One book changed my thinking about wealth and the direction in which I am trying to guide my family. That book is Strategy for the Wealthy Family by Mark Haynes Daniell.
In his book, Strategy for the Wealthy Family, Mark Haynes Daniell claims that ‘There is a discreet world of the respected super-rich, where family legacies, high-return portfolio investments, successful family businesses, philanthropic endeavors, and protective trust practices have been refined and have evolved to reach the highest levels of excellence in private wealth management. These practices and strategies have been employed to build and protect great family fortunes across generations in many countries around the world.”
“Until today”, he says, “the benefits and wisdom of that world have been inaccessible to most of us.”
In Riches to Rags, I reviewed three of the seven ‘principles’ which Daniells believes are involved in his strategy. He refers to these principles as elements in the family strategy and says that the very most successful families integrate all 7 of them into their family strategy.
As a refresher, the first three principles were:
- Principle 1 – A Framework for Family Strategy
- Principle 2 – Family Organization and Leadership
- Principle 3 – Family Wealth Preservation
Here are the remaining four principles.
Principle 4 – Family Wealth Management
In these chapters, the author suggests that you should diversify assets and access the best investments and investment managers by having a formal process of asset allocation and wealth management.
Daniell’s provides a model for successful investing. At the center is family wealth management and surrounding it in an interconnected circle are the activities of strategic asset allocation, investment manager selection, determining an investor profile and objectives, the investing process, reporting and control, risk and cost management and tactical selection of the investments.
The investment process should be structured, forward looking and include checks and balances, with perhaps an investment committee to oversee and approve certain levels or kinds of investments. It might include a guide which documents the process, objectives and the family’s vision and values. It incorporates documentation of investment proposals as well as reviews of past performance.
The investor profile needs to include the family’s attitude towards risk, their return targets, geographic preferences, liquidity needs and investment horizons. How much money the family has can greatly influence the investor profile, with a billionaire family needing more diversity requiring the use of sub-portfolios with different strategies, objectives, managers and profiles.
Strategic asset allocation not only includes diversifying the family portfolio between the traditional low risk, medium risk and high risk investments but also might involve picking of a ‘high alpha’ investment manager, currency investing and the timing of being allocated in certain investment classes.
The tactical selection of investments is done once the investment profile, process and asset allocation are known. There is a buffet of investments from which families can select – not only in traditional asset classes such as cash, stocks, bonds and commodities; but also in hybrid asset classes such as foreign currency, structured products, and derivatives; and in alternative asset classes such as private equity, mezzanine funds, hedge funds and collectibles. Determining which to buy when is not an easy task – but is made more manageable by having the profile, process and asset allocation models in place.
Risk management requires review and transparency – especially in some of the more complex investments where the risk may not be as readily apparent – such as a family who invests in a company through a hedge fund and the company it self is also leveraged.
Costs must also be transparent to avoid situations that pile fees on top of fees. For instance, if a family made an investment through a private bank (which charges the family a fee) and that investment was in a fund (which charges the private bank a fee) which then invests in an individual company. This can be compounded if the family uses a trust office (which takes a percent of assets to manage the trust) and a family office (which costs money to maintain) as well as a broker (who charges commissions).
All of these things should be reviewed using the reporting and control processes which a wealthy family should have in place for the management of their wealth.
Principle 5 – The Family Business
Family businesses can be great wealth creators, but they can also cause discord among family members and family members can create havoc in the business. Here he wants us to clarify and integrate family business strategy with long-term family wealth plans.
Usually the family business is most productive while its founding generation is still involved in the business but then it becomes less and less successful with each succeeding generation. Family businesses have unique advantages, but also have unique complexities. Family businesses can get mired down in family issues – such as providing a job for a family member who really can’t do that job, or fights amongst the second generation family business inheritors as to who should run the business.
Often families must decide if they should sell the family business – and if so, may wonder if that business really was the only thing holding the family together. They may want to arrange for family members to be able to ‘opt out’ of the business if the family wants to keep the business going. The family must also decide what it means to opt out. Does the exiting member get to take business assets? Some families allow members to buy out other members. Other families have intentionally cut members out of the business.
Daniell provides a set of 10 imperatives for managing the family business – such as separating family and business issues or insisting on equal career opportunities within the business.
If the business provides the bulk of the family wealth, the family wealth management process must take steps to deal with the risk that entails (concentration of wealth).
Principle 6 – Effective Philanthropy
Each family has it’s own definition of how to give back. The family can agree to share wealth in a manner that unites the family and gives it meaning.
Approaches to philanthropy range from highly random to highly organized. Families at the lower end of the wealth continuum may make more random, personal contributions to the charities of their choice. Families at the other end of the continuum may establish their own family foundation to manage their philanthropic efforts across generations.
Giving can be done in any manner desired by the family and/or it’s members and does provide many benefits. See Building Your Family Legacy Through Philanthropy – 4 Family Benefits from Giving for some of them.
Principle 7 – Living a Truly Wealthy Life
Finally, Daniell recognizes that the lives of individual members of wealthy families can be negatively impacted by the wealth and he encourages us to remember the unique nature of individual family members – including yourself. A family cannot be wealthy if it’s individual members do not live lives allowing them to pursue their individual values, paths and choices.
He says “By designing and implementing far-sighted and highly informed strategies that plan forward across generations, actions can be taken today to improve the lives of children not yet born. This caring for unknown future family members reflects the great power of the family as a collective entity, and highlights the love that bind a family together over time and through many challenges.”
If you want your own copy of Strategy for the Wealthy Family – Seven Principles to Assure Riches to Riches Across Generations, follow my affiliate link below to Amazon – alternately, check out your local library to see if they have a copy.