Many wealthy individuals take a “do it yourself” approach to managing their investments, regardless of their personal experience or expertise. They make decisions around portfolio construction based on the recent headlines, a tip from a friend or a suggestion from their accountant or attorney – “coffee table investing”. This sometimes-haphazard approach to wealth management carries several risks, such as making a bad bet on a hot stock, facing higher tax liabilities, or damaging your reputation from being linked to a problematic investment.
Based on my years of practice as a financial professional, there are three main reasons for this DIY approach. One is ego (“I was successful running a business and I am well equipped to manage my wealth.”) and the others include procrastination (“I know I should start a family office but let me wait a little longer.”) and cost (“I don’t want to pay for a team of financial professionals when I can do it for less by myself.”)
Whilst all these responses sound reasonable, they also do a disservice to other family members, who may be left in the dark following the death or disability of the wealth-building patriarch or matriarch, who has been managing the assets. Therefore, it is so important to create structure for managing wealth through the generations, to ensure that there is an institutionalisation of the knowledge and approach.
The certainty is that death comes to us all, however no one has devised a system to warn us as to the when. Hence, it makes sense to put a contingency plan in place now, while you still can. If your spouse, children, or grandchildren don’t have a clue about how to manage wealth, they will be at a severe disadvantage when making financial decisions. If an in-law has ulterior motives, they will be empowered by the lack of knowledge. They might start following the advice of others that may not be pertinent to themselves and invest in a trendy asset that they don’t understand. Even if other family members do have a background in business or finance, they might still be taken advantage of by a friend, a distant relative or even a potential future spouse seeking a lifetime “meal ticket.”
Creating a plan
One of the best ways to avoid the downsides of a DIY approach is to create a family office, where appropriate, designed to accommodate your individual personality, goals and investment philosophy. If a family office is not right for your family, its needs or size of wealth, a strategy should be in place to protect your assets, preserve your legacy and empower the next generation.
For instance, a family office team or a panel of specialised advisors, can educate your spouse, children, and grandchildren about managing wealth, to guide them and hopefully avoid costly mistakes. It can also provide them with an opportunity to develop investing skills providing advice and reviewing their performance.
The cost of setting up and maintaining a family office or board of advisors can be relatively small, compared to the size of the portfolio. You can also derive significant value from having a professional team dedicated to your financial interests and create that institutional knowledge well before you lose the ability to manage your funds. Having an institutional type of structure in place also provides a safeguard against making impulsive decisions that could have serious consequences, both financial and emotional.
So, rather than put your family members at risk, now is the time to think seriously about institutionalising your wealth management process.