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Think Like A Shrink

Advisors to the wealthy should master family dynamics.

Understanding Today’s High Net Worth

"Family dynamics" is an old concept that has new applications. In the financial planning context, family dynamics represent the force of emotional issues that come into play when a family is deciding how to manage its wealth. Managing emotional family issues has taken place for decades in financial planning for the "ultra-high net worth." Today, advisors to the affluent need to understand why they should adopt some of these techniques to serve the specialized needs of their clientele, even if they aren’t in the leagues of the Mellons or the Carnegies.

The vast majority of today’s millionaires are first generation. These high net worth have never received "training" in being wealthy, and are without role models to guide them through the complex financial issues that impact their entire families.

In addition, today’s high net worth are younger and very concerned about their children. According to the 2001 Phoenix Wealth Management Survey, conducted with 1,000 investors with net worth in excess of $1 million, 37 percent agreed with the statement "I am concerned my children will not have the same work ethic that I have." Another 31 percent agreed with the statement "I am concerned I have spoiled my children by giving them too much." The modern millionaire is worried that children may take family comforts for granted, and when it comes down to creating a plan to manage their financial future, this can have a special impact.

The survey also uncovered that first-generation wealthy believe hard work contributed to their success, but may feel guilt about their prosperity, especially if their parents and siblings are of more modest means. In discussions on how to distribute and transfer wealth, advisors need to know how to handle these types of concerns before implementing a financial plan.

By incorporating family dynamics into a services portfolio, the advisor can create relationships with clients that are deeper, more personal and less mobile. They are also helping to remove the emotional roadblocks that can actually halt the financial planning process. Prince & Associates determined that only 3.6 percent of heirs continue to use the same financial advisor as their parents. This means an advisor who becomes skilled in managing family dynamics can provide value to a wealthy family for more than one generation.

Advisors Should Make a Diagnosis, Then Think About Product

The traditional process of financial planning begins with the advisor consulting with the client and gathering important data. This leads immediately to shaping the goals and objectives of a financial plan. Advisors in today’s market need to feel comfortable talking with clients on a more personal and intimate level about their values, the causes they care about, the relationships they have with their children or other heirs, etc.

Entering into a client’s life in this way may seem a bit more like psychology than financial planning. However, an interesting dichotomy exists -- the more money a client has, the greater the need to discuss other factors beyond money, such as family values and the impact of wealth on future generations.

Recognizing the Role of the Family Founder

Central to the Wealth Management Model is the family founder, the person who created the family wealth. He or she is instrumental in setting the culture or atmosphere that defines the family and determines the approach to the money. The financial advisor’s point of entry into the family may not always be with the founder, but with a second-generation cousin, for instance. In this case, a cousin may need to approach the founder to sell the advisor and a structured wealth management process. Another possible point of entry is through a family advisor (attorney, trust officer, family office executive). Having direct access to a founder is preferable, however.

Understanding the Cultures, Values and Beliefs of the Family

The family founder sets the stage for family culture. This refers to issues such as the degree of openness (or secrecy) among family members, family operations or "rules of the house." For example, do family members openly talk about their wealth to each other? How about to those outside of the family? What is considered taboo? Family wealth will have a much better chance of surviving multiple generations if these types of barriers are broken and managed.

Family values are also key to establishing a point of reference for "who" the family is. Do they embrace religion? Is there an emphasis on education? What types of organizations or causes do they support? And what is the family work ethic?

The core, long-standing beliefs of the family can run a spectrum of emotions. Certain individuals or small groups in the family may have a negative outlook, which can hinder financial planning if not discussed and dispelled. Somewhat surprisingly, negative beliefs concerning family money can be reinforced from generation to generation; a family member that does not feel good about wealth may feel isolated, which can lead to destructive and obsessive/compulsive behaviors, or feelings of panic and fear. Conversely, uncovered family beliefs may illuminate positive emotions that reinforce desires for a philanthropy, educational attainment, or commitment to public service.

Legacy, Heritage and Vision

In this zone, exploration of the past (heritage) and future (legacy) come together to clarify where a family is today, and where they see themselves in five, 10, 20 years and beyond. Some family founders may be more interested in perpetuating their fortune for generations to come (vision), and others may have philanthropic desires, which would liquidate their estate upon their death.

