THE RISKS OF TRANSITIONING WEALTH It s More Than Just the Money!

Transcription

1 THE RISKS OF TRANSITIONING WEALTH It s More Than Just the Money! FALL 2014

2 THE RISKS OF TRANSITIONING WEALTH It s More Than Just the Money! In this issue: Transitioning Wealth Across Generations 4 The Conflict-Consensus Continuum 4 Increasing the Probability of a Successful Business Transition 5 Understanding Technological Convergence 6 Contributors: Roger W. Adams, CFA Editor, Asset Management William E. Dove, CFA Portfolio Manager, Asset Management Bryan Austin, CFP, CIMA Director, Financial Planning Arne Boudewyn, PhD Managing Director, Family Dynamics and Education Carol M. Schleif, CFA Regional Chief Investment Officer, Asset Management Bradley P. Solfest, CFA Managing Director, Banking Bob Whitehead, CFA Director, Asset Management Generating wealth is no easy feat, but preserving it across generations is hard work. We know that long-term wealth preservation requires proper estate planning, diligent asset management, and financial responsibility. While these elements are certainly vital, more important is family communication and preparedness. According to studies of ultra-high net worth families, only 3 out of 10 wealth transitions are successful in transferring control of assets to beneficiaries. The majority of failed transitions are due to a breakdown of communications and trust within the family and inadequately prepared beneficiaries. Our integrated approach to wealth management views family wealth as an enterprise complete with a governance system that incorporates stakeholders, leaders and thoughtful succession plans. Developing the right team and implementing a calculated strategy takes time and commitment. We also know that articulating a clear vision that reflects a family s deeply-held core values increases the probability of a successful transition. For these and other best practices in orchestrating wealth transitions, please read our whitepaper, Preparing for Family Business Transitions: Achieving the Vision for the Business and Family, authored by Arne Boudewyn, Managing Director of our Family Dynamics and Education practice. In this edition, we delve into this subject and explore the associated risks to the family enterprise. On another subject, we conclude with the exciting release of our latest whitepaper, Convergence, authored by Carol M. Schleif, Regional Chief Investment Officer. Also available is our popular and informative annual publication, 2014 Year-End Planning: A Guide for Investors, contact your Relationship Manager for a copy. Heading into year end, we thank you for your interest and look forward to reconnecting next Spring when we resume publication. We also look forward to connecting with you through our Annual Letter sent in January from our President, Jim Steiner. Happy reading! 2 The Risks of Transitioning Wealth It s More Than Just the Money!

3 At Abbot Downing we view significant family wealth as an integrated enterprise with the ultimate goal of achieving stability and continuity over multigenerational time frames. Long experience proves that committing the time and resources needed to identify and implement a family s core values within the context of family governance, education, and planning offers the greatest probability of success in achieving that goal. Family Enterprise Health and Maintenance Shared Vision Shared Family Goals/Values Shared Family Risk/Opportunity Strategic Direction for the Future Responsible and Motivated Stakeholders Rights and Responsibilities Ongoing Education Process Strong Family Leadership Family Continuity from generation to generation Effective Family Governance Unifying Structures Effective Processes Accountability and Authority to Act 3 The Risks of Transitioning Wealth It s More Than Just the Money!

4 Transitioning Wealth Across Generations Families often limit their definition of risk to financial security or investment volatility. While addressing these two approaches to risk is important, a more holistic risk management program requires the examination of a much broader spectrum of risks. Our process focuses on identifying, managing and mitigating risks so that you and your family are better positioned to achieve your vision for the future. Wealth transfer and communication Wealth planning is a values-based process that enables everyone in a family to air their concerns and goals before definitive plans are set in motion. By facilitating communication and collaboration among parents and heirs, values-based wealth planning helps families discover and articulate their personal, family, and social vision and values. The Conflict-Consensus Continuum What sorts of concerns may be covered? Parents often worry that wealth might ruin their kids. Beneficiaries taking over a family business may not want the business tied up in a trust as this may introduce additional complications. Often direct beneficiaries may want assets to skip a generation and go directly to their children. After these concerns and any others are identified, families can agree to wealth plans that unite rather than divide. Studies show that families who pass their assets on for many generations tend to adopt a broader focus beyond their financial wealth, including human and social factors. The process in action Values-based planning usually requires a series of meetings that may span six or even 12 months. Why so much time? Every family comes with its own unique dynamics. Allowing sufficient time to explore each family member s goals and concerns offers the best opportunity for achieving a successful plan. Wealth Transfer Planning Family Wealth or Business Family Philanthropy Family Divergence/Conflict Aspirations Goals Decisions Plans Communications Actions Family Convergence/Consensus Family Education Family Leadership Development and Succession Family Decision-Making, Role Transitions and Governance 4 The Risks of Transitioning Wealth It s More Than Just the Money!

