensure your assets are working towards your family’s long-term goals.  We are highly qualified and would be happy to help your family build a Family Enterprise which provides the generations to come with the assets they will need to perpetuate your family’s great name.

• Who are the senior members of the family?
• Who are the junior members of the family?
• Who is being groomed as the future family leader(s)?
• Is the next generation prepared to lead?
• Do we have an adequate succession plan?
• Do the right people understand what we own?
• Do they understand how we own it?
• Have we ever articulated our family mission?
• Is our family’s decision making process and governance structure clear?
• Is it working?
• Are the right people engaged?

Do we have an expert advising our family in the following? (Yes/No)

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

Who is responsible for coordinating these advisors?

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

How well are these relationships working for us?

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

Are the incentives of these advisors aligned with our own?

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

Are the activities of these advisors in line with our family’s mission?

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

What level of involvement do we have with each of these activities? Is this ideal?

• Asset Protection
• Financial Planning
• Asset Management
• Estate & Tax Planning
• Risk Management

The Abernathy Group II Family Office is a multi-family office helping high net worth business owners and physicians manage, preserve, and grow their assets across multiple generations.

Established to safeguard the wealth and values of the descendants of founder Steven Abernathy, the firm evolved into a multi-family office in 2010.  Today, The Abernathy Group II’s pioneering spirit continues to redefine the Family Office experience for generations of the world’s wealthiest families.

To learn more about creating a Family Enterprise, contact us today.