History often plays a very strong role in what motivates individuals and their families. Whether someone comes from wealth or poverty will play an important role in how they feel about their wealth. Multigenerational inheritors will have their own unique set of issues to overcome. The advisor familiar with such nuances can be capable of identifying, exploring and understanding wealth-related emotions such as guilt, loneliness or mental paralysis, and in turn be better equipped to bring tailored solutions to the family.

Uncovering Prosperity, Inheritance, Governance, Philanthropy

In the Wealth Management Model, prosperity is defined as the current and desired level of wealth for the family. This is especially key when addressing retirement issues.

Inheritance issues are extremely important, too. Discussing them will reveal how the founder and other decision makers feel about bequeathing money, while identifying potential family dynamics that have the ability to stall or halt estate planning. Issues such as withholding (the estate value), fair versus equal distribution of assets, and resentment (between heirs and their parents) may be raised by various family members.

Family governance refers to how the family makes decisions. Historically, the head of the household might have taken the lead on financial decisions, based on counsel from a trusted outside advisor, such as an attorney. We’re suggesting that that model does not work any longer . Families should move from a pyramid structure to a circle of inclusion. Structures such as family councils, family offices, and family meeting processes are all growing trends to help families of means achieve a comprehensive wealth and family dynamics management process.

Family philanthropy is an ideal venue in which to educate young children about money. For adult children, family foundations may offer leadership opportunities – cultivating next generation founders. Family "giving circles" can also provide a valuable purpose for families to congregate and communicate with one another other than funerals or weddings.

Wealth is the Tie that Binds

The last piece of the Wealth Management Model is the wealth itself. On one hand, money provides strong links between generations and between cousins who share a beneficial interest in family entities. On the other hand, the links that wealth creates can become a source of stress and resentments. By techniques that explore the family dynamics of wealth, a family can convene and build consensus on major financial issues, allowing all family members to become genuine stakeholders in the family’s future.

The Family Meeting

Typically, the central purpose of a family meeting is to identify key family values, working to resolve family issues and create a common purpose.

Advisors engage in a more holistic discovery process with wealthy clients through a family meeting. The outcome of the meeting will be a family mission statement that forms the foundation for the wealth transfer plan and products and services the advisor offers. This process also allows the advisor to build credibility and trust with the entire family, not just the founder.

Through the family meeting process, the advisor can expect to:

Help the family succeed

  • Ensure a sense of inclusion so everyone is heard;

  • Build consensus among family members;

  • Create a sense of belonging and family continuity with purpose.

Help the family learn

  • Dispel family legacy myths;

  • Start peaceful sharing of joint assets, planning of family vacations together;

  • Prepare subsequent generations for wealth inclusion and a place in the family business or foundation.

Help the family achieve

  • Develop the family's mission statement;

  • Begin the discussion about the family fortune with children and grandchildren;

  • Leverage family wealth as a whole to make a bigger impact.

After the meeting, the advisor manages the follow-up and begins to create the link between the family mission statement and the wealth management plan. As the advisor gains confidence with the process, he or she may want to take on a greater role in the next family meeting, possibly facilitating the meeting alone or with another professional present for additional support.

Advisor Benefits

Exploring the family dynamics of wealth offers a number of benefits to advisors who are seeking to grow their practice in the high-net-worth market. These benefits include the ability to:

  • Act as a quarterback for all of a client’s advisors by taking the leadership role with the family;

  • Differentiate their practice from other advisors and provide significant benefits to the wealthy family that will create significant customer loyalty;

  • Offer wealth management planning that is distinct from financial planning;

  • Facilitate the multigenerational transfer of wealth and increase the likelihood of retaining the assets at the death of the family founder.

The value of the program lies in the fact that advisors do not need to be psychologists to implement it. The real skill is asking the questions and giving clients and their families the opportunities to discuss openly, perhaps for the first time, values, past hurts and misunderstandings, and the impact wealth will have on heirs. It is an opportunity to think of the possibilities for the succeeding generations, which may include creating a family foundation as a means of gathering the family to work together.

Carol Larco-Murzyn and Vanessa Bohrer are creators of Exploring the Family Dynamics of Wealth, a specialty service offered by The Phoenix Companies, Inc. Dr. Terry Hunt, a licensed psychologist, helped develop the program.

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