5 Defining family values Once everyone s wishes and concerns are clear, family stakeholders collaborate on developing a family values statement. A values statement should make the family stronger, more cohesive and enduring so that the successes of one generation can pass on to the next. The statement need not conform to any rigid rules. What matters is that this statement of commonly held principles and goals provides the foundation for a sound legacy plan, one that inspires and motivates, and is both realistic and visionary. Furthermore, it can serve as an effective tool for managing family conflict. Applying the values Only after values are established do we begin to look at customized strategic financial solutions. Exploring these strategies involves educating clients on financial literacy and estate planning. In addition, our banking line of business works with families across multiple generations. The objective is to provide a host of consultative depository and credit solutions for heirs during their formative years and beyond. This ongoing multi-level family interaction assists in creating greater familiarity and a broader knowledge base with the entire relationship when wealth transfer topics are discussed. At this point in the process we usually enlist the client s attorney and tax professional to collaborate on matters within their expertise. All done? Planning is never done because life is not static. Ongoing reviews are essential to determine if tax laws, family, or economic issues have resulted in changes that need to be addressed. If the family has experienced significant changes it may be time to develop a new comprehensive plan. The goal is that whatever plan is in place, it is one that takes the values into account. Clients, their loved ones and advisors want effective financial and estate plans that are flexible, allowing for change over time. Abbot Downing planning teams understand the complexities of tax, insurance, financial and other evolving implications of significant Increasing the Probability of a Successful Business Transition In the family business context, families who successfully navigate major transitions share these best practices: Start transition planning early Articulate a clear vision to family, employees, and key stakeholders Formalize a succession plan as part of a larger business plan Prepare the next generation Communicate the plan to extended family Anticipate and purposely address potential conflicts as a result of executing the plan Build an experienced transition management team Develop a written business succession plan with an implementation timetable wealth. The unique viewpoints of all family members are key to creating a successful financial plan. It is critical to discover the expectations of all stakeholders during the visioning process. This reduces the risk of incorrect assumptions, increases cooperation in creating the plan, and helps to reduce conflict. This ultimately results in a better plan. Once in place, a clearly articulated vision statement can boost feelings of engagement and satisfaction, increasing the likelihood that family members can work together effectively to make important decisions about the future of the business and management of the family s wealth. 5 The Risks of Transitioning Wealth It s More Than Just the Money!

6 Understanding Technological Convergence Throughout modern history, periods of heightened innovation and technological advance were followed by a relatively radical step up in the human condition as new industries, processes, routines and services became commonplace. In the mid- to late-1800s, the United States became truly united with the completion of the transcontinental railroad and interconnected waterways while advances in electricity, modern plumbing, engineering and modern medicine accelerated the efficiencies of life and business dramatically. Recent advances in such things as robotics; computer processing and storage; sensors; materials science; and synthetic biotechnology have brought us to the verge of yet another new era, one with significant long-term implications for investors. While many of these technologies have been around for decades, recent progress has brought us to a critical point of convergence, teeing up the global markets for intense change. In much the same way that multiple tributaries come together to form a mighty rushing river, we expect this convergence to vastly change and drive the world to a new and higher plane of existence. Carol Schleif s full perspective on Convergence- Transformative technologies in the early 21st century can be found at the link or by going to the insights page of the abbotdowning.com website. A Z Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance does not indicate future results. The value or income associated with a security or an investment may fluctuate. There is always the potential for loss as well as gain. The information and opinions in this report were prepared by Abbot Downing and other sources within Wells Fargo Bank, N.A. Information and opinions have been obtained or derived from information we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Abbot Downing s opinion as of the date of this report and are for general information purposes only. Abbot Downing does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Additional information is available upon request. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal and tax advisors to determine how this information may apply to your own situation Wells Fargo Bank, N.A. All rights reserved. Member FDIC. ECG The Risks of Transitioning Wealth It s More Than Just the Money! Investment Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value