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Family Businesses Offer Opportunities – and Pitfalls – for Wealth Managers

Family Businesses Offer Opportunities – and Pitfalls – for Wealth Managers

Families who have most of their wealth tied up in a thriving family business present a classic double-edged sword dilemma for wealth managers. To be sure, the potential market is large and lucrative: Nine out of 10 businesses in the United States are family-owned, and family businesses account for half the country’s gross national product.

But the downside is stepping into family feuds that may be messy and more trouble than they are worth. As Tolstoy famously observed, “Happy families are all alike; every unhappy family is unhappy in its own way.”

So while cracking the family business market may seem daunting, wealth managers who take the time to recognize and study its nuances will be well rewarded, experts say.

For starters, wealth managers who want to work with family businesses can’t be afraid of conflict, say Leslie Dashew and William Roberts, co-authors, along with Sam Lane, Joe Paul and Darrell Beck of the just-published book, The Keys To Family Business Success.

“You don’t need to become a psychologist, but you do need to understand the dynamics of the family and understand what they’re comfortable dealing with – and what they’re not,” said Dashew, head of the Human Side of Enterprise and a Scottsdale, Az.-based consultant to wealthy families and family businesses. “A lot of people are not comfortable walking into a situation with conflict. But advisors have to recognize that conflict is normal and be able to create a forum for people in the family to sit down and talk.”

In fact, Dashew and Roberts cited the 2010 Tax Relief Act, which allows a lifetime gift and estate tax exemption of $5 million per person (up from $1 million) until the end of next year, as an incentive to get families to discuss their goals.

“It’s really a best practice to encourage families to begin to work together to think about and align with a shared vision of the future,” said Roberts, a family business consultant based in Denver. “You’ll often find that the values that they hold dear are not reflected in their documents and that’s something they’ll want to correct.”

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Listen and Repeat
An advisor’s ability to listen is particularly valued by wealthy families who own family businesses, Dashew said. “A lot of advisors come in with preconceived notions,” she explained, “but you have to be open-minded and be willing to form a partnership with the family about their values and vision.”

Advisors should paraphrase what family members tell them to make sure they understand what was said and to signal that they’re paying attention, according to Dashew. “Don’t just nod your head and say, ‘I understand,’” she said. “Reflect back to them in their own words what they have said. Doing this can help differentiate an advisor and demonstrate his competency to really listen and understand.”

Collaboration with Other Advisors Critical
Collaboration is also critical for advisors who want to work with family businesses. A recent survey by the GenSpring Family Business Center revealed that families with wealth concentrated in a family business used an average of 26 trusted advisors.

“One of the real surprises we’ve found working with these families is that we thought that lawyers, accountants and other advisors would resent an intrusion into the affairs of the family business, but that hasn’t been the case,” said Steve Salley, who heads the Family Business Center for GenSpring. “We don’t practice law, but we encourage the practice of quality law. And we’ve found a sweet spot managing very complicated affairs that demand collaboration.”

Collaboration also comes into play when families are looking for new information but are reluctant to part ways with financial advisors who have been with them for years.

“Families get very comfortable with old advisors,” Dashew noted. “But often when the business becomes more successful, they need more sophisticated advice. Advisors who have been with the family for a long time should welcome some new thinking but not feel threatened the family will be taken away from them. And new advisors should see the old advisors as partners instead of trying to edge them out.”

Risk Management More Important
Family businesses are also increasingly focusing on risk management, according to experts in the field.

“You’re seeing much more emphasis on risk management now,” said Mario Fidanzi, who organized the Next Generation Family Enterprise Leadership Forum at Rollin College in Orlando, Fla. last fall. “As the next generation of family business owners become more engaged, they are very aware of the risks involved, especially after 2008.”

In fact, Fidanzi said, more family members have started new businesses to make up for losses they suffered after 2008. “They’re engaging in entrepreneurial activity to replenish their wealth,” he said. “There’s obviously risk involved in these ventures, and advisors with good risk management skills can be particularly valuable.”

Salley noted that some wealthy families actually subsidized the family business with their own personal wealth after 2008.

As a result, he said, advisors have to be more aware of the interplay between a family’s personal portfolio and its business. “Wealth management is not as independent of a family business as people think,” Salley said. “It’s irresponsible to create a portfolio that doesn’t take that into account. It requires dialogue with the client to make sure personal assets are not correlated with the business. Investment managers working with families have to get more sophisticated on how they address and avoid risk.”